Saturday, August 19, 2006

Succession Law Reform Project Committee's Proposed Dependants' Relief Anti-Avoidance Clause is Inadequate

I am disappointed in the British Columbia Law Reform, Succession Law Reform Project’s recommended changes to the Wills Variation Act, RSBC 1996, c. 490, which I have described in a general way here. My biggest concern is that the recommendations fail to adequately protect spouses in cases where the deceased spouse has structured his or her affairs so that assets pass to other beneficiaries outside of the deceased’s estate.

In British Columbia, a spouse (including a person who has lived in a marriage-like relationship with the testator for at least two years) or child may apply to vary a will if adequate provision has not been made for the spouse or child in the will. The court may then award the child or spouse such provision as the court considers adequate, just and equitable in the circumstances.

But the Wills Variation Act only gives the court jurisdiction to make an award out of the deceased’s estate. This means that the court cannot make an award to the spouse or child from assets that pass outside of an estate such as assets held in a joint tenancy that pass by right-of-survivorship to the surviving joint tenancy, or to a designated beneficiary of an insurance policy.

It is possible for someone to have millions of dollars of assets immediately before their death, but leave no estate. For example, a father and husband might buy real estate, and hold it in a joint tenancy with an adult child from a previous marriage, designate the child the beneficiary of his Registered Retirement Income Funds and Life Insurance, and leave few assets remaining to fall into his estate. In this case, the wife could be effectively disinherited, with no recourse under the Wills Variation Act.

In the above scenario, the wife would have to persuade the court to declare that the child is holding assets in trust for the estate, or to set aside transactions in favor of the child on some other grounds. Or the wife might have some other claim to the assets, perhaps on the basis that she contributed to the assets or provided care to her husband, and the child would be unjustly enriched unless the court imposes a constructive trust on some of the assets in favor of the wife. But, the wife is in a much more difficult position than if the assets fell into the estate, and the husband had left the assets to the child in his will.

Why should the wife’s entitlement depend on whether the husband left his assets to the child under his will, or by structuring his affairs so that the child can receive the assets outside of his estate?

Most perversely, if the wife had left her husband, started a suit against him, and was granted an order that there was no reasonable prospect of reconciliation under the Family Relations Act, RSBC 1996, c. 128, thereby triggering her interest in family assets held in the husband's name, she would be in a stronger position than if she remained happily married to him until his death, perhaps caring for him when he was sick.

The Succession Law Reform Project subcommittee assigned to consider the Wills Variation Act was alive to this issue. The Subcommittee circulated a paper for comments proposing that death be treated as a triggering event under the Family Relations Act, which would give the surviving spouse the same right on the death of the other spouse as a separating spouse has on the breakdown of the marriage.

I felt that this was at least an improvement over the current legislation, but that it would be preferable to extend the ambit of the Wills Variation Act so that it applies to assets that flow outside of an estate, such as jointures and life insurance. I wrote in response to the request for comments suggesting that the Succession Law Reform Project consider proposing legislation similar to Ontario’s Succession Law Reform Act, RSO 1990, c. S26.

The Committee has rejected this approach. According to the final Report at pages 62-3:

The Intestate Succession, Wills Variation Act and Family Relations Act Issues Subcommittee initially concluded that there was no need for anti-avoidance measures if a surviving spouse could elect within a limited time after the death of the other spouse to exercise the right to a division of family assets on the basis of Part 5 of the Family Relations Act.

Consultation with the family law Bar, however, led to the conclusion that there are too many difficulties in the way of introducing such an election under British Columbia’s current matrimonial property regime in Part 5 of the Family Relations Act. Once the proposal for a post-mortem spousal election was abandoned, anti-avoidance provisions were revisited. Provisions similar to those in the Ontario Succession Law Reform Act and other Canadian statutes involving the inclusion of the value of asset dispositions by the deceased in a notional estate and clawback powers were reviewed.

These, however, were thought by the Project Committee to be overly intrusive. Ultimately, a provision was conceived that operates by analogy to the Fraudulent Conveyance Act. This provision treats transactions by the deceased conferring a benefit on a second person with the intent to defeat rights under the dependants relief provisions of Part 5 as voidable at the instance of eligible claimants whose rights are or could be diminished by them. It does not apply to transactions entered into by the second person in good faith, for valuable consideration, and without notice or knowledge of the deceased’s purpose at the time of the transaction.

A court could make any order in respect of a transaction voidable under this provision that it could have made under the Fraudulent Conveyance Act. These could include making the property involved in the transaction subject to seizure and sale to satisfy an order giving relief under the Act to an eligible claimant, declaring the property is held in trust for the purpose of satisfying the order, ordering that the amounts payable under the order form a charge on the property, or directing a judicial sale. [footnotes omitted]

With respect, this remedy is inadequate.

The Fraudulent Conveyance Act, RSBC 1996, c. 163, allows a claimant to set aside transactions if “made to delay, hinder or defraud creditors and others of their lawful remedies.”

In Hossay v. Newman (Feb. 5, 1998), BCSC, Kelowna Registry 27559, the court held that an independent adult child who had no claim independent of a Wills Variation Act claim, was not a “creditor or other” under the legislation.

On the other hand, in Jack v. Parkinson (1994), 91 B.C.L.R. (2d) (C.A.), the Plaintiff’s husband transferred land to his common law spouse. His legal spouse from whom he had been separated sought to set aside the transfer. Mr. Justice Goldie said at page 98, “There is no doubt in my mind that Mrs. Jack [the Plaintiff] falls within the words in the statute, ‘creditors and others.’” On the facts, the court held that there was no fraudulent intent, and upheld the trial judge’s decision dismissing the claim.

Accordingly, spouses are already be able to set aside transactions if they can show that the deceased intended to avoid their claims, and that at the time of the transactions they had claims independent of the Wills Variation Act. But, they have to prove fraudulent intent. As a practical matter, in the case of spousal claims it is not clear that the Committee’s proposed remedy adds much to the current law--although admittedly the law is not now clear, and the proposal would clarify the law somewhat.

There are cases where spouses can be left with little or nothing because of the deceased spouse’s poor planning, or because of changes in circumstances, rather than because the deceased intended to defeat the survivor's potential Wills Variation Act claim. I have seen cases where one spouse attempts to find a fair balance between his or her spouse, and children from a previous marriage, but does not fully appreciate the needs of his or her spouse. Would the proposed remedy apply in such circumstances? I don’t know.

Supposing the husband prepares his estate plan at a time when he has significant assets. He plans to leave significant assets to his wife, worth well over one million dollars. He designates his children as the beneficiaries of a half-million dollar life insurance policy. He has no intent to avoid the Wills Variation Act. He suffers of business reversal, and dies bankrupt. But the life insurance is exempt from creditors. His children get the life insurance, and his wife gets nothing. Would the wife have any remedy under the Committee’s proposed anti-avoidance clause?

If the a deceased spouse fails to make adequate provision for the surviving spouse, and has significant assets that pass to other beneficiaries outside of his or her estate, why should the surviving spouse’s remedy depend on whether the deceased spouse intended to avoid the Wills Variation Act or the proposed new dependants' relief legislation?

How is it anymore intrusive to vary how life insurance proceeds are distributed than to vary a will? The Committee does not elaborate.

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