Using Trusts to Avoid the Wills Variation Act

In reasons for judgment released a couple of days ago, Madam Justice Wedge considered a vigorous challenge to a trust created for the purpose of avoiding a claim by an independent adult child to vary his mother's will under the Wills Variation Act, RSBC 1996, c. 490. Mordo v. Nitting, 2006 BCSC 1761, is a fascinating case on a number of levels, with interesting facts, multiple issues, leading lawyers, and thorough reasons for judgment. Today, I am going to deal with some of the issues relating to the trust.

Mrs. Eida Mordo had two children: Viviane Nitting, who was very devoted to her parents, and Alexander Mordo, who had a more difficult relationship with his parents. Eida Mordo's husband, Gabriel Mordo,died before her. Alexander Mordo is a very wealthy, successful business person in Vancouver. Viviane Nitting has lived more modestly, and has not done as well financially as her brother.

Mrs. Mordo wanted to leave most of her wealth her daughter, and nothing to her son. She was concerned (rightly, as it turned out) that her son would dispute her will, and she wanted to protect her daughter.

In British Columbia, an adult child may make an application to vary a will pursuant to the Wills Variation Act, on the grounds that adequate provision has not been made for the child. If the court finds that adequate provision has not been made, the court may order such provision as the court considers adequate, just and equitable in the circumstances.

Although the Wills Variation Act gives the courts considerable discretion to vary gifts made in wills, it only applies to wills. It does not give the court jurisdiction to vary a property that is transferred to a trust by a parent during the parent's life .

One of Mrs. Mordo's most valuable assets was a warehouse in Vancouver. To avoid a claim to this property under the Wills Variation Act, she settled a trust in which she appointed one of her solicitors as the trustee. The terms of the trust provided that she would receive all of the income from the trust during her lifetime. She would also have the right to have trust property transferred to her. On her death, the trust property would go to her Viviane Nitting if alive, or to Viviane's issue per stirpes if her Viviane died first. The trust was set up to comply with the Income Tax Act, Canada provisions for an alter ego trust to avoid Mrs. Mordo having to pay tax at the time of the transfer of the warehouse to the trust.

Mrs. Mordo also signed a transfer document to transfer the warehouse to the trustee, but left the transfer document with the trustee, instead of having the transfer registered immediately. The trustee held onto the transfer until after Mrs. Mordo's death, thereby deferring payment of property transfer tax until she passed away. Mrs. Mordo also signed a declaration that she was holding title to the warehouse in trust for the trustee.

Mrs. Mordo's son challenged the trust on several grounds. His arguments included the following:

1. because the transfer of the warehouse was not registered when the trust was created, there was no valid transfer of the warehouse to the trust;
2. the trust was a sham;
3. the trust was testamentary in nature, and did not comply with the requirements of the Wills Act;
4. Mrs. Mordo retained a degree of control over the trust property that was inconsistent with a trust; and
5. the trust was invalid because it offended public policy.

The court rejected all of these arguments as well as few others advanced on behalf of the son.

With respect to the transfer, the court held that Mrs. Mordo by signing the transfer, and leaving it with the trustee, as well as signing a declaration of trust, she did all that was required of her. Madam Justice Wedge consider both the common law requirements, and section 20 of the Land Title Act, RSBC 1996, c. 250, which made the transfer binding as against Mrs. Mordo (if not third parties).

The court rejected the allegation that the trust was a sham. Mrs. Mordo intended to create a binding trust. The property of the trust was certain, as were the beneficiaries. In contrast to a sham, which is intended to mask the parties true intentions, there was nothing misleading about the trust document. The fact that she could call upon the trustee to transfer trust property back to her as long as she was competent to do so, did not negate the binding nature of the trust.

The argument that the trust was testamentary (in the nature of a will), also failed. Madam Justice Wedge found that Mrs. Mordo intended for the trust to take immediate effect. It was not dependant on her death for its force and vigour.

The fourth argument I mention is that Mrs. Mordo exercised a degree of control such that the trust was not a true trust. The argument is that the trustee was really Mrs. Mordo's agent, subject to her directions. She had the power to appoint and remove trustees, and could require the trustee to give her property from the trust. Again, the court rejected this argument. The trustee had full powers to manage the trust property, including selling the warehouse. His powers came from the trust document itself. The right to remove or replace a trustee does not make the trustee a mere agent. With respect to Mrs. Mordo's right to require that property be transferred to her, Madam Justice Wedge distinguished between a power of appointment, which is what Mrs. Mordo's had, and a direct right in, and control over, the trust property. Mrs. Mordo's power of appointment was consistent with a properly constituted trust. She did not have the degree of control required to render the trustee her agent.

Mrs. Mordo's son also argued that the trust was invalid on public policy grounds. He argued that it offended public policy as an attempt to avoid probate fees, and to avoid the Wills Variation Act. Madam Justice Wedge held that it was not against public policy for Mrs. Mordo to engage in estate planning that avoided probate fees. With respect to the Wills Variation Act, she applied the decision in Hossay v. Neuman, in which the court held that estate planning to avoid a moral claim of an independent adult under the Wills Variation Act, does not offend the Fraudulent Conveyance Act, RSBC 1996, c. 163.

Madam Justice Wedge dismissed Mrs. Mordo's son's claims under the Wills Variation Act, in any event, but I will save a discussion of those reasons for another post.

Mordo v. Nitting lends support to the use of trusts created by a parent during the parent's lifetime to disinherit an independent adult child, and to avoid the Wills Variation Act. It is important that the parent's intentions are well document, the trust is carefully drafted, and the trust property is properly transferred to the trust. Such a trust may leave some flexibility for the parent to get access to the trust property, but it is important to take care that the trustee has sufficient management and control to avoid a successful challenge on the grounds that the trust is a mere agency relationship.

I do not read this case, or Hossay, as saying that you can avoid all claims under the Wills Variation Act by transferring assets into a trust before death. In the case of a claim by a spouse, or a child who has a legal claim apart from the Wills Variation Act, the transfer could still be successfully challenged under the Fraudulent Conveyance Act.