Thursday, January 26, 2006

The Pitfalls of Haphazard Estate Planning

It appears to become increasingly popular to use joint bank accounts, real estate joint tenancies, life insurance designations, and Registered Retirement Savings Plan (“RRSP”) and Registered Retirement Income Fund (“RRIF”) designations as methods of transferring wealth at death, as Will substitutes. These are all legitimate estate planning tools. Unfortunately, all too often people who are not qualified to give legal advice are suggesting these methods be used to avoid probate fees, and people are taking that advice without consulting with a lawyer. In some cases the results can be disastrous: instead of saving money, in the end the beneficiaries spend tens of thousands of dollars in court.

A case here in the Okanagan decided a couple of years ago illustrates the problem. The case is called Neufeld v. Neufeld, 2004 BCSC 25. Charlotte Neufeld died on July 29, 2003. She appointed her brother Seigfried Neufeld as executor of her Will, and provided in her Will that her estate would be divided equally between her brother Seigfried and her brother Harry Neufeld. Before her death she transferred savings certificates worth a total of $35,000 and a bank account that at her death had about $3000 in it into joint names with Seigfried: She also designated Seigfried as the beneficiary of her RRIF, which was worth about $43,000 when she died.

After Charlotte died, Seigfried took the position that he could keep the savings certificates, the joint bank account and the RRIF for himself. A bank employee testified that she explained to Charlotte that by putting Seigfried’s name on the bank account and the savings certificates, and by designating Seigfried as the beneficiary of the RRIF, Siegfried would receive the proceeds at Charlotte’s death. The bank employee also testified that she felt that Charlotte wanted Siegfried to have the funds.

Harry took the position that Seigfried held the savings certificate, bank account and RRIF for the estate. His evidence was that he, his wife and Charlotte discussed using joint accounts and designating a beneficiary under the RIFF as a means of avoiding probate fees. (See my post on British Columbia Probate Fees here.)

The judge had doubts about the testimony of the witnesses on both sides. He based his decision on a legal presumption that where one person contributes all of the money into a joint account with another, on the death of the contributor, it belongs to the contributor’s estate unless the other joint account holder can show that it is a gift. Lawyers call this presumption a presumption of resulting trust. There are some historical exceptions to this presumption such as transfers from husbands to wives, and from parents to children. In this case, the judge found that Seigfried’s evidence did not overcome the presumption of resulting trust, and he had to share the bank account, savings certificates and the RRIF with Harry.

The court’s decision in this case may surprise some. Although there are many cases where the courts have said that the money contributed by one person into a joint bank account belongs to the contributor’s estate on the contributor’s death, the writer is not aware of any previous case in British Columbia where the court has applied this presumption to a beneficiary designation of a RRIF. (I have written about joint bank accounts here.)

No one will ever no for sure what Charlotte intended. If she intended for Seigfried to keep the joint account, the savings certificates, and the RRIF for himself, she should have asked her lawyer to draw up a clear written memorandum stating her intentions for her to sign.

If Charlotte intended these assets to be shared equally between her brothers, it would have been better if she had kept the bank account and the GIC certificates her sole name, and either designated her estate as the beneficiary of the RRIF, or designated both brothers as beneficiaries.

The potential probate fee savings to Charlotte’s estate were about $1134. The legal costs to the two brothers of the four days trial required to sort out this haphazard estate plan must have been substantially more than that.

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