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A Happy Ending for Basket Clauses

Many people who live or have assets in Ontario are concerned about the amount of Estate Administration Tax (probate fees or “EAT”) that will be payable on their death given the high rate of approximately 1.5% of the value of estate assets. One common estate planning technique for minimizing EAT is the use of multiple wills (for a discussion of techniques to minimize EAT please see our advisory “Planning to Minimize Estate Taxes”). While multiple wills have long been accepted by the Ontario courts and are specifically provided for in the Ontario Rules of Civil Procedure, the recent Ontario decision in Re Milne Estate held wills that contain “basket clauses”, which are commonly used in multiple will planning, to be invalid. Fortunately, the decision was recently overturned on appeal, and now that the appeal period has expired for that decision, the issue appears to have been settled.

In multiple will planning to minimize EAT, a person executes two wills, one which deals with assets which will likely require a probate certificate to administer and one which deals with assets which likely will not require a probate certificate to administer. Multiple will planning allows the “probate” will to be submitted to court and EAT to be paid only on the value of the assets falling under that will, while the other “non-probate” will is not submitted to court and no EAT is payable on the assets it covers.

Obtaining a probate certificate from the court provides third parties with proof of the executor’s authority to deal with a deceased person’s assets. Third parties such as financial institutions often require a probate certificate to protect them from liability in releasing assets to an executor. An executor can usually deal with assets such as shares in private corporations, personal effects or family loans without a probate certificate as typically no third parties are involved that will insist on it.

However, because wills are often executed many years before death, it is uncertain at the time of making a will what assets will be owned at death and will require a probate certificate. For this reason, many estate planning lawyers use a “basket” or “allocation” clause. This type of clause allows the executor after death to allocate assets between the two wills based on whether a probate certificate is actually required by a third party. The EAT savings are potentially much greater when such a clause is used, but also tainting of the non-probate will by inclusion of an asset for which it turns out a probate certificate is necessary is also avoided because of the flexibility it provides.

Re Milne Estate called into question the validity of basket clauses. In this case, Mr. and Mrs. Milne both died having executed multiple wills with basket clauses. Their executors applied to obtain probate certificates for their “probate” wills (the “Primary Wills”). The application judge, of his own accord and based on his view of what is necessary for a will to be valid, held that the basket clauses created a legal uncertainty as to the assets covered by each will which resulted in the Primary Wills being invalid.

This court decision resulted in serious repercussions for multiple wills planning in Ontario. Basket clauses have been used for many years and have been included in thousands of wills. Having even the possibility of invalid wills created an unacceptable situation, and many lawyers contacted their clients who had basket clauses in their multiple wills to alert them to the decision and the option to amend their wills to delete the basket clause pending the outcome of the appeal. It was unknown if the decision would be appealed, and if so, when the appeal would be completed, and whether it would be successful.

Fortunately, the Divisional Court has now confirmed that the use of a basket clause does not render a will invalid, and that the type of clauses used in the Milnes’ wills do not create any uncertainty because the standard by which the executors determine which assets fall under each will is objective. The Divisional Court also recognized the benefits of using basket clauses in estate planning.

The Divisional Court’s decision is welcome news. We now have the benefit of clear judicial authority which did not exist before on the use and validity of basket clauses in multiple will planning, which will assist in obtaining optimal results to minimize EAT.

While the legal path that ultimately led to this result was uncertain and unsettling with many twists and turns, fortunately, we now have a happy and helpful ending.

— O’Sullivan Estate Lawyers