Tag: Trust

Unintentionally extinguishing survivorship with joint accounts

At issue

Over the last few decades, joint ownership has grown in use as an estate planning and property succession tool involving adult children.  The reason for distinguishing here between planning and succession is that joint ownership is a multi-faceted concept.  Below the surface of the recorded title there can be much more going on, with beneficial rights frequently diverging from legal title.   In particular, within families the law presumes that the addition of an adult child to title is not a beneficial transfer, though the child has the opportunity to rebut that. 

One issue that may not be so well known is that joint ownership may operate differently with real estate as compared to bank or investment accounts.  In the former case the real estate itself is the subject matter of the arrangement, whereas in the latter the practical focus (and value) is with the contents of the account.

While this may sound like splitting hairs, it can have some real world implications.  If an otherwise beneficially entitled adult child is not careful in managing those joint arrangements, beneficial entitlement can be put at risk, possibly extinguishing survivorship rights.

Zeligs v. Janes, 2015 BCSC 7, supplemental reasons 2015 BCSC 525, upheld 2016 BCCA 280

Dorothy Burnett was 94 when her daughter Diana Janes (and husband) moved in with her.  Within a year, Diana had been added as joint owner on the property, granted power of attorney by Dorothy, and made joint owner of Dorothy’s bank account.

In the following years, Diana borrowed against the property (for herself, not her mother) via line of credit and reverse mortgages.  After Dorothy entered a nursing home at age 101, Diana sold the house for $2.7 million, retired the accumulated $832,643 in mortgage debt, and used the net proceeds to purchase a new home and investments for herself and her husband.  On Dorothy’s death at age 103, as executor Diana paid the estate expenses and legacies to grandchildren, then split the residue between herself and her sister Barbara Zeligs, each receiving $63,783. 

Barbara died a year after her mother, and her husband later commenced an action as executor of Barbara’s estate impugning many of Diana’s dealings with Dorothy’s affairs.

The trial judge found that though a resulting trust applied on the joint ownership of the home, Diana had rebutted that presumption as well as a claim of undue influence.  The key evidence was a handwritten note the judge found expressed Dorothy’s true intention to add Diana as “joint owner as long as I live and full owner when I die.”  He went on to discuss how joint ownership requires that there be four unities: title arising from same instrument, equality of interest, time of vesting, and right to possession.  It was held that these unities remained intact despite the mortgages taken out by Diana, and even upon sale of the property since the proceeds were placed into the joint bank account.  

However, “once they were withdrawn from the joint account for the sole benefit of [Diana and her husband], to the exclusion of Dorothy, the unity of possession was destroyed and the joint tenancy was severed.”  

The court ordered half of the sale proceeds be paid to the credit of the estate.  Furthermore, in supplemental reasons Diana was held to be in a conflict of interest when she used her authority under power of attorney to discharge the mortgages.  She breached her fiduciary duty to Dorothy and was ordered to return $832,643 to the estate.

In the result, Diana’s actions destroyed her own right of survivorship that would have applied if the home had been held to Dorothy’s death, or even if the proceeds had remained in the joint account after Dorothy’s death.  

Practice points

  1. Joint ownership with an adult child can be more complicated than first apparent, with its application to bank and investment accounts being distinctive and potentially more complicated than in dealing with real estate.  
  2. Even if there is identity of legal and beneficial interests, the continuing form and process of dealings with the property must be carefully managed.  Specifically, if property is encumbered, disposed or converted in a way that is inconsistent with the unity of interests among the owners, current and future rights may be lost.  
  3. Extra special care must be taken where the child/joint tenant also holds power of attorney over the parent’s property, especially after the parent has lost mental capacity.

Using the preferred beneficiary election with new qualified disability trusts

At issue

Testamentary trusts may come into being at and as a result of a person’s death.  Commonly this is done using a Will, less often using an insurance or RRSP/RRIF beneficiary designation, and occasionally as a result of a court order.  

For decades the tax benefit of such trusts has been their entitlement to use graduated tax brackets, as opposed to top bracket treatment for inter vivos trusts.  As of 2016, testamentary trusts no longer have this preference, except for the first 36 months of an estate and for certain trusts for disabled beneficiaries.  In the former case of an estate, there are limited opportunities to engage in meaningful tax planning. 

On the other hand, trustees can and must act strategically on behalf of disabled beneficiaries.  In the first place, there is a positive obligation to file an election to preserve those graduated brackets, and only one trust can be so-elected.  This can complicate how a parent approaches trust drafting in isolation, let alone where multiple contributors may be contemplated.  

As well, trustees need to be certain how existing trust tax rules for disabled beneficiaries may be affected.  At the head of that list is the continuing use of the preferred beneficiary election.

Income Tax Act (ITA) Canada – 104(14) — Preferred beneficiary election

The term “preferred beneficiary” is a defined term in the ITA, and for present purposes includes someone who has a mental or physical impairment that entitles the person to claim the disability tax credit.

Section 104(14) sets forth that: “Where a trust and a preferred beneficiary under the trust … elect in respect of the particular year … such part of the accumulating income of the trust … shall be included in computing the income of the preferred beneficiary for the beneficiary’s taxation year”.

The effect of the election is that some or all of the trust income is allocated to the beneficiary.  Tax is calculated based on the beneficiary’s graduated rates, and the trust pays that tax.  The net income remains in the trust under the care and control of the trustee.  

ITA 122(3) — Qualified disability trust (QDT)

As noted, testamentary trust usage of graduated tax brackets is now very limited.  However, where the QDT definition is met, a trust remains entitled to use graduated brackets to calculate its taxable income.  To qualify, a joint election must be filed by the trust and a beneficiary of the trust who, by reason of mental or physical impairment, is entitled to claim the disability tax credit. 

Importantly, the electing beneficiary cannot “jointly elect with any other trust, for a taxation year of the other trust that ends in the beneficiary year, to be a qualified disability trust.”  To the point, there may be only one QDT for a given person in any taxation year.

2015-0605111E5 (E) — Qualified Disability Trusts – Preferred beneficiary election

The taxpayer described a hypothetical situation in which an individual with a disability has four grandparents and each grandparent establishes under his/her will a trust for the individual.  It is acknowledged that only one of the trusts could be a QDT for the 2016 and subsequent tax years.  The inquiry goes on to ask whether the trustees of the additional three testamentary trusts created for the benefit of the same individual can make a preferred beneficiary election for each additional trust.  

In response, the CRA author confirms that there have been no changes to the preferred beneficiary election rules as a result of the changes to the rules applicable to testamentary trusts, including the introduction of the QDT.  

Both the QDT and preferred beneficiary election are elective provisions, and those elections are not mutually exclusive.  As such, the trustees together with the disabled beneficiary can choose which joint election will be made, if any, and it is indeed possible for a trust that has made a joint election to be a QDT to also make a preferred beneficiary election.  

Practice points

  1. As of 2016, most testamentary trusts cannot use graduated tax brackets, but the new qualified disability trust preserves that treatment for disabled beneficiaries.
  2. For existing trusts, additional tax filing obligations are required to assure QDT treatment, which fortunately may be coordinated with the preferred beneficiary election.
  3. For families in the preparatory stages, they should confirm with legal counsel that appropriate powers and permissions have been explicitly drafted into trusts and other planning documents.

When to revise your Will

Do new rules for trust taxation warrant a review?

For some people, even the thought of creating a Will casts a pall over their mood. Yes, a Will deals with a person’s death, but the broader process of estate planning is about caring for the most important people in your life, and having an up-to-date Will is central in that process.

But how do you know if you are really “up to date”?

While there’s no black-and-white answer to that question, there are principles that can be used as a guide. And within that inquiry, recent changes to the taxation of trusts may be sufficient to prompt a review and potentially a revision.

When to have a Will

Estate planning is about taking care of yourself now and in the future, and taking care of the people around you – now, in the future and when you are no longer there.

Sometimes the need for a Will is obvious: There is a significant other or a child, or a house or business with employees. Consider though a parent forced to deal with the intestacy of a twenty-something child, or an unanticipated large insurance payout or court award from an accidental death. 

In my opinion, everyone who is legally capable of executing a Will should do so.

Having a Will provides certainty, not just about who will receive what, but also because it allows for tailored planning of when an inheritance will be distributed, and how the process will be managed. In this last respect, there is little ability to manage tax concerns without having worked through the issues ahead of time and having executed a Will designed to manage remaining contingencies.

When to review your Will

What then may prompt the review of a Will? (And when I say “prompt,” I am suggesting that a call to your lawyer may be in order to ask whether there is a need to discuss implications.) I would put it into the following three categories, in order of priority:

Changes to the people

  • This includes you, a dependent, a Will beneficiary, an immediate family member (whether or not a beneficiary), an executor, or a trustee or guardian
  • Beginning or end of a close personal relationship, whether or not legally married
  • A birth, adoption, death, mental capacity concern or significant health event
  • Immigration, emigration or change in citizenship
  • A change in liability exposure, such as a bankruptcy, being joined in a lawsuit, signing a guarantee or starting a business

Changes to the property

  • Sale of a large asset, especially if it is the subject of a specific Will bequest
  • A windfall, such as an inheritance, court award or lottery prize
  • A theft, loss or consumption, including a marked decline in or withdrawal from an investment account, especially for an RRSP/RRIF plan where a beneficiary designation factored into inclusion or exclusion of beneficiaries in a Will
  • Ownership change or transfer, including loans or gifts to Will beneficiaries, a change to bank signing authority, or addition of a joint owner on investments or real estate
  • Cancellation or loss of life insurance (for example, on retirement from employment) where the plan proceeds or a beneficiary designation factored into Will planning

Passage of time

Even if you and the property have remained effectively the same, the legal landscape may have shifted beneath you. It is difficult to say exactly how much time would be appropriate, but I would suggest no more than five years. The principal sources of law are as follows:

  • Case law – Judicial decisions where the strategies, circumstances and facts may have relevance to your situation and planning decisions
  • Provincial law – Changing legal entitlements and administrative processes, for example, Ontario creating a more stringent estate-administration tax-reporting regime and Alberta now treating a marriage as not revoking a pre-existing Will
  • Federal law – Mainly changes to tax legislation that could have an impact on drafting Wills and on the administration of estates and trusts

Trust tax changes

First proposed in the 2013 Federal Budget and passed into law in 2014, as of the beginning of 2016, testamentary trusts have lost most of their previous tax preferences.

A testamentary trust is created under a person’s Will. Up to the end of 2015, such a trust was entitled to graduated-tax-bracket treatment, similar to an individual’s personal tax treatment. Though taxable from its first dollar of income, the trust would initially be subject to the lowest combined federal-provincial rate then work its way up through the tax brackets. As of 2016, the top federal-provincial rate – near or exceeding 50% in most provinces – applies throughout.

There are two key exceptions to the new rules, bringing two new acronyms into the lexicon:

  • Graduated rate estate (GRE) – For the first 36 months of a deceased’s estate, graduated tax brackets will remain available. However, the rules are complex, and if not carefully navigated, the preferential treatment may be lost
  • Qualified disability trust (QDT) – Ongoing graduated-tax-bracket treatment may be available to a testamentary trust with a beneficiary who is qualified for the disability tax credit

In the past, an estate-planning lawyer may have recommended the creation of one or more testamentary trusts and drafted the Will accordingly. Today, those trusts may have little or no benefit and may turn out to be an impediment to efficient estate administration. For those who have benefited from what was good planning in the past, it may be time to call the lawyer and discuss appropriate planning in this new environment.