Navigating the Sibling Estate Fight – Plus a Book Giveaway

I recently read the book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight” (bubkes is Yiddish, meaning nothing, nada, zip, zilch), by Charles B. Ticker, which explains how to navigate a sibling estate fight. Charles, who is a mediator and estate litigation lawyer, previously contributed a guest post to this blog on The Top Five Areas of Estate Litigation.

As an accountant who has dealt with families for many years and has written on various sibling issues (such as Sibling Rivalry – Parents Beware, it is not only a Childhood Isssue and Is Your Estate Planning Horizontally Challenged?, where I discuss how parents need to consider their children’s sibling relationships when drafting a will), I found this book very interesting.

Today I am going to highlight a few of the issues and points made in the book that caught my attention (Note: I am not reviewing each chapter, so I jump between chapters in my post below).

In addition, Charles has graciously provided three free copies of his book to give away to readers of the blog. Please see the details at the end of the post.

Mom always liked you best

In his book, Charles states that many sibling estate fights have deep roots that can go back 50 or more years. In the first chapter he notes the most famous line from the Smothers Brothers Comedy Hour, a classic TV show from the late sixties, where Tommy Smothers would complain to his brother, Dick, “Mom always liked you best.” Charles recounts how Tommy said the audience went wild the first time he came out with that line and that it resonated because everyone could relate to the experience.

The issues siblings have do sometimes stem from perceived favouritism by mom, but more likely they come from an event or events that occurred in childhood, such as letting a pet get loose or “killing the pet through neglect,” taking a hockey card collection or injuries from roughhousing. Charles notes that once the parental referees are out of the picture, the gloves come off.

Charles sums up this topic by saying, “My clients constantly refer to negative childhood episodes involving a sibling with whom they are engaged in a legal dispute over the parent’s estate. Even though what happened when they were kids has nothing to do with the lawsuit, the painful memories of those negative experiences fuel the estate dispute between them as adults.”

It’s not fair!

In his second chapter, Charles notes a very common refrain from his clients: the will is not fair. But Charles states that it is a common misconception that a will has to be fair. He notes that “while wills are often challenged because they appear to be unfair, a successful challenge in most jurisdictions is not based on the issues of fairness but rather the issue of whether the parent understood what he or she was doing when the alleged unfair distribution of the estate was made.” This is a shock to most people

The concept of fairness is a tricky one. Is a will unfair if there are unequal gifts? Is the will unfair when there are equal gifts, but one child took mom into her home the last 10 years of the mother’s life and fed her and looked after her?

Charles concludes the second chapter by saying that perceived unfairness – regardless if the children are treated equally or unequally – may contribute to an estate fight.

Why it’s important to visit your parents

Many children are cut out of a will or left a smaller inheritance than their siblings because they had a diminished relationship or no relationship with their parents. Charles makes an interesting comment on this issue when he says, “This may seem like a cruel remark, but the bottom line is that an adult child should not expect to receive a bequest from a parent’s estate if he or she did not have an ongoing relationship with that parent.”

While this would seem obvious, apparently it is surprising to many of Charles’ clients.

Parents: Have that discussion

Readers of my blog will know that I am a huge proponent of discussing your will to some extent with your family and explaining your intentions. Charles seems to agree with me. He states that choosing not to talk to your children is a big mistake, “as leaving questions unanswered can create these difficult disputes.”

The child as a caregiver

I commented above on whether it is fair to have equal gifts where one child has looked after a parent for years. This has become more common the past few years, whether the care is in the home of the child or in the parent’s home or a nursing home. Very often one child becomes the primary caregiver - through desire, geographic location, job demands, whatever.

Charles notes that in Ontario the caregiver child may be able to claim for more of the estate based on the care they provided to their parents. They do this by claiming compensation for services rendered to the parent based on a doctrine called quantum meruit. Of course, this all presumes there was no formal contract between the parent and the child.

Broken promises

In Chapter 4, Charles discusses the common complaint from a child that a parent had promised a particular asset or gift to the child and that “promise” was not in the actual will. Charles notes a recent Ontario case on the issue, where a farmer broke his promise to leave the family farm to his son. Fourteen years after the farmer passed away and enormous amounts of money were expended in legal fees, the Ontario Superior Court awarded the farm to the son but ordered him to pay $1.325 million to his sister.

The moral of the story is: parents, if you promise your child something, ensure it is reflected in your will or don’t make the promise in the first place.

As I don’t want to give away the whole book, I will stop here. If you would like to order a copy of Charles' book, purchase it here (Canadian link).

Charles Ticker is an estates lawyer based in Toronto who focuses on estate litigation and mediation of estate disputes. More information about him can be found at http://www.tickerlaw.com/. The information in this blog is not intended to be legal advice. Readers should consult their own lawyer, attorney or other professional for advice.

Book giveaway

As noted above, Charles has provided me three books to give away to my readers. If you are interested in a copy of the book, email me at bluntbeancounter@gmail.com by December 16th. I will notify the winners by email on December 20th.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Wealth & Estate Planning Missteps

Wealth & Estate Planning Missteps

To help you avoid parting with your wealth, I'd like to share my article (link here) that I wrote today for the Globe and Mail Online Personal Finance Tax Section titled "Want the kids to inherit the house? Avoid these common tax mistakes." This article deals with common wealth and estate planning errors parents accidentally make because

they lack knowledge or because they listened to a tip they picked up at a cocktail party. These missteps relate to real estate transfers, probate planning and inheritance issues.

I would like to thank Roma Luciw, the Globe’s personal finance web editor, for providing me with the opportunity to write this article during Financial Literacy Month.

Long time readers will be shocked that Roma was able to have me condense my originally submitted article to only 650 words. I really appreciated Roma’s editorial expertise.

Dream Job by Richard Peddie - Book Giveaway Winners

The two winners of the autographed copies of Richard Peddie's Dream Job book giveaway are Steve K. and Imelda L.You will be contacted by email to arrange delivery.

Thanks to all the people who entered the contest. I had several women who entered on behalf of their husbands or boyfriends, since they thought they would like the book. Very interesting, I wonder how many guys would enter on behalf of their wives or girlfriends if it was a women related book giveaway. Just saying :)


 

Qualifying Spouse Trusts – How do They Actually Work? -Part 2

Today, in the conclusion of her two part guest post on Qualifying Spousal Trusts, Katy Basi discuses how these trusts actually work. I thank Katy for her excellent posts.

Qualifying Spouse Trusts - How do They Actually Work? 

By Katy Basi

In Part 1 of this blog, BBC aficionados were introduced to the idea of leaving their estate to their spouse using a “qualifying spouse trust” or QST ("QST"). This week we look at the degree of protection that a QST can provide to non-spouse beneficiaries, and at methods of ensuring that a QST functions effectively.

In Monday's post, Fred’s will left the residue of his estate to his wife Wilma by way of a QST. The QST provides that any property remaining in the QST upon Wilma’s death is equally divided among Fred and Wilma’s children. How confident are we that the children will actually receive anything from Fred’s will? How protective is this QST?

The degree of protection afforded by the QST to the children (and any other non-spouse beneficiaries) will depend on two main factors:

1) The trustee’s ability to encroach on the capital of the trust for the benefit of Wilma.

2) The identity of the trustee.

The QST must provide that all income be paid or payable to Wilma. Of course, the trustee can invest the QST in assets producing high amounts of income, or no income at all. (In the latter case, the trustee should be cautious about a potential claim by Wilma.)

As to capital, the QST can provide that:

(i) no one is entitled to the capital of the QST during Wilma’s lifetime (very protective but also very inflexible),
(ii) the trustee can encroach on the capital for Wilma’s benefit under limited circumstances (eg for medical reasons), or
(iii) the trustee has full discretion to encroach on the capital for Wilma’s benefit, even if the encroachments exhaust the trust prior to Wilma’s death.

Clearly, the broader the encroachment power, the greater the likelihood that there will be minimal property remaining in the trust upon Wilma’s death.

A broad encroachment power can still be protective, depending on the identity of the trustee. If Wilma is the sole trustee of a QST with a broad encroachment power, we are back in “just trust me” territory. We are relying on inertia/laziness for protection – Wilma can pull all of the funds out of the QST, but we’re hoping that she doesn’t get around to it!

It would be more protective to name an independent trustee, or Wilma and an independent trustee, jointly, to manage the QST and make encroachment decisions. In my view, some flexibility is necessary re capital encroachment – Wilma could have major medical needs and require some (or even all) of the capital of the QST for very legitimate reasons.

At this point in my explanation of QSTs, many of my clients revert back to the “just trust me” option (no doubt thanking their heavenly stars that they didn’t go to law school), while others go ahead with the QST structure.

For the latter group, it is imperative to note that only assets falling under the will are grabbed by the QST. Therefore, joint assets (which are inherited by right of survivorship, and not under the will) and assets with completed beneficiary designations (eg RRSPs, RRIFs, TFSAs, life insurance, pensions) do not fall into the QST.

It is often necessary to split joint investment accounts (ie create two investment accounts, one in Fred’s name, and one in Wilma’s name) in order to make the QST structure viable. There is often no point in having a spouse trust containing only $20,000, as a trust tax return must be filed every year, and the QST funds must be held in a separate, segregated account which may also incur fees.

Splitting joint accounts is viewed with horror by the probate tax-avoidance crowd, as Wilma may have to then probate Fred’s estate and pay probate tax on his investment account. I am not terrified by this concept, as I view it more as a prepayment of half of the probate tax bill when Fred dies. If the account were maintained as a joint account, probate tax would be payable on the entire account upon Wilma’s death in any event – so we’re just paying half of the probate tax early (this is a very simplified analysis, of course!)

Finally, let’s get to the income splitting benefits of a QST. QSTs are often recommended not for any of the protective reasons mentioned above, but because the QST is a separate taxpayer that has access to the marginal rates of tax. In other words, Wilma can elect to have some or all of the income of the QST taxed in the QST, and essentially income split with her QST (which seems only fair, since she can no longer income split with dead Fred).

However, the federal budget in March of this year indicated that marginal rates for testamentary trusts (which would include QSTs) may soon be a relic of the past. We are waiting for draft legislation to be released, but the idea of inserting a QST purely to income split may be dying a slow, tortured death – we will have to wait and see. [Mark comment: As per this government consultation paper, it is proposed that testamentary trusts will only be allowed a low rate of tax for 36 months].

Income splitting aside, if you or your clients like the idea of their cold, dead hands controlling their assets long after their death, and can live with some complexity in their estate planning, a QST may be just the ticket.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

Katy Basi is a Barrister and Solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

Qualifying Spousal Trusts – What are They and Why do we Care?

Last week I noted the concept of a qualifying spousal trust in my post on "When Spouses Don’t Leave All Their Assets to Each Other - The Income Tax Implications". The creation and use of spousal trusts can be very complicated, so I thought this week, I would have Katy Basi, an estate expert break down the topic. I just had no idea 88 Fingers Louie and brontosaurus burgers would be that integral to the explanation.

Qualifying Spousal Trusts- What are They and Why do we Care?

By Katy Basi

Whenever I am drafting wills for spouses, I’m usually on the receiving end of both a quizzical look, and a moment of silence, near the beginning of the first meeting.

My clients level a quizzical look at me when I tell them that their plan of leaving everything to each other, and then to their children, means that they are creating “just trust me” wills.

To illustrate this point, we run the scenario of Fred dying and leaving everything to Wilma. After a suitable period of grieving, Wilma marries Barney (I’ve assumed that Betty divorced Barney years ago and has been living it up in Cuba). In Ontario, marriage revokes a will, so Wilma is intestate. Understandably alarmed, she runs to her nearest estates lawyer and draws up a new will, leaving everything to Barney. Wilma is concerned about Barney, as he not skilled at saving for retirement and will need funds in his old age if Wilma predeceases him.

Hmmm. That’s when the moment of concerned silence arrives. Back when Fred and Wilma made their original wills, they were trusting each other to “do the right thing” in the future. Sometimes that works out! Sometimes, not so much.

How can we address this issue? There are three main options:

1) Call up a family lawyer. The family lawyer can draft a marriage contract requiring Fred and Wilma to keep their current estate plan regardless of future circumstances. This is a relatively expensive and time-consuming option, especially if the only goal is to manage estate issues.

2) Create “mutual wills”. Mutual wills are essentially wills where Fred and Wilma promise not to change their wills in the future. I do not recommend mutual wills – they are fraught with legal uncertainty, and litigation abounds when mutual wills are in play.

3) Create “qualifying spouse trusts” (“QSTs”) in Fred and Wilma’s wills.

Let’s say that the residue of Fred’s estate was left to Wilma in a QST. If Fred dies first, a trustee (usually but not always the executor) will hold the residue in trust for Wilma. If there are funds left in the QST at Wilma’s death, it is Fred’s will that determines the distribution of the funds (not Wilma’s!) Upon Wilma’s death, Fred’s will instructs the trustee to divide the remaining funds among their children. This is starting to sound like a good idea!

A QST is a special kind of trust, with beneficial tax effects. When Fred dies, he is considered, for tax purposes, to have disposed of all of his assets at fair market value, and he will be taxable on any capital gains triggered by this disposition. There is an exception to this rule if Fred leaves his assets to Wilma, or to a QST. Fred is then considered to have disposed of his assets at his cost for tax purposes (so that no gain is triggered upon Fred’s death), and the QST is considered to have acquired the assets at that same cost. When Wilma dies, the QST will be considered to have sold its assets at fair market value, finally triggering any accrued capital gains. More or less, these are the same tax effects as if Fred had left the residue of his estate directly to Wilma.

So….we can use a QST in Fred’s will to provide for Wilma’s needs and take care of their children, without being disadvantaged from an income tax point of view. But how do we ensure that the QST functions effectively to protect Fred’s estate? On Wednesday, in Part 2 of this blog post I will address this issue and other practical questions such as how to ensure that the QST applies to the right assets.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.