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Were You Actually Mom’s Favourite, or Did She Just Have a Bad Estate Plan?

A Look at Resulting Trusts

When leaving money to their children, clients generally have two objectives: (1) to make things as simple as possible for their children, and (2) to pay the least amount of taxes. Clients want to ensure that the wealth they have accumulated over their lifetime actually gets into their children’s hands, while also hoping that their children aren’t left with any headaches or unanticipated delays in getting their inheritance.

On this quest for simplicity and efficiency, the legal consequences of some shortcuts are often overlooked.

Take Rosie, for example.

Rosie has three adult children, Al, Beth and Carl. Her eldest son, Al, lives in Toronto with her and visits every Sunday for dinner. He also takes her to all her appointments and talks to her on the phone every day. Al happens to be the most financially responsible of the children, and Rosie thinks he is the best choice to be the executor of her estate and to ensure all assets are divided equally among the three children, especially since Beth and Carl both live out of province.

One day, while attending a financial seminar, Rosie was shocked to learn that probate could take at least 6 months in Toronto, and that her estate would have pay a tax to probate her Will on all her assets. Even more surprising was that this tax rate in Ontario was roughly 1.5%. Rosie was worried that the value of her house, her only significant asset in her estate, would be eaten up by this Estate Administration Tax, also known as probate tax.

Following the advice of a friend, she thought the best solution was to put Al’s name on title to her home as a joint tenant with right of survivorship: this way, she thought she could avoid paying probate tax as the house would pass by right of survivorship to Al on her death, and Al could then sell the house and share the proceeds with his siblings.

Rosie also thought she may as well name Al as the sole beneficiary of a registered plan and a nominal life insurance policy as further assurance that she could avoid probate. This way, Al would also have immediate access to money to pay for her funeral expenses and help get the estate settled.

Rosie thought she was all set.

Although the Supreme Court of Canada’s decision in Pecore v Pecore ([2007] 1 S.C.R. 795) is often written about and litigated, many are still surprised to learn that when an asset is put into joint names with an adult child for no consideration, there is the presumption that the property is not a gift to the child but rather that the child is holding the property in trust for the estate of the parent.

Although Rosie’s house was now owned jointly with Al, the probate tax she was trying to avoid on her death may still be payable since the house is considered to be beneficially owned by Rosie and her asset.

But probate taxes may not be the only issue at play.

Rosie never told her children about her wishes or her planning strategies. What if, say, Al thinks or later claims that Rosie transferred title of the house to him as an additional gift? After all, he was the only one who cared for mom while Beth and Carl moved as far away as they could from Rosie. Rosie always told Al he was the favourite child – maybe mom did want him to have the house?

The presumption of a resulting trust can be rebutted, with the onus being on the transferee adult child to show that the transfer was intended to be a gift. The threshold is high, and Al would need concrete evidence that this transfer was intended to be a gift to him by Rosie, evidence which would go above and beyond the Sunday dinners. Even if he is not able to prove the transfer was a gift, the additional legal costs, time, and potential family discord in trying to settle this was clearly not what Rosie would have wanted.

What about Rosie’s RRIF and life insurance policy? It has been thought that the presumption does not extend to assets where there is a designated beneficiary by virtue of the contract, in which case Al isn’t under any obligation to actually share the proceeds with his siblings or use the funds to help pay for the funeral, as Rosie wanted. Rosie will have to hope that Al is as financially responsible and trustworthy as she thinks, and that he doesn’t decide to use this money to potentially fund his pursuit of the house.

However, just last year the Ontario court found that the presumption of a resulting trust as applied in Pecore did in fact apply to a registered account designated to an adult beneficiary (Calumsky v Calumsky, 2020 ONSC 1506).

Although this case has not been appealed at this time, the Ontario Bar Association has proposed amendments to legislation that would explicitly state that there would be no presumption of resulting trust for these designations made under the Succession Law Reform Act or the Insurance Act.

Whether this decision will be upheld or these legislative amendments are approved, the fact remains that when it comes to leaving assets to your adult children, there are certain risks and unintended legal consequences that must be considered.

Quick and easy is not always the way, and sometimes what may seem like the easiest solution at the time can actually cause the most problems later on.

— Stephanie Battista

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.
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