Helpful Tips for Executors When Dealing with Banks

Helpful Tips for Executors When Dealing with Banks

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From providing the death certificate to establishing the estate account, this is what executors need to know.

A key challenge executors face when administering an estate is dealing with the banks where the deceased held their accounts. Banks don’t want to expose themselves to potential legal issues by releasing funds to someone who is not legally entitled to receive them and are also bound by privacy legislation not to disclose information about client accounts to an unauthorized person.

Executors can help smooth the estate administration process by being prepared and working with the bank’s dedicated estate settlement department. Arguing with a bank employee is unlikely to help the situation, so providing the information they request in a timely manner is your most efficient option. If the bank says they need a particular document from you, just give it to them and follow the procedures request.

As one of the first steps of the estate administration process, banks will ask the executor for a death certificate for the deceased. Funeral homes generally provide around 10 copies of the original death certificate, and executors can typically ask for more if needed. Executors will need to provide these certificates to a number of companies, including the Canada Revenue Agency, the estate lawyer, and the provincial court, as well as any bank, life insurance company, or investment company where the deceased had accounts. The bank will also require a copy of the Will and identification for all the executors.

In Ontario, probate is a legal requirement for any estates with a total probatable value in excess of $50,000 CDN. As a matter of course, banks will freeze all accounts of the deceased, upon notification of their passing, if they have any reason to believe that the probate threshold will be met. Banks generally require a certificate of probate from the executor to prove the Will is valid and that the executor is the authorized personal representative for the estate administration before releasing any funds. However, if the estate is small, a bank may exercise its discretion and not require the executor to obtain probate. In those cases, the bank will release funds to the executor but will likely require them to sign an indemnity to protect the bank from potential liability.

When the bank is initially notified that an account holder has died, it will freeze the deceased’s accounts. However, banks generally will allow certain payments, such as probate or income tax to government agencies or funeral fees to funeral homes. They may also allow for the payment of other immediate expenses, such as lawyer’s fees or utility bills. The bank generally will make these payments directly to the payee and not to the executor.

Once the executor has received their Certificate of Appointment of Estate Trustee, they will typically establish an estate account into which they can consolidate the deceased’s assets and make payments on behalf of the estate. Establishing a dedicated estate account is highly advised, since as an executor, you are personally accountable to the beneficiaries from the date of death.

In some more complicated cases, it may be advisable not to consolidate all the deceased’s accounts. For example, if a payment or distribution from the estate needs to be made to a payee or a beneficiary in another province (or country) and the deceased held an account in that province (or country), it may be practical to leave that account open to make these payments.

While the bank will help the executor as they administer the estate, executors should keep in mind that banks aren’t able to provide legal or tax advice. For that, executors should consider seeking advice from an estate lawyer or accountant. Banks may be experts on their own policies and procedures — regarding their own products and services — but do not look to them for advice on other matters related to the estate-settling process.

When the time comes to make distributions to estate beneficiaries, the bank will want a letter of direction signed by the executor (or executors) and a copy of the Certificate of Probate. The bank will then issue a cheque to the executor or to the estate, not to the beneficiaries directly. The executor will deposit the cheque into the estate account for later distribution to the beneficiaries.

Tips for making estate administration easier

Retail staff at the bank will typically refer the executor to their estate department. The executor should ask for a direct phone number for first contact with the bank’s estate department to save themselves from having to go through the main contact centre each time they call. Executors should also note the bank’s file reference number for the estate, because the bank will keep detailed notes of conversations with the executor. This will streamline things.

Executors should communicate with the bank in writing — either email or letter — whenever possible. When meetings occur in person or over the phone, executors should take notes so they can hold the bank accountable for any agreements made, and to prevent any misunderstandings later on.

Each time they meet with bank representatives, executors should take along identification and the estate file with all documentation. Executors should also be prepared to repeat the “story” of the estate — the key details about their estate administration — to bank representatives. It’s uncommon for a bank to assign a specific individual to one file.

How can you make your estate easier to administer, when the time comes?

The quality of your Estate Plan, in conjunction with your Last Will and Testament, will determine how difficult, time-consuming, and expensive your estate is to administer. For a preliminary consultation to discuss creating, updating, or formalizing your Estate Plan, contact us. We can potentially save your estate many thousands of dollars that will end up with the government (taxes), courts and lawyers without an effective Estate Plan. Probate is not mandatory for all estates, and our Estate Plans always aim to keep our clients’ estates out of probate, whenever possible.

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Bulls and Bears

Stock picking supports segs in 2022

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Doing well last year meant preserving capital and minimizing losses

Last year was challenging for investors, including segregated fund managers. With the prices of most equities and fixed income securities down, winning was a matter of minimizing losses and preserving as much capital as possible.

Canada Life Assurance Co.’s three seg fund families did this well, with Great-West Life Assurance Co. (GWL) recording the highest percentage of assets under management (AUM) ranked in the first or second quartile by Chicago-based Morningstar Direct for 2022 at 85.6%. London Life Insurance Co. had the third-highest percentage at 80.7% and Canada Life’s branded funds had the sixth-highest, 62.8%.

Canada Life’s vice-president of portfolio construction and analysis, Brent MacLellan, attributed this performance to strong stock selection and active management. Last year was a “risk off” period that favoured value investing, low-volatility stocks, the energy sector and higher dividend-yielding stocks.

The other stellar performer was Empire Life Insurance Co., which ranked second with 84.8%. Its seg family benefited from stock picks that came to fruition in 2022, said Paul Holba, senior vice-president and chief investment officer.

Here’s a closer look at some seg fund families:

Canada Life Assurance

The firm’s internal asset-allocation manager had “a strategic lower duration profile” for fixed income, MacLellan said. The underlying fixed income managers “were tactical in ensuring bond yields were higher than the benchmark.”
MacLellan attributed GWL’s and London Life’s strong showing to their large amount of AUM in five target-risk asset-allocation funds, all of which ranked in the first or second quartiles. He noted that these funds have “diversified exposure,” including to private credit and real estate. Those asset classes generally did better than public equities and credit in 2022.

The Canada Life family held proportionately less AUM in the asset-allocation funds. Nevertheless, its sixth-place finish was driven in part by above-average performance from three risk-managed funds. (This family is the only one open to new investors.)

Empire Life Insurance Co.

Empire Life’s managers focused on U.S. and Canadian equities, overweighting energy and underweighting tech.

Two winning stocks in 2022 were Maxar Technologies Inc., a space intelligence company based in Colorado, and Ross Stores Inc., a discount clothing retailer based in California, Holba said. Maxar’s stock doubled in December, when private equity firm Advent International Corp. announced it was acquiring Maxar. As for Ross Stores, Empire’s managers bought its stock in May, when low inventory pulled the price to around US$70. When inventory replenished, the price bounced back to US$115, about where it’s been trading since late November.

As for fixed income, managers held bonds with shorter duration than the benchmark and had a “very meaningful yield pickup” in corporate bonds, thanks to deep research into companies, Holba said.

Beneva Inc.

The company was formed when SSQ Insurance Co. and La Capitale Insurance and Financial Services Inc. began merging in 2020, a process completed on Jan. 1. Each insurer’s products will be rebranded as Beneva later this year.

Beneva uses only external managers for its products. This strategy, combined with rigorous manager and fund selection processes, contributed to Beneva’s 2022 investment performance, said Mathieu Roy, investment product development and strategy advisor.

Funds that performed well included La Capitale Low Volatility American Equity (TDAM) Fund, which outperformed its benchmark on a gross-returns basis by 15.5%; SSQ TD Global Dividend Equity GIF Fund, which outperformed by 13.6%; La Capitale Diversified Income Fund (Fidelity), which outperformed by 7.1%; and La Capitale Global Equity (AGF) fund, which outperformed by 4.2%.

On the fixed income side, strategies with short durations tended to outperform due to the rising interest rate environment. For example, the SSQ AlphaFixe Bond and Bank Loan GIF Basic fund outperformed its benchmark by 5.3%.

Industrial Alliance Investment Management Inc.

This fund family only had 33.2% of net long-term assets in funds ranked in the first or second quartile. Pierre Payeur, senior vice-president and head of fund management and oversight, said this was partly because the family has relatively more seg funds with higher guarantees — thus higher fees — than many of its peers. Payeur said if calculations are made using gross returns, the family had about 50% of its AUM in funds with above-average returns.

Payeur said 2022 was an active year for managing fixed income. Holdings of short-term municipal bonds and floating-rate notes helped boost returns, as did using short positions on short-maturity Treasury bills.

Some of iA’s holdings on the equities side did well — specifically Bombardier Inc., Canadian Pacific Railway and Cenovus Energy Inc. Bombardier reported strong revenue growth due to increased demand and prices for regional jets, and Cenovus benefited from high oil prices. These factors allowed both firms to decrease their corporate debt, which some investors had viewed as too high. CP benefited from regulatory approval of its merger with Kansas City Southern Railway Co.

iA offers a series of global asset-allocation funds that invest in illiquid assets such as commercial mortgages, private debt, private equity and infrastructure, as well as publicly traded fixed income and equities. “In addition to earning a certain liquidity premium, several of these securities are less exposed to market sentiment and benefit from stable revenues or income through long-term contracts or business models,” Payeur said.

Manulife Investment Management Ltd.

Manulife, which placed 12th, is a bottom-up stock-picking firm. Managers don’t chase short-term gains, but position themselves for the next five to 10 years, head of product management Sanjiv Juthani said, so 2022 was a year to buy or add to holdings of high-quality companies.

“Managers focus on companies with strong recurring revenue and cash flow,” Juthani said. A few examples are Toronto-Dominion Bank, CGI Inc. and Amazon.com Inc.

Juthani said TD is a “high-conviction holding” where managers see “lots of future upside.” CGI is a Canadian multinational IT consulting firm with a strong management team. The stock has performed well in the past six months. Amazon has strong opportunities across the board and the big drop in its stock price in 2022 provided a buying opportunity.

As for fixed income, Manulife’s managers “were quite active to take advantage of market dislocations,” Juthani said. That will continue. For example, as central banks pause rate hikes, the teams may reduce exposure to floating-rate loans.

Estate Planning

Ontario’s new probate process for small estates is easier

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By: R. Mezzetta May 11, 2021

New rules may allow more executors without a legal background to apply for probate

The Ontario government’s simplified probate process for estates valued at $150,000 or less will make administering small estates less costly and easier for estate trustees (as executors are known in Ontario), estate practitioners say.

Probate, known as estate administration tax in Ontario, is the process whereby a court validates a will and confirms the executor’s authority to administer the estate. While not all wills need to be probated, banks and other financial institutions generally don’t release money held in the deceased’s accounts until the executor obtains probate.

Ontario’s new procedure for small estates, which came into effect on April 1, involves a simpler application form and removes the requirement for certain supporting documents.

The new process will make applying for probate “more accessible to people without a legal background so that they can do this themselves,” said Matthew Urback, partner with Shibley Righton LLP in Toronto.

Legal fees, which start at $1,500 for even “a very simple estate,” can deter executors from applying for probate, said Krystyne Rusek, an estate lawyer with Pallett Valo LLP in Mississauga, Ont. The standard probate procedure is time-consuming and challenging for laypeople to navigate on their own, she said.

According to the Ontario government, about one in four probate applications in 2020 were for estates valued at $150,000 or less. The new process won’t affect the province’s estate administration tax, which remains set at $15 of every $1,000 of estate assets above $50,000. (In 2019, Ontario eliminated probate fees on estate assets below $50,000.)

The simplified process also means executors won’t have to post a bond when there are no minors or vulnerable individuals who might have a financial interest in the estate. The posting of a bond acts as a form of insurance for interested parties against the executor’s misadministration of estate assets.

Executors will be issued a Small Estate Certificate with the same legal effect as a Certificate of Appointment of Estate Trustee issued under the standard process, but the executor’s authority will be limited to the estate assets listed in the application. If other assets are discovered, the executor may have to file an amended application to deal with those assets, as long as the estate’s total value remains below $150,000. If the newly discovered assets push the value above that threshold, the executor would have to apply for a standard certificate.

Executors for small estates may choose to apply for probate under either the small estate or the standard process.

While the new procedure has many benefits, it could expose estate trustees to risk — if, for example, an interested party commences litigation against the estate or if it is later discovered that the deceased held foreign assets.

“[An executor] should investigate and determine the assets and liabilities of the estate before applying for this [simplified probate procedure],” said Sanjana Bhatia, director of tax and insurance planning with Sun Life Financial in Waterloo, Ont.

If estate assets — whether foreign or domestic — are discovered after probate has been granted, then the regular probate process gives the estate trustee more authority to deal with those assets and any litigation that arises with respect to them, Bhatia said.

Urback said he hopes the streamlined probate process will encourage more people to take on the role of executor, particularly in cases where the primary person originally named in the will can’t or won’t accept the role. In those cases, it can be difficult to find someone to take on the job if the estate is small. “It’s too onerous and they feel it’s not worth it,” Urback said.

However, Rusek wonders whether beneficiaries of small estates will begin to expect executors to apply for probate themselves rather than seek legal advice now that a simplified process exists.

Executors may have “to make a decision as to whether to do this alone without any legal guidance or whether they’re going to seek representation and legal assistance where they could be later questioned by beneficiaries about that expense,” Rusek said.

She said she expects estate lawyers could use the simplified probate application process on behalf of clients when administering small estates, where appropriate. “That’s going to be a cost saving to clients,” she said.

Diversified portfolios

Diversified portfolios – more important than ever

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When the world caught Covid, diversified investors stayed healthy

By: James Langton May 27, 2021

Bonds and equities continued to offset each other during recent market volatility

Even in extreme market conditions, diversification across asset classes remains a “free lunch” for investors, according to research from Morningstar Indexes.

In a new report, the firm examined the performance of bond and equity market indexes during the Covid-19 crisis — finding that diversification continued to work.

While equities markets around the world plunged with the onset of the crisis, bonds acted as a safe haven for investors.

“The Morningstar Canada Core Bond Index actually gained more than 1.7% in the first quarter of 2020,” the report noted.

Conversely, in the first quarter of 2021, with rates rising as the economic recovery gained strength, fixed-income assets suffered.

“Canada core bonds saw an unusually steep quarterly loss of 5%, and their global counterparts also plummeted,” the report said.

Yet these losses in bond markets “were more than offset by strong gains for equities,” the report said.

“Diversification has often been called the only free lunch in investing,” the report noted, as building a portfolio with uncorrelated assets can produce better risk-adjusted returns over the long term.

This proved true in the latest market crisis, the report said. “When the pandemic came around, bonds also did their job. They diversified equity market risk, damped volatility, and preserved capital.”

“Spreading one’s bets is typically a good strategy, particularly in Canada due to its relatively narrow sector representation and small percentage of global market capitalization,” said Dan Lefkovitz, strategist at Morningstar Indexes, in a release.

Estate Planning

Estate Planning: Proper Documentation Is Critical

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Proper documentation can help protect your intent of beneficiary designations

In early 2020, the Ontario Superior Court made a decision that has increasingly been a focus of attention: Calmusky v. Calmusky.

In that case, the entitlement of a named beneficiary to receive the proceeds of a Registered Income Fund (RIF) was challenged. The designation had been made in favour of an adult child, one of the sons of the deceased RIF owner. There was no obvious “price paid” by the son for his father’s having designated him as the beneficiary. The court decided, in those circumstances, there was a legal presumption that the beneficiary received the death benefit on the basis of a “resulting trust” — that is, in trust for the estate. In other words, it was not money for the son to keep personally but rather it was to be handed over to the estate, unless he could prove to the court that his father intended for him to have the money as his own. He was unable to do so. And so, the court ruled that the death benefit was estate property.

The court’s holding, in the Calmusky decision, that a presumption of a “resulting trust” should be applied on the facts of that case, for the benefit of the estate, runs against what is generally accepted by estate planning lawyers and those practicing in the area of insurance and pension law. For them, unless a designator specifies that the beneficiary is to hold the proceeds for an estate or for someone else, the proceeds are for the beneficiary to keep. Note that in Calmusky the beneficiary was an adult, and it was key to the decision that the designation was made for no consideration (e.g., the beneficiary did not in any way ”pay” to become the beneficiary, or was not somehow ”owed”). The presumption of a resulting trust will not be made if the beneficiary is a minor.

The approach taken by the court in Calmusky applies, in principle, to more than just RIF designations, and so would include traditional life insurance. The court’s approach would also apply to more than just so-called ”two-party” contracts, where the product owner is also the life insured. In the case of a ”three-party” contract, where the life insured is someone other than the owner, the beneficiary would hold the proceeds payable on death in trust for the owner. Again, we are considering an adult beneficiary who had not ”paid for” or somehow had “earned” the beneficiary designation.

In response to Calmusky, industry and professional associations have made their concerns known to Ontario, calling for a legislative fix. To date and to our knowledge, no other court in Ontario has followed the Calmusky approach. But for the time being, the prospect that another court might cite Calmusky and rule accordingly does remain a possibility. That court could be outside of Ontario, in some other common-law province or territory (not including Quebec). Already, in certain provinces, there is “Calmusky thinking”.

Preventative measures you should take:

• Properly document your intentions to make a gift, if such is the case, when designating a beneficiary (especially when designating an adult beneficiary, ”for free”, even if that beneficiary is your spouse; the rules around gifts to spouses and whether any presumptions apply can be complex, and can vary by jurisdiction — it is safer to treat a spouse like any other adult beneficiary).
• This documentation would provide evidence to overcome any presumption the beneficiary was intended to hold the death benefit for an estate, or for someone other than the beneficiary personally.
• Keep a copy of the documentation with your policy and/or your will.
• Make your family members aware of your estate plans and how you intend to distribute your assets.
• When designating a beneficiary for your assets, be aware of possible tax implications for your estate and obtain appropriate professional advice as part of your tax and estate planning.
• Otherwise, if tax liability issues have not been addressed, a court in any particular case might find it equitable to draw back at least a portion of the registered assets into the estate, to cover any associated tax liability.
• Review your designations, make any necessary changes, properly document and provide explanatory notes.

Implementing the above measures can help ensure that your wishes are carried out as intended. Need help? Please contact me.

A well-designed Estate Plan, in conjunction with an RTO plan, will reduce your tax obligations throughout the rest of your life — and beyond — keeping more available for you to utilize during your lifetime and reducing the estate’s losses to taxes and fees upon your death.

If you found the information on this page useful, please give me a quick “like” or share it with someone else who may find it helpful:

For a no-cost preliminary consultation to determine what would be involved with reducing or eliminating your estate’s exposure to litigation, probate, the Estate Administration Tax, and other probate fees, contact me. I specialize in Estate Planning and Retirement Planning and offer financial planning services across Ontario. My office is in Kingston, Ontario, and I am happy to speak with anyone on the phone, or meet in person with anyone in the surrounding area.

For tips on how to Avoid Probate in Ontario, click here

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The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of January 2021. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate professional advisor.

DIY Investing

DIY investors less satisfied with their firms: J.D. Power

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Is “Do-It-Yourself” really your best option?

By: Mark Burgess, May 28, 2020

Despite strong market conditions last year, do-it-yourself investors’ satisfaction with their firms declined, a report from J.D. Power says, as platforms missed opportunities to connect during client onboarding and improve their mobile experiences.

Investors’ satisfaction with self-directed firms declined to 717 from 726 the previous year, according to the J.D. Power 2020 Canada Self-Directed Investor Satisfaction Study, which ranks investor satisfaction on a 1,000-point scale. Questrade topped the rankings with a score of 736, followed by BMO InvestorLine (731) and Desjardins Online Brokerage (730).

Almost half (46%) of DIY investors experienced a problem with their firm’s website. Younger investors the were most put off by these disruptions, with 26% suggesting they would switch firms after not being able to access a website.

The survey found that when problems occur, satisfaction is much higher among investors who work with a human to solve it than among those who use firms’ self-service digital channels.

“The recent flurry of new account openings and increased trade volumes are obviously good for self-directed firms but have also exacerbated some client experience issues that existed before the pandemic, especially around the availability and navigation of digital platforms,” said Michael Foy, senior director of wealth and lending intelligence at J.D. Power, in a statement.

Self-directed firms facing more competition from low-cost robo-advisors will need to resolve website problems quickly if they want to keep new clients, Foy said.

The study said firms are missing an opportunity to improve satisfaction and brand loyalty with mobile apps and through the onboarding process. Platform tutorials contribute significantly to customer satisfaction, the report said, yet most new investors didn’t get an online tutorial or information about downloading the app.

Find the full survey results and study here: https://canada.jdpower.com/financial-services/canada-self-directed-investor-satisfaction-study

For more information, or to discuss investment options, contact me.

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The perils of owning U.S. life insurance

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Charmaine Ko, May 29, 2020

These tax-advantaged savings vehicles can result in a tremendous tax headache

Many Canadians with life insurance assume their policies will provide tax-free funds to support their beneficiaries. In the cross-border context, however, these generally tax-advantaged savings vehicles can result in a tremendous tax headache.

U.S. life insurance may appear attractive due to lower rates or greater potential returns in the policy’s cash value or death benefit.

In the worst-case scenario, however, estates are left to deal with additional taxes and penalties from years of unreported income over the life of an insurance product, and the beneficiaries end up with much less than what was intended.

For a life insurance product to be considered life insurance for Canadian and/or U.S. tax purposes, it must qualify under a series of complicated provisions and tests in their respective tax laws.

Tax problems can arise when a product that’s labelled as life insurance doesn’t meet the standards of the jurisdiction in which the owner is resident (when a Canadian resident purchases U.S. life insurance, for example, or when a U.S. citizen, green card holder or resident purchases Canadian life insurance).

This column discusses the potential tax problems when Canadians purchase U.S. life insurance; future columns will examine the potential tax problems when U.S. citizens who live in Canada purchase Canadian plans.

How to tell if a policy qualifies

The Canadian income tax rules set out a long, complex definition of what qualifies as a life insurance policy under Canadian income tax rules. The definition is so complicated that it requires an actuary to interpret.

The determination is made on a per-policy basis; therefore, the same person may own some policies that qualify and some that don’t.

In simplified terms, the determination is made by comparing each individual policy with the exempt test policy (ETP). The ETP is a hypothetical policy defined under the Canadian Income Tax Act that sets out the maximum accumulation of value allowable within a policy.

A policy has to be tested against the ETP at each policy anniversary. If the accumulation within a policy exceeds what is allowable, it is no longer an exempt policy for Canadian tax purposes and will become subject to tax.

In short, there’s no easy way to tell if a policy qualifies as life insurance in Canada. Canadians shouldn’t purchase a foreign life insurance policy unless the insurer can certify in writing that it qualifies. People who move to Canada and already own foreign life insurance should ask their insurer if it qualifies. Where a policy doesn’t qualify, they should consult a tax professional about their options.

Canadian tax on non-exempt policies
If a Canadian resident purchases a U.S. life insurance policy that doesn’t meet the Canadian definition, that policy won’t be tax exempt in Canada and the policyholder will have to pay Canadian tax annually on the income that accrues in the policy.

However, determining the amount of included income is not easy, as the amount is determined with respect to the policy’s premiums, cash surrender value and the present value of the death benefit. As a result, the policyholder may be subject to tax on an annual basis without any cash to pay the tax.

As the accrued income within the non-exempt policy will be subject to annual Canadian taxation, this would increase the Canadian cost base of the non-exempt policy. At the death of the insured, the death benefit of the non-exempt policy will be subject to tax if it exceeds the policy’s cost base.

Because of the different definitions of life insurance in the two countries, Canadians buying foreign life insurance should ensure the product qualifies under the Canadian definition to avoid complicated and expensive tax problems.

Charmaine Ko, JD, LLM, is a cross-border tax lawyer at Polaris Tax Counsel in Vancouver.

Family conflict & estate planning

Family conflict, estate planning and the value of advice

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Family conflict & Estate planning

Advisors’ influence on family unity is growing

Advisors play a critical role in the financial affairs of families. In recent years, the advisor’s place at the family’s kitchen table has gone beyond managing investments and into tasks such as estate planning and wealth transfer, which are at the core of family unity.

A Wealth survey of estate professionals found that family conflict is the leading threat to estate planning. What creates the threat? Respondents said the top cause of family conflict is beneficiary designations (30%), followed by the absence of communication (25%) and the dynamics of blended families (21%).

We are increasingly seeing the effects of family conflict on estates in Canada. Advisors need to pay attention in order to better service their clients and, by extension, their clients’ families.

Beneficiary designation

In Canada (except Quebec), the ability to designate beneficiaries on insurance policies, segregated funds, pension plans, TFSAs and RRSPs/RRIFs provides annuitants and policy holders a way to bypass probate tax. It also provides for a relatively seamless transition of the plan proceeds to their estate’s beneficiaries.

Two cases in Alberta and Ontario underscore beneficiary designations as a leading cause of family conflict.

Morrison Estate (Re), 2015, Alberta Court of Queen’s Bench:

John Morrison, predeceased by his wife, died in 2011, leaving a valid will that provided for his estate to be divided equally among his four children: Robert, Douglas, Cameron and Heather. He also provided for a bequest of $11,000 from Robert’s share of the estate to be divided among John’s grandchildren. Each child had also previously received $25,000 from the sale of John’s principal residence.

At the time of John’s death, the largest single asset of his estate was a RRIF with a date of death value of $72,683. Douglas was named the sole beneficiary of the RRIF. The estate’s assets, including the RRIF, totalled $77,000.

Since Douglas was not a “qualified beneficiary” (a spouse, common-law partner, infirm financially dependent child or grandchild), he could not receive the RRIF proceeds of $72,683 on a tax-deferred basis. The estate was responsible for income taxes payable on the RRIF, which amounted to $28,780.

With the payment of taxes on the RRIF, debts and funeral expenses, the residue of the estate for four-way distribution to the children was $21,733, ($5,433 each). Therefore, Robert’s share was not enough to pay the $11,000 bequest to John’s grandchildren.

Cameron brought an application for advice and direction seeking an order deeming the RRIF proceeds to form part of John’s estate, which would then be distributed equally among the four children and not as a “gift” to Douglas.

The court held that, among other things, the fact that John’s will provided for equal distribution among his children and treated each of them fairly did not negate John’s intent that the RRIF proceeds go to Douglas, to the exclusion of the other children. Therefore, the RRIF proceeds remained with Douglas. The court further found it was unfair for the estate to pay the tax liability on the RRIF, so Douglas was ordered to reimburse the estate the $28,780.

Finally, the court made clear that John “…was unaware of the tax consequences of designating his son as beneficiary [and that] beneficiary designations should be made with full knowledge as to the benefits and detriments and as to the consequences of making a designation or not making a designation…”.

McConomy-Wood v. McConomy, 2009, Ontario Superior Court of Justice:

Lillian McConomy, predeceased by her husband, died in the fall of 2015 leaving a valid will that provided for her estate to be divided equally among her three children: Lewis, Roland and Lisa. Lillian, among other estate assets, had a RRIF with an approximate date of death value of $392,190. Lisa was surprised to learn that she was named as the sole designated beneficiary of the RRIF. As sole beneficiary, Lisa ultimately received a cheque for the RRIF proceeds of $392,636.

Lisa’s brothers, Lewis and Roland, brought an action claiming, among other things, that Lisa held the RRIF in trust for each of the beneficiaries of Lillian’s estate and should not be the sole recipient of the proceeds. Their contention was that their mother always (and especially during the weeks preceding her final days) maintained that her children would be treated equally in the estate, with statements like “Don’t worry, all of my assets will be divided equally among the three of you.”

The court was convinced that, based on Lillian’s history of fair and equal treatment of her children during her lifetime, it was her intention for all three children to receive the RRIF proceeds equally. Lillian was ordered to share the proceeds with her siblings.

Blended families

According to the 2016 Canadian census, 9.7% of children 14 and under (a total of 567,270) live in a blended family situation—either with or without half- or step-siblings. Advisors must pay attention to the unique challenges of estate planning for blended families.

In many instances, each spouse or common-law partner brings independently created wealth to the relationship, but they also create wealth within a new family unit. The question becomes how the estate should be dealt with upon death.

A couple of options are available, depending on the family’s composition and circumstances. They may wish to consider a spousal trust, where certain assets are placed in trust for the benefit of the surviving spouse, with the children from a previous relationship as the contingent beneficiaries. This provides continuing financial support to the surviving spouse or partner while protecting the capital/inheritance for the deceased’s children. Usually, this does not include the children of the surviving partner. Insurance could also be utilized to provide an inheritance for children from a previous relationship.

Communication

In the beneficiary designation cases discussed above, the court decided in the first case (Morrison) that it was the father’s intent for one child to receive the RRIF proceeds. In the second case (McConomy-Wood), the court found it was the mother’s intent for all three children to receive the RRIF proceeds. Obviously, the resolutions were not to everyone’s satisfaction. Better communication would have decreased the need for the courts to intervene.

Since communication is the foundation of effective wealth transfer and estate planning, advisors should encourage family meetings to discuss some or all the following topics:

  • last will and beneficiaries
  • enduring power of attorney (for property/personal care)
  • personal/heath care directive, representation agreement
    bequests
  • charitable giving
  • candidates for executorship or alternate executorship
  • the merits and rationale for beneficiary designations
    disability planning
  • the use of the family cottage/cabin
  • tax planning
  • business succession planning
  • memorandum of personal effects
  • trust planning
  • investments

As advisors become aware of the increasingly significant role they play in their clients’ lives, they should encourage clients to have timely and meaningful conversations around the very serious subject of wealth transfer, which will help to prevent family conflict. The benefits are incalculable, as is the value of advice.

July 31, 2019, by: Tim Brisibe, TEP, Director, Tax & Estate Planning at Mackenzie Investments

Multiple taxation on death: the taxpayer’s nightmare

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Steps to limit tax in other jurisdictions

When clients and their assets become more globalized, they may face the possibility of multiple taxation on death.

Most jurisdictions impose some type of death, succession or estate tax. While some countries tax the deceased or the estate, others tax the beneficiary. There are also different bases for charging tax, such as citizenship, domicile, residency and asset location.

Canada and a few other jurisdictions (including Australia, New Zealand and Denmark) tax capital gains on death.

The U.S. has an estate tax but the exemption is now so large (US$11.4 million in 2019) that few pay it. Capital gains are exempted from taxation on death.

While estate tax is charged on the value of a deceased person’s assets when they die, inheritance tax or succession duty—which exists in Japan, Chile, Venezuela and many European countries—is charged on lifetime gifts and bequests that a beneficiary receives. Accession tax is a form of inheritance tax; there’s often an exemption up to a certain amount, above which a beneficiary is taxed on the gifts and bequests they have received during their lifetime.

When tax laws collide, the same assets can be taxed several times. For example, a Canadian resident with a beneficiary living in Japan could have assets taxed twice: Canadian capital gains tax on the Canadian resident’s death and inheritance tax payable on the same assets by the beneficiary who resides in Japan.

It is important to address multiple taxation as part of the will planning process when there are beneficiaries living in countries with an inheritance tax. The client will have to consider whether the beneficiary bears the burden, or whether it is borne by the estate, impacting all beneficiaries—including those who do not live in a jurisdiction with an inheritance tax.

Most Canadian wills contain a “debts and death taxes” provision that provides for all death taxes to be paid by the estate, so the beneficiaries receive the same net amount notwithstanding inheritance tax and other taxes levied outside Canada.

However, if the inheritance tax or other tax is disproportionately high, beneficiaries living in Canada could be disgruntled if they end up bearing part of the burden. Inheritance tax can be more than 55% in some jurisdictions.

Planning for multiple taxation

There aren’t many treaties that provide relief for Canadians against double taxation on death. Treaties with the U.S. and France allow certain taxes paid in one country to be credited against tax paid in the other, including U.S. estate tax and French inheritance tax, which can be credited against Canadian capital gains tax paid on the same assets.

There are opportunities in some cases to minimize exposure to multiple taxation by restructuring assets and other planning options. For example, Canadians may be able to shelter assets from U.S. estate tax by using a trust with appropriate terms or a “blocker” corporation, or they may purchase insurance to cover the additional tax.

In France, certain life insurance vehicles can be used to hold investments that are not subject to inheritance tax. In the U.K., trusts can be used to shelter against inheritance tax in some cases for persons not yet domiciled in the U.K.

Without such planning, an estate can be severely diminished. Identifying the issue of potential inheritance tax to be paid by a beneficiary and determining whether the burden should fall on the estate or the beneficiary is a good start.

Each client will have their own philosophy on this issue. Some clients value complete equality, wishing their children to receive the same amount after all taxes and believing that a child should not be penalized for living in a jurisdiction with an inheritance tax. Other clients may take the view that the beneficiary subject to the tax should bear the burden.

With increasingly global families, it will only become more important to understand the perils of multiple taxation on death and to obtain appropriate professional advice to deal with it.

Margaret O’Sullivan is founder of O’Sullivan Estate Lawyers LLP.