Don't Wait For Your Divorce To Make a New Will

I have often had people tell me that they would make an appointment with me for a new will once they have resolved their lawsuit with their spouse to divide their property, or once they have obtained their divorce. My advice? Don’t wait.

In N. v. N., 2009 BCSC 667, Mr. N. started a divorce and family law proceeding against his wife, Mrs. N. in 2005.

The Supreme Court of British Columbia had granted a declaration that the couple had no reasonable prospect of reconciliation. The effect of this order was to give each of the spouses an interest in any family property owned by the other spouse. There is a presumption in British Columbia of equal sharing of the family property, but the court can re-apportion the division in favour of one spouse or the other.

Mr. N. died on October 7, 2008, before the family law proceeding was resolved and before the court granted a divorce order.

In his will, he appointed Mrs. N. as his executor and left her his entire estate. The reasons for judgment do not indicate the date of the will.

Mrs. N. did not apply to probate the will, but as the executor named in the will she directed Mr. N.’s lawyer to remove certificates of pending litigation against family property. (A certificate of pending litigation is a document that can be filed against real estate when someone is making a claim to an interest in the real estate. The effect of the certificate is to protect the claimant’s interest in the land in case the registered owner tries to sell or mortgage the land after the certificate is registered.)

Mr. N.’s lawyer was concerned that Mrs. N. was in a conflict of interest, and refused to accept instructions from her without directions from the court.

Mr. and Mrs. N. had three children, one of whom is 21, while the other two are still minors, aged 17.

If Mr. and Mrs. N. had been divorced, the effect would be that Mrs. N.’s appointment as executor and her benefit under the will were void (unless there were a contrary intention shown in the will for the appointment and gift to remain valid despite a divorce).

Because there is no divorce, Mrs. N. is entitled to the estate. But their children could apply to vary the will under the Wills Variation Act.

The children might very well be content to allow their mother to inherit their father’s estate, but the two youngest children do not have the legal capacity to release their potential Wills Variation Act claims.

The Public Guardian and Trustee of British Columbia took the position on behalf of the minor children that the family law proceeding must be completed to determine what assets will comprise Mr. N.’s estate. Mrs. N. would have to be passed over as the executor in favour of someone who does not have a conflict of interest.

Instead, Mr. Justice Powers directed that someone should be appointed as a litigation guardian for the two minor children to consider their interests, and make submissions as to whether it is in the best interests of the two minor children to make a Wills Variation Act claim. The parties would also provide the court with further information concerning the family assets.

Mr. Justice Powers approach appears to me to be a good one. If it is not in the minor children’s best interest to apply to vary the will, and if the adult child does not want to make an application, then it would be a waste of money to insist that the family law proceeding be concluded. If there is no Wills Variation Act claim, Mrs. N. will receive all of the disputed assets anyway.

Now, I will go back to my original point. It may be that Mr. N. would have wanted his spouse to receive his estate despite the breakdown of the marriage. But if he would have preferred that his share of the family assets go to his children on his death, then he needed to make a new will before his family law proceeding was resolved.

Ecological Gifts and Conservation Covenants

In my last post on ecological gifts in Canada, I described how you can donate ecologically sensitive land to a qualifying organization, receive some Canadian income tax benefits now, while continuing to use and enjoy the land during your lifetime.

If you do this, you will not be able to leave the land in your will to your heirs, nor will you be able to sell the land (except for your limited interest which may not be marketable).

An alternative way of preserving the natural features of your ecologically sensitive land for the future, while enjoying some tax benefits now, is to register a conservation covenant.

A conservation covenant is an agreement registered against your land that affects what you and future owners may do with your land. The purpose of a conservation covenant is to preserve natural features of the land including wildlife.

Because a conservation covenant will restrict or prevent future development of your land, it will reduce the value of your land. The reduction may be small in some areas, but substantial in others, such as land that could otherwise be developed in Vancouver, or another large city.

The conservation covenant is held by a government or private organization, which may enforce the covenant, if you or a future owner fails to comply with the terms of the covenant.

If you grant a covenant on ecologically sensitive land to a qualifying organization, then you will receive a tax receipt for the value of the covenant. The amount of the receipt will be significantly lower than the amount you would receive if you donated the land, or even donated the land subject to a life interest.

Each province has its own legislation concerning conservation covenants.

In British Columbia, section 219 of the Land Title Act governs conservation covenants. A covenant may include provisions “that land or a specified amenity in relation to it be protected, preserved, conserved, maintained, enhanced, restored or kept in its natural or existing state in accordance with the covenant and to the extent provided in the covenant.” The covenant must be in favour of the provincial government, a municipality or regional district, or certain organizations (usually land trusts) approved by the provincial government.

For more information you may wish to read a short article by the Land Trust Alliance of British Columbia here.

Ecological Gifts and Life Estates

As I wrote in my post on the tax benefits of ecological gifts in Canada, it is possible to continue to own and use your real estate, while receiving tax benefits now.

One way you can do this is to give ecologically sensitive land to a qualifying organization, while retaining a life estate (or life interest) in the land.

You can slice ownership of land in different ways. One way is to create successive interests in time. One person may have the right to the benefits and obligations of ownership during his or her life (called a “life tenant”), while another will receive possession of the land on the death of the life tenant (called the “remainderman”).

If you would like to give your ecologically sensitive land to a qualifying organization now in order to receive a tax benefit now, you can make the gift now while retaining a life estate on the title. You will be able to continue to use the land as your own during your lifetime, but you will also have to continue to have the obligations of an owner, such as paying property taxes.

What’s the catch?

Because you are retaining a life estate, which is something of value, the amount of the charitable tax receipt you will receive will be less than if you donated the land without retaining a life estate.

To receive the tax receipt, the land will have to be appraised. Appraising land is more complex if there is a life estate. First the appraiser will need to appraise the value of the land if you sold it now. Then, the appraiser will have to appraise the value of your life estate, and deduct that amount to arrive at the value of the remainder interest that you are donating. The extent of the reduction for your life estate will be related to your age. If you are young, the recipient of the gift will probably have to wait a long time before obtaining possession of the land, which reduces the value of the gift now. The older you are, the smaller the reduction in the appraised value of the land.

Although you may retain the right to enjoy the land during your lifetime, you are giving up something of value. Because your interest in the land ends at your death, you cannot leave it to your heirs in your will. If you later need money to live on, you will no longer be able to sell the land for its full value. Although in theory you could sell your life estate, no one is likely to be interested in buying an interest in your land, knowing that on your death he will have to give up possession.

Although you may continue to use the land after making a gift if you retain a life estate, you may not change the use (without permission from the Minister of the Environment) or use the land in a manner inconsistent with its status as ecologically sensitive land.

What if you want to keep the land during your lifetime, and you also want your spouse and a child to have it for their lifetimes? You could keep a life estate for yourself, and give life estates to your spouse and a child, while giving the remainder interest (after the deaths of all three of you) to a qualifying organization. The amount of your charitable tax receipts will reflect the fact that the qualifying organization will not receive possession until the last of the three of you to die.

I recommend reading Environment Canada’s publication “Retaining the Right to Use Land Donated as an Ecological Gift.”

In my next post on ecological gifts, I will write about conservation covenants.

Qualifying Organizations for Ecological Gifts in Canada

On Sunday, I wrote about the tax advantages of making gifts of ecologically sensitive land to certain organizations. I followed this post with one discussing how to find out if your land may qualify as ecologically sensitive land in order to take advantage of the tax advantages.

The next question is what organizations qualify under the ecological gifts program?

You may give your land to the Government of Canada, to the government of any province or territory, or to any municipal government under the Ecological Gifts Program. You may also give the property to a number of other organizations that have been approved by the federal government. Most of the approved organizations are land trusts, incorporated for the purpose of conservation.

If you are interested in donating land to a land trust or other approved organization, you can check the listing of approved organizations here.

You will notice that some of the organizations are national or provincial in scope, while others are local. For example the Central Okanagan Land Trust holds ecologically sensitive land here in Kelowna and the Central Okanagan Regional District.

What is “ecologically sensitive land?”

I wrote yesterday about the Canadian income tax credits for gifts of ecologically sensitive land. But how do you know if your land is ecologically sensitive land?

Environment Canada uses the following criteria, which are posted on its website:

areas identified, designated or protected by a local, provincial, territorial, national or international system or body as ecologically significant or ecologically important;

natural spaces of significance to the environment in which they are located;
sites that have significant current ecological value, or potential for enhanced ecological

value, as a result of their proximity to other significant properties;

municipal or rural lands that are zoned or designated for biodiversity objectives;

natural buffers around environmentally sensitive areas such as water bodies, streams or wetlands; and

areas or sites that contribute to the maintenance of biodiversity or Canada's environmental heritage.

In addition to these criteria, some provincial governments also have their own criteria. The criteria for Ontario, Quebec, New Brunswick and Prince Edward Island are also listed on Environment Canada’s website here.

As of the date of this post, I am not aware of any additional criteria for British Columbia.

You will need to get your land certified as ecologically sensitive to qualify. You may contact to the regional Ecological Gifts Program coordinator or a designated certification authority for your region (see this link for contact information), and provide his or her office with some information about the lands. You can see an illustration of the information required here.

You can ask for a Certificate for Donation of Ecologically Sensitive Land before you commit to completing the gift. Then, if the land does not qualify, you can decide whether you still wish to make the gift.

Tax Benefits of Ecological Gifts in Canada

Do you own ecologically sensitive land in Canada? Do you want to preserve the lands natural features and habitat indefinitely?

If so, there are a number of ways that you can do that, a few of which I will be writing about in a series of posts on ecological gifts.

The Canadian Government has made gifts of ecologically sensitive land to certain organizations in order to protect the land attractive by providing generous tax benefits. As I will discuss in a future post, it is even possible to continue to own and enjoy the land (subject to some restrictions on use), while receiving some tax benefits now.

In this post, I am going to discuss the tax advantages of gift of ecologically sensitive lands to qualifying organizations. (I will save a discussion on what qualifies as ecologically sensitive land, and what organizations qualify for later posts.)

There are two significant tax advantages to making gifts of ecologically sensitive land to qualifying organizations. First, you will receive a charitable tax credit for the value of the gift. The federal tax credit, as of 2008, was 15% on the first $200 and 29% for all amounts over $200. In addition to the federal tax credits, each province provides further tax credits, which vary from province to province.

In contrast to most other charitable tax credits, there is no limit to the amount you can claim in any one year for a gift of ecologically sensitive land, except that the credits are non-refundable. This means that you can use the credits to reduce your income tax to zero, but the government won’t pay you anything after you have used your credits to offset all of the income tax you would otherwise have to pay.

What if you are not able to use the full amount of your charitable tax credit in the year you make the gift? You can carry the unused tax credits forward to apply it to income in future years. You can carry the credits forward for up to five years.

The second significant advantage to ecological gifts is that you can avoid capital gains tax on the gift.

In many cases, if you sell land at a profit the profit will be taxed as capital gains. For example, if you bought land for $200,000, in 1995 and now sell it for $400,000; you will have capital gains of $200,000. Half of the $200,000 is then brought into your income, and you will have to pay income taxes on $100,000 of income. (I have simplified this somewhat).

But, using this example, if the land is ecologically sensitive, and you give the land to a qualifying organization, you will not have to pay any tax on the $200,000 capital gain, but will still get a tax credit for a $400,000 gift. This is more attractive than if you sold the land for $400,000, paid capital gains tax, and then gave the sale proceeds to charity.

You should note that not all land will be taxed as capital gains. For example, if the land you own is inventory rather than capital property, then this benefit will not be available to you. Or, on the other hand, if the land qualifies for your principal residence exemption, it will be exempt from capital gains anyway.

Environment Canada provides some examples with calculations of the tax benefits for gifts under its ecological gift program here. You may also wish to read The Canadian Ecological Gifts Program Handbook 2005.

Chief Judge Hugh Stansfield (1957-2009)

I was saddened to hear about the death of the Chief Judge of the Provincial Court of British Columbia, Hugh Stansfield, from cancer on May 7, 2009.

Before his appointment as Chief Judge, he sat as Provincial Court Judge, and Associate Chief Judge, here in Kelowna, and was well liked and respected amoung our local bar.

You can read the Provincial Court press release announcing his passing here, and a short bio on the Canadian Bar Association, B.C. Branch website here. There will be a Special Sitting of the Court on Thursday, June 4, 2009 from 9:00 to 10:00 am in the Great Hall at the Law Courts, 800 Smithe Street, Vancouver.

Elder and Guardianship Mediation

One of the Canadian Centre for Elder Law's most recent projects is on Elder and Guardianship Mediation. According to the Centre's overview:

In October, 2007 the BC legislature passed the Adult Guardianship and Planning Statutes Amendment Act. Once the Bill is implemented, it will require mandatory mediation for guardianship applications in many common circumstances. While these changes will put British Columbia at the vanguard of guardianship law, mandatory mediation raises a multitude of issues to be addressed such as:

- impartiality of mediations

- capacity to mediate or participate in the process

- abuse / neglect / self-neglect

- conflicts of interest

- confidentiality

- mediator accreditation / training

Due to the relatively low costs of mediation as compared to litigation, more and more families are turning to mediation as a way of resolving family conflict. Mediation may be well suited for many situations, but the same issues listed above must be taken into account to ensure that the process is fair, supportive, and respectful of the parties' rights.

In this project the CCEL is gathering pertinent research and consulting key stakeholders in order to provide information essential for both the adoption of mandatory mediation in British Columbia, and for mediators who work with older clients.

You can read the backgounder here.

Differences Between Moral Obligations To Married and Common Law Spouses Under the Wills Variation Act

Now that common law spouses are allowed to make claims under the British Columbia Wills Variation Act, should a common law spouse be treated differently in a Wills Variation Act claim from a married spouse?

The first case that I am aware of where the court dealt with this issue was Picketts v. Hall, 2007 BCSC 133. In that case, Mr. Justice Bauman held that the deceased common law spouse did not have the same legal or moral obligations to the surviving spouse as would a legally married spouse. [Since I wrote this post, the Court of Appeal has overruled the trial judge's decision in Picketts. See my discussion of the Court of Appeal decision here.]

In my comment on the Picketts case, I wrote:

This decision provides authority in support of the view that a common-law spouse does not have identical obligations as a married spouse under the Wills Variation Act. On the other hand, I think one should keep in mind that this case dealt with a very large estate. In a smaller estate, the courts may impose similar obligations on common-law spouses in long-term relationships as they do on married spouses who do not make adequate provision for each other in their wills.

In a more recent case, Lamoureaux v. Kalyk, 2009 BCSC 584, Mr. Justice Slade considered this issue further.

Kathryn Lamoureaux dated Nick Kalyk from 1992 to 1998. They then lived together in a marriage-like relationship from 2000 until June 1, 2006, when Mr. Kalyk died at the age of 69. They had planned to marry, but he died before their wedding.

In his last will, made in 2002, Mr. Kalyk gave Ms. Lamoureaux the right to live in his house for 10 years, and $50,000. He left the rest to his three daughters.

The day before he died, Mr. Kalyk signed a transfer of his house into a joint tenancy. He was also changing his will, and planned to increase the gift to Ms. Lamoureaux to $100,000, but died before he completed a new will.

Ms. Lamoureaux applied to vary the will on the basis that Mr. Kalyk’s will did not make adequate provision for her.

Ms. Lamoureaux worked as a clerk for the City of Kamloops. Apart from the house she received from Mr. Kalyk as the surviving joint tenant, her main asset was another house worth approximately $280,000 which she rented out. She was also the beneficiary of Mr. Kalyk’s Registered Retirement Savings Plan, which held about $105,000. She had two adult children. She was 19 years younger than Mr. Kalyk.

Mr. Kalyk had an interest in a company he had established to develop land in Kamloops. He had reorganized the company in 2000 to transfer shares to a trust settled for his daughters in an estate freeze. He still owned redemption shares worth $672,000 (before tax) in the company, which comprised most of his estate at death. The net after-tax value of Mr. Kalyk’s estate was $480,000 (this does not include the house he held in a joint tenancy with Ms. Lamoureaux).

Mr. Kalyk’s three daughters were in their forties, and were all financially well off.

Mr. Justice Slade considered the competing legal and moral claims of Ms. Lamoureaux and Mr. Kalyk’s daughters. He found that Mr. Kalyk’s legal obligation to Ms. Lamoureaux (that is what she would be entitled to on a breakdown of the relationship) was limited to spousal support, which would be satisfied by the $50,000 left to her in the will. Mr. Kalyk had no legal obligations to his daughters. Mr. Justice Slade also found that Mr. Kalyk’s moral obligations to his daughters were met by the family trust he set up for his daughters.

What about Mr. Kalyk’s moral obligations to Ms. Lamoureaux? Mr. Justice Slade found that in this case he did have moral obligations that were similar to those he would have if they had been married. He distinguished the decision in Picketts as follows:

[108] In Picketts v. Hall Estate, Bauman J. rejected the argument that Ms. Picketts should be treated as though she were the wife of Mr. Hall and entitled presumptively, to a one half interest in the family assets. He said:

"This is simply an effort to attain morally, what Ms. Picketts could not have achieved legally. It is not a proper approach and it does not honour the decision by this couple not to marry, even if Ms. Picketts found that decision disappointing."

This finding, however, was in a case in which the value of the estate was, at a minimum $18,000,000. Hence, the size of the estate was irrelevant to the task of ascertaining the proper division for an adequate, just and equitable award under the Tataryn moral obligations standard (para 61).

[109] In the present case, as the estate was not sizeable, a determination that Ms. Lamoureaux is entitled to an amount equal to her legal entitlement if married, would not be contrary to principle, if such is warranted to establish an adequate, just and equitable award.

Mr. Justice Slade awarded $220,000 to Ms. Lamoureaux, which represents half the net value of the estate.

Smith v. Graham

Yesterday, the British Columbia Court of Appeal released reasons for judgment in Smith v. Graham, 2009 BCCA 192.

As I previously wrote, the Supreme Court of British Columbia had ruled that a deceased’s person’s executor could transmit the deceased’s interest in the title to land into the executor’s name, even if the deceased held title as a trustee of an unregistered trust. The original Supreme Court decision was good news for estate planners. It facilitated planning that minimized probate fees payable to the Provincial Government without incurring tax under the Property Transfer Tax Act. I elaborated in my previous post.

I also thought—and still think—the Supreme Court of British Columbia decision made sense, being consistent with both the provisions of the Estate Administration Act, and British Columbia’s Torrens land title system.

But the Registrar of the Land Title Office took a different view, and his view prevailed in the Court of Appeal.

The Registrar’s position is that he is required by section 260(3) of the Land Title Act to be satisfied that the deceased held “good safe holding and marketable title before he could register the title into the executor’s name. What does “good safe holding and marketable title” mean? The Court of Appeal accepted the Registrar’s description as follows:

What the cases suggest is that a good safe holding and marketable title is a title where (1) the possession of the person on title is safe from attack and they cannot be displaced (safe holding) and (2) it is title “which, so far as its antecedents are concerned, may at all times and under all circumstances be forced upon an unwilling purchaser” (marketable). These cases suggest that the question of whether or not a person’s title is ‘doubtful’ is not one of whether there is a strict legal defect in the claimed title but whether there is some issue which would lead a reasonable purchaser to question the title and thus refuse to complete a transaction.

The Court of Appeal held that when the registered owner (now deceased) signed the trust agreement acknowledging that he was holding the land in trust for the trustees of a trust, he no longer had good safe holding and marketable title. Madam Justice Levine wrote at paragraphs 22 and 23:

[22] The Registrar noted, correctly, that the titles transmitted to the respondents from the deceased under the Estate Administration Act and the Trustee Act were subject to all of the interests to which the deceased’s interests were subject at law.

[23] Under the terms of the Deeds of Settlement, the deceased’s titles were not secure, or safe-holding, because they had transferred the property to the Trustees “absolutely … by way of gift” and agreed “at the request of the Trustees to transfer the property to or to the order of the Trustees.” The deceased’s titles were not marketable, because they had agreed not to deal with the property “without the written direction of the Trustees”, and a purchaser seeking to deal with the property who became aware of the terms of the Alter Ego Trusts could not be forced to complete a transaction without resolution of their requirements.

In the result, where the deceased’s held land as trustee of an unregistered trust, it will be necessary for the deceased’s executor or administrator to have the trust registered (which in most if not all cases will trigger property transfer tax).

Are there other implications of this decision?

The Court of Appeal says that the deceased could not force an unwilling purchaser who became aware of the trust to complete the transaction. Why not?

If a purchaser becomes aware of the unregistered trust before taking title, does this affect the purchaser’s title?

Presumably a purchaser could rely on sections 20 and 23 of the Land Title Act. Section 20 (1), for example, says:

(1) Except as against the person making it, an instrument purporting to transfer, charge, deal with or affect land or an estate or interest in land does not operate to pass an estate or interest, either at law or in equity, in the land unless the instrument is registered in compliance with this Act.

But if purchasers are protected by section 20, and are not bound to recognize the unregistered trust, how does the unregistered trust affect the marketability of the title?

Aside from unregistered express trusts, there are other types of trusts such as resulting trusts (where one person contributes property or the funds to purchase property gratuitously to the title holder), and remedial constructive trusts (where the court imposes a trust on the registered owner). If there is a potential for such a claim, does the potential for such claims affect the registered owner’s good safe holding and marketable title?