When laws collide: how an Alter-ego trust saved the day

A recent case, decided in the BC Supreme Court, examines the interplay among three important BC laws: the Wills Variation Act (“WVA”), the Family Relations Act (“FRA”) and the Fraudulent Conveyance Act (“FCA”). The case is Easingwood v. Cockroft, 2011 BCSC 1154

Very briefly, the WVA allows a disappointed spouse or child to challenge a will on the basis that the deceased failed his or her legal or moral duty to adequately provide for the spouse or child in the will. The FRA allows one spouse to claim against the assets of the other in the event of a breakdown of the marital relationship (whether a legal or common-law marriage). And finally, the FCA allows a creditor to claim that property which should have been used to satisfy or secure a debt has been improperly transferred out of the debtor’s name. Obviously there is a lot more to each of these laws, and whether a claimant will be successful depends on the circumstances of each situation, but to understand the Easingwood case, this is enough.

Reg Easingwood had four adult children when he married Kay Easingwood, who had two adult children. It was a second marriage for both, and as they both had significant assets, they signed a marriage agreement saying they would keep their property separate and not claim against each other’s estates. They each wanted to ensure their assets went to their own children. Reg and Kay remained married from 1983 until his death in 2009.

In 2001, Reg gave power of attorney to one of his daughters and his son Hank (a lawyer). The power required the two of them to act together, so that if one died, the power would terminate altogether. This was later to become an issue.

In 2004 Reg made a Will. Kay would have an income for her life, and she was allowed to remain in the family home (registered only in Reg’s name) during her life. Reg also left money to pay house expenses so long as Kay lived in the house.

The rest of Reg’s estate was divided among his surviving children and grandchildren. Kay knew about the Will and approved of it.

Reg had a number of business interests, including rental properties. Kay also had her own business, which she operated out of Reg’s offices, and later, as Reg developed dementia, Kay took over some of the duties in operating Reg’s businesses.

When it became clear that Reg was suffering from Alzheimer’s, Hank and his sister started using the power of attorney to manage Reg’s business affairs, with Kay’s blessing. However, in 2005, Hank was diagnosed with cancer, and by 2007 it was clear that he might not survive his father. In order to ensure that Reg’s affairs could continue to be managed after Hank’s death, and for tax planning purposes, Hank and his sister created and settled an Alter Ego Trust on Reg’s behalf. They transferred all of his assets into that trust, except his residence and his Canada Pension benefits. In all, about $5M in value went into the Trust, leaving about $550,000 in the Will. The terms of the Trust tracked Reg’s Will exactly, so that the income fund and the house operation fund were in the Trust.

Reg died in 2009, and Kay filed her first law suit within weeks of his death. She applied under WVA, claiming that Reg had failed to properly provide for her in his Will. She also claimed that the Alter Ego Trust was not a valid trust, so that the assets transferred to it would fall back into Reg’s estate and her WVA claim would include them. Just in case that failed, she also claimed that the transfer of Reg’s assets to the Trust was a fraudulent conveyance, meant to hinder her position as a creditor of Reg’s estate under both family law and unjust enrichment for the work she had done for Reg’s businesses.

So what happened? The Supreme Court judge found that the Trust was valid (it is open to attorneys to settle a trust for the person who gave them the power, so long as the terms of the trust are for the benefit of that person.

Since the trust was valid, was the transfer of the assets to it a fraudulent conveyance? Again the judge said no, because Kay was not a creditor as defined by the law.

Bottom line? Provided it is done properly, (ie, the proper matters are considered when the trust is created and the assets are transferred to it), the creation of an Alter Ego Trust is a good planning strategy.

An analysis of how the judge came to her conclusions will follow in my next post. And of course I’ll be watching for the Court of Appeal’s decision to see if the Supreme Court’s decision stands. I hope it does because it is a good, well-reasoned and very helpful judgment.

If you think your estate plan might benefit from a discussion about an Alter Ego Trust, please contact me.

BC Enduring Powers of Attorney now in force

September is here and with it comes the new Part 2 of the British Columbia Power of Attorney Act. Most of the changes relate to the powers that your attorney (the person you appoint to act as your agent) will have. There are also some very important changes about who can be your attorney, and some changes to the form itself.
You already have a Power of Attorney? Excellent. Enduring PAs made before today (September 1, 2011) remain valid, even though they are not going to be in the new format. PAs made under Part 1 of the Act are not affected at all.
Section 8 of the Act, which said that a PA expired when the maker of it becomes mentally incompetent, unless the PA expressly said otherwise, has been repealed and replaced by Part 2, Enduring Powers of Attorney. An Enduring PA, therefore, is one that remains valid even after the maker becomes incompetent.
The main difference in form between the old Enduring PA and a new one, is that now, the people you appoint as your attorneys must also sign the PA in front of witnesses. They will still also have to sign the affidavit stating they were legally adults, if the PA was to be used in the Land Title Office. The PA cannot be used until the attorney has signed it in the presence of two witnesses. Only one witness is needed if the witness is a lawyer or notary public. If you have two attorneys being appointed and only one has signed, the one who has signed can use the PA even though the other attorney has not yet signed (unless you specify the two of them have to act together, and then neither can do anything until both have signed.)
Another important changes is that paid caregivers are no longer allowed to become an attorney for a person they are caring for. That should prevent a lot of the problems that have arisen in the past, where people hired to look after an elderly person have taken advantage of the close relationship that often develops, to get access to the elderly person’s money and assets. The exception to this rule is that if the paid caregiver also happens to be a family member, then that person may be appointed as attorney.
There are also some rules concerning who may act as the witness to the signing of a PA, again designed to prevent abuse by someone trying to take advantage.
I usually recommend to my clients that they consider appointing their spouse (if they have one) as their PA, and failing that, an adult child or other trusted individual. It is very important that such a PA be an enduring one, because otherwise one of the main reasons for making the PA is lost. Often, the time the attorney will need the PA is when the maker has become incapable of making their own decisions, either by reason of injury or disease.
The coming into force of the new Part 2 provisions of the Power of Attorney Act provides a good opportunity to remind everyone to think about what would happen to their finances family, if they were to become incapable and no one had the ability to take over the management of their financial affairs. It could be ugly. It is so easily taken care of that, so why not do it?

Mediating Estate Disputes

Early in my career as a lawyer, I practiced family law, and I found myself helping nasty people fight over things like who got the kids on their birthdays. My last family law case involved a battle over who should get the lamps and the step ladder (seriously!) and I will never forget the judge’s displeasure over having to decide who got what. The judge was especially ticked because neither party really seemed to want their little daughter. It was awful, and as soon as I could afford to stop doing family law I quit.

So imagine my dismay when, in the course of helping clients administer their parents’ estates, I discovered all of the same nasty issues cropping up. People will fight over the silliest things when money and emotions come together. What is it about the junk that clutters Mom’s house that makes it suddenly so desirable upon her death?

Telling a client he is being irrational when he gets upset over his brother laying claim to Dad’s beat-up Lazy-boy, is not going to help. He probably already knows that. He knows he is acting like a child. And that is really the point, isn’t it. It is a matter of sentimentality and emotions and hanging on to the past.

These types of disputes, like their counterparts in matrimonial law, really do not belong in the court system. They are much better dealt with through sitting down and discussing the underlying issues: the emotions, the pent-up resentments, the petty grievances that turn into major issues under stress. What can be more stressful that the death of a loved one?

This is where mediation can really play a role. A trained mediator can sit down with the parties and try to find a middle ground. Unlike a judge, whose job is to listen to evidence (a really limited amount of information) and then make a binding decision, a mediator can listen to each person’s “side” of the story and then ask questions to find out what is really going on. Suggestions are made in an effort to get the family members to come up with their own solution.
“You stole Mom’s antique clock and sold it, she meant for me to have it!” may really mean, “you never thought I was worth anything and even though you knew Mom wanted me to have that clock you don’t think I am worthy of it”. Maybe the Mediator can find out (a) what Mom’s intentions really were, (b) why the executor sister who sold the clock actually did so and (c) whether the complaining brother really wanted the clock or just wanted the money for himself. Quite a different approach from what the court could do with an accusation of theft!

There are other benefits to mediation. It is a “softer” approach that may allow family members to resolve their dispute without having to “sue” each other. There is nothing more likely to cause people never to speak to each other again than a public court fight. It is also a less expensive approach, meaning that at the end of the dispute there may still be something left over for the beneficiaries.

The Template Will: Pay now or pay later

This is a true story. It is a cautionary tale to anyone who thinks it’s a good idea to draw up their own will.

A woman (Myrtle) falls ill, goes into hospital in Feb 2006.

She makes a will in the hospital, using a “template”. No legal advice is sought. She dies soon after.
Myrtle is married to a Mr. P, her second husband, to whom she leaves nothing. She has five children (all adults), and leaves her estate to three of them. She ignores two of her children altogether: her two mentally disabled sons who probably need her help the most.

She appoints her son Bert as executor. Bert’s wife is one of the witnesses to the will, as is the husband of one of her daughters. Basic wills law: if a beneficiary, or the spouse of a beneficiary, is also a witness to the will, the gift to that beneficiary is invalid. Your basic “template” Will may not make that clear. The result is that part of Myrtle’s estate is distributed as if she left no will at all.

Bert is an accountant and has lent his parents (so he says) a lot of money over the years, which he now claims as a debt of the estate. Of course he has nothing to back that up.

The template Will does not give Bert the ability to refinance Mom’s property (a farm) and no one is making the mortgage payments, so the farm goes into foreclosure. The “template” does not include the powers Bert needs to deal with the estate assets properly.

So Bert offers to buy the farm from the estate. His sisters get greedy and refuse to agree to the price he offers. Then due to the foreclosure proceedings, the fact no one is maintaining the place, and the 2008 market melt-down, the value of the farm falls by 40%.

Bert eventually does buy the farm after putting in a whack of his own money for repairs to try to sell it. Because the template did not give him the specific power to spend that money, his sisters dispute his claim for reimbursement. They also dispute his claim for executor’s fees.

In addition to that dispute and the foreclosure, Mr. P makes a claim for the of the estate that falls outside of the will and the Public Guardian makes a claim on behalf of the two disabled sons. That makes four court actions out of one bad estate plan.

The dispute against Bert is heard by the Registrar in January 2011. Myrtle died almost 5 years ago and the Estate is still not distributed.

What is wrong with this picture? And how did an estate worth $813,466.48 (even after the fall in real estate prices) end up having only $57,032 left for distribution?

In this case, there were a number of factors, but at the bottom of it, the fact that Myrtle and her family wouldn’t spend say, $1,000 to have some legal advice and a proper will done, cost the family at least several hundred thousand dollars. If they could have gotten the farm sold in 2007, they probably would have been up by another two or three hundred thousand.

Havng a good will and estate plan drawn up might seem costly, but what if it could save you hundreds of thousands of dollars? I’ll bet Myrtle and her family would now think it was money well spent. If only they could go back and change things!

Lines of Communication

Recently I had a get together with a group of friends. We have known each other for over 20 years and gather to celebrate each other’s birthdays a few times a year. As you can imagine there have been a some big “milestone” birthdays along the way. It is truly marvellous that all 8 of us are still doing well and enjoying life. There have been cancer scares, a stroke (very mild, thank goodness) and all the usual bumps and bruises along the way.

Where the years really show, though, is when we talk about our families, especially elderly parents, relatives and friends. In those twenty or so years, six parents have become ill and died, and four older relatives are now suffering from ailments that need, if not hospital care, then at least assisted living. It’s a big strain on my friends, as they strive to make the best arrangement possible given the finances and needs of the elderly.

A common thread is the reluctance of the elderly to accept the help they need. Either they don’t think they need it or they think that with minimal help they can manage in their own homes. That puts a tremendous strain on those trying to make the necessary arrangements. Another common thread, which I think is one of the underlying causes of the first problem, is the difficulty the older generation has in discussing their wishes with those who will be making the arrangements.

Those of my friends and cousins who are finding it easiest to deal with the issues faciong them, are the ones who actually broached the subject years ago with their parents/relatives/friends. They asked the tough questions: Do you have a will? Do you have a power of attorney? Who do you want making decisions for you if you can’t do it for yourself? Where would you like to live if you can’t manage in your home anymore?

They made sure it got documented via wills, representation agreements, powers of attorney.

One of my friends has been quite Machiavellian about her aunt’s situation. She befriended the director of a lovely assisted living facility. The elderly aunt is coming for a visit to my friend’s home, and then they are going to meet the director friend for lunch, except “she’s really busy” so they’ll have to meet her at the facility. Chance for a tour, yes they take pets, isn’t this nice, etc. We’ll see if it works.

On the other hand, one of my cousins has a parent who is very “old school”, from a culture where parents never discuss finances or living decisions with their children. There is no power of attorney or other planning tool in place. My cousin has just about had a nervous breakdown dealing with her father. Things came to a head and she threatened to stop providing 24 hour care. Someone else finally talked some sense into him, sat both parties down and forced them to confront the problems. Things are back on track…for now. But the father is intractable, has a sense of entitlement as big as all outdoors and thinks caregivers are servants to be ordered about. I think my cousin is going to have to apply for adult guardianship to solve the problem.

So what to do? Yes, it is a tough topic to discuss. You can’t just sit down for coffee one afternoon and say “so Dad, what should we do with you when you lose your marbles? When the Depends don’t do it anymore? When the third care giver in a month quits because you are such a miserable old coot?”

Or maybe you can . Maybe it’s better to raise the questions while Dad still has a sense of humour, rather than when he really is a miserable old coot and is no long able to listen to reason. Do it for your own sake, and also for his.

Changes coming to BC Wills law

It has been a long time coming, but the BC government has passed a new law that will replace a bunch of existing laws dealing with the making of wills and the administration of estates. The law is not yet in force, but if you are interested in this area of law, it makes sense to know ahead of time what is changing.

For example, did you know that if you have a will, and then you get married, the will is no longer valid? The only exception is where you make a will that mentions the upcoming marriage, names the new spouse and the date of the wedding. And if you don’t do that? Your spouse could find that you died without a valid will!

This change brings legal marriages into line with common law marriages, because there is nothing about just moving in together that invalidates your existing wills.

Another interesting change deals with what happens when a person does die without a will. Right now, if a person dies leaving a “spouse” and children, the spouse gets the right to live in the house (assuming the house was only in the deceased’s name) for life. (A family home in joint ownership is not affected.) He or she also gets the first $65,000 of the deceased’s remaining estate, and splits the rest with the deceased’s kids.

Under the new law, assuming the house is only in the deceased’s name, the spouse does not get the right to live there for life. Instead, he or she gets the first $300,000 (which can include the house), but only if all the deceased’s kids are also his or her kids. If there are children of the deceased from another relationship, then the surviving spouse only gets the first $150,000. In either case, if there is more in the estate than the first $300,000 or $150,000, as the case may be, then that excess gets split 50/50 between the surviving spouse and the deceased’s children. That means the kids can easily end up owning part of the family home.

Given the value of real estate these days, it really makes sense to encourage your spouse to add you as a joint tenant to the family home if that’s appropriate (it isn’t always) and to make a will.

A third big change is the broad powers the courts will have to “fix” problems with wills. You wrote all over your will? You added stuff after you signed it? You never actually got around to signing it after you went to see your lawyer? These may not be the big problems they used to be. Currently, if you cross something out on your will and write in something to replace it, the crossed out parts that can no longer read are gone, but the replacement parts are not valid unless you signed and had them witnessed according to the rules for making a valid will. The result can be a gap in your testamentary wishes. Under the new law, it will be possible for your executor to go to court to ask for an order fixing that problem. Of course, the cost of that means less for the residuary beneficiaries, so it’s bestter to avoid such problems in the first place.

If you want to make changes to your will, it is still best to consult an expert and have it done properly, or, new law or not, part of your estate could still end up in the wrong pockets!

I’ll write more about the coming changes in future posts.

We’ve “lost” another one

This past Sunday evening, Elizabeth Buhler, believed to have been Canada’s oldest living person, died in Manitoba at the age of 111. Another two weeks and she would have been 112. May she rest in peace.

The National Post, in today’s print edition, advised us that Canada had lost its oldest citizen. Lost? where did she go?

I regularly read the obituaries, (yes, I’ll admit it, people’s lives facinate me) and at least 80% of the obits say that the deceased “passed away.” Sometimes they just “passed.” What did they pass, a kidney stone? a slower vehicle? Or did they omit to do something (like planning their will, maybe?)

I am always heartened to find an obituary where the family will admit the loved one “died.” What is it with us as a society, that we cannot bring ourselves to speak frankly about death, even when it affects us directly?

I ask this question because of what it means for estate planning.

Given that we have trouble speaking in terms of death and dying about people who have actually died, how can we expect people to admit they themselves will one day die? And if we can’t admit that much, is it any wonder so few of us actually get to the point of planning for that day?

I recently had an elderly client come in, wanting to make a will. She mentioned, apologetically, that she needed a will because she’s getting older and several close friends had recently died. I think it’s great she recognized that she needs to do something before it’s too late.

But how many of us can actually know when it will be “too late”? That bus could run over me today. I hope not until much later, but it could happen sooner. And if it happens to you sooner, what will your loved ones say about you? That you “passed” on doing any planning?

Make the effort to talk about this difficult topic, because if you don’t it could be a whole lot tougher for your loved one after you have (gasp!) died.