Are Will Clauses Making Gifts to Inter Vivos Trusts Valid in British Columbia?

In British Columbia it is common to create trusts in a will. In the will, the will-maker appoints a trustee and sets out the terms on which the trustee holds the property for beneficiaries. This is referred to as a testamentary trust.

It is not as common, but not unusual, in British Columbia for someone to create a trust during his or her lifetime and transfer property to the trustee to hold on the terms set out in the trust. This is called an inter vivos (among the living) trust. Often the person who settles the trust (the “settlor”) is a beneficiary for life, and then the trust sets out the beneficiaries on the settlor’s death. I have written before about some specific examples, referred to as alterego and joint partner trusts. The trust agreement may allow the settlor, or perhaps someone else, to change beneficiaries later.

But what if you create an inter vivos trust, and then put a clause in your will providing that your estate, or part of it, will pour over into the inter vivos trust? I will refer to this as a “pour-over clause.” Can you do this? In my experience, this is not very common in British Columbia, but appears to be more common in the United States. On Thursday, December 12, 2013, the Supreme Court of British Columbia considered the validity of a pour over clause in a will in Re Kellogg Estate, 2013 BCSC 2292. This case may be the first time a British Columbia court has considered a pour over clause.

Robert Kellogg was a resident of Washington State, but owned an interest in land on Saltspring Island in British Columbia. He and his wife, Lisa Kellogg, settled an inter vivos trust in Washington State in 1994, and transferred assets to the trustees. The trust was called the Kellogg Family Trust. The terms of the trust provided that Mr. and Mrs. Kellogg were the beneficiaries during their lifetimes, and following the death of the last of them to die, the trust assets were to be divided into three equal shares for each of their three daughters. Robert and Lisa Kellogg reserved the right in the trust to change the beneficiaries.

Mr. Kellogg signed his will in Washington State, in the presence of two witnesses, who also signed the will, on March 23, 1994. The will contained a pour-over clause. He gave his estate “to the Trustee under that certain Trust executed by me, which is known as [the KF Trust]. The Trustee shall add the property bequeathed and devised by this Item to the corpus of the above described Trust and shall hold, administer and distribute said property in accordance with the provisions of the said Trust, including any amendments thereto made before my death.”

The will also had a clause that said that if the Kellogg Family Trust were found to be invalid or if it no longer existed at Mr. Kellogg’s death, it would be given to the trustees named in the trust and distributed in accordance with the provisions of the trust in respect of his death as they were when the trust were found to be invalid or ceased to exist. In other words, if the trust no longer existed, the provisions of the trust were incorporated by reference into the will, so that the will would carried out as though those provisions were in the will.

On December 2, 1998, Mr. and Mrs. Kellogg signed a document amending the trust to delete one of their daughters as a beneficiary, so that the other two would receive all of the trust assets on the death of their parents. The amending documents were not witnessed.

Robert Kellogg died on April 15, 1999, and Lisa Kellogg died on October 24, 2010, without having probated her husband’s will. Their daughter, Inga Rouches, obtained a grant of probate of her father’s will in British Columbia, and asked the Supreme Court of British Columbia to decide if the pour over clause is valid.

Madam Justice Gray considered three possibilities. If the pour-over clause is valid, and Mr. Kellogg’s interest in the land on Saltspring Island goes into the Kellogg Family Trust, then under the terms of the trust, his interest in the land would be distributed to two of Mr. Kellogg’s daughter. A second possibility is that the pour-over clause is invalid, but the clause incorporating the trust by reference is valid to the extent that it incorporated the terms of the trust as it existed when Mr. Kellogg signed his will. In that case, his interest in the land would be divided among all three of his daughters. The third possibility is that both clauses are invalid, and his interest in the land would pass on an intestacy, there being no valid gift in the will. In that case, all three daughters would share.

Madam Justice Gray found that the pour-over clause is invalid because the clause contemplated that the beneficiaries of the trust could later be changed, and they were in fact changed, through a document that does not comply with British Columbia’s Wills Act. The Wills Act provides, with certain limited exceptions, that a will must be in writing, signed by the maker, who must either sign in the presence of two witnesses, or acknowledge his signature in the presence of two witnesses, who then sign the will as witnesses in the presence of the will-maker and each other.

The pour-over clause contemplated that the Kellogg Family Trust could be amended, and it was amended, which would in effect allow Mr. Kellogg to amend the distribution under his will by a document that did not comply with the formal requirements of the Wills Act.

She wrote at paragraphs 68 through 71:

[68]          The arguments suggesting that the Pour-Over Clause is not effective are that, at least with respect to the Amendment to KF Trust, it would enable RPK to avoid the requirements of the Wills Act; that although the execution of the KF Trust Indenture and the Amendment to KF Trust were acknowledged to a single notary public, they did not have the degree of finality and solemnity which would arise from proper compliance with the Wills Act, including two witnesses; and that the doctrine of “facts of independent significance” is not recognized in B.C. law, and the old English cases in which the doctrine is rooted should not be extended to apply in this situation.

[69]         In my view, the fact that the Pour-Over Clause refers to future amendments of the KF Trust and the fact that the KF Trust Indenture was amended by the Amendment to KF Trust following the execution of the Will is determinative.

[70]         The gift cannot “pour over” to be held by the trustee of the KF Trust on the terms which existed at the time the Will was executed, because that trustee is now obliged to follow the terms set out in the Amendment to KF Trust. The gift cannot “pour over” to be held by the trustee on the basis of the Amendment to KF Trust because the effect would be to permit RPK to have effectively amended his Will without complying with the Wills Act.

[71]         Even though there is some formality associated with acknowledging execution of a document before a single witness who is a notary public, the court does not have jurisdiction to weigh the degree of formality. The failure to comply with the Wills Act is fatal.

On the other hand, Madam Justice Gray held that the terms of the Kellogg Family Trust, as they were when Mr. Kellogg signed his will were incorporated by reference into the will. A will signed in accordance with the Wills Act may incorporate another document by reference, even if the other document does not meet the formal requirements of the Wills Act, if the document was in existence when the will is made. Mr. Kellogg’s will makes reference to the trust as being in existence when he signed the will, and both documents were dated the same day.

Although the clause incorporating the Kellogg Family Trust by reference referred to future amendments, and future amendments that were not made in accordance with the formalities of the Wills Act could not be given effect, Madam Justice Gray held that the court could interpret the will to give effect to the terms of the Kellogg Family Trust as they were when Mr. Kellogg signed his will in order to avoid an interpretation of the will that would result in an intestacy. 

She concluded her discussion of this issue as follows:

[81]         At the time he executed the Will, RPK intended that the residue would pass to the trustee of the KF Trust on the terms set out in the KF Trust Indenture. He also intended that any amendments to the KF Trust would effectively result in amendments to his Will, but he did not take steps in compliance with the Wills Act to make such amendments applicable to his Will.

 [82]         As a result, the Incorporation by Reference Clause incorporates the terms of the KF Trust Indenture, which governed the trustee on the date that RPK executed the Will. The gift of the Musgrave Farm Interest essentially passes to a testamentary trust which is on the terms of the KF Trust as at the date RPK signed the Will, being the terms set out in the KF Trust Indenture without amendment.

[83]         As a result, the Musgrave Farm Interest is to be shared equally by RPK’s three daughters.

Although I don’t read this decision as saying that all pour-over clauses in wills are invalid in British Columbia law, they would need to be drafted so that either the inter vivo trust cannot later be amended, or both the will and the trusts should require that future amendments can only be made in accordance with the formal requirements in British Columbia for wills.

In her decision, Madam Justice Gray notes that Washington State has legislation expressly recognizing pour over clauses in wills. British Columbia does not have similar legislation.

Finally, I note that under section 58 of the Wills, Estates and Succession Act, which will come into effect on March 31, 2014, the Court may give effect to a document that does not comply with the formal requirements for a valid will. It might have been possible for the Court to give effect to the amendment to the Kellogg Family Trust under the Wills, Estates and Succession Act, if it had been in effect when Robert Kellogg died.