Saturday, January 16, 2016

Should the Presumption of Resulting Trust Apply to Beneficiary Designations in Benefit Plans?

The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers.  When a transfer is challenged, the presumption allocates the legal burden of proof.  Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended....
This quote is taken from the Supreme Court of Canada decision in Pecore v. Pecore, 2007 SCC 17 at paragraph 24.

The presumption of resulting trust is most often applied to transfers of wealth that occur during the lifetime of the transferor. For example, a mother might gratuitously transfer the title to real estate to her daughter or perhaps into a joint tenancy with her daughter. In such circumstances, there is a presumption that the daughter holds the real estate in trust for her mother, and after her mother’s death, for her mother’s estate.  But the court may find that the mother intended to make a gift of the real estate or an interest in it to her daughter, in which case the presumption is rebutted and the daughter is entitled to keep her interest in the real estate.

As I have written before, the Supreme Court of British Columbia has held that the presumption of resulting trust also applies to the proceeds of a Registered Retirement Income Fund following the death of the annuitant. In Neufeld v. Neufeld, 2004 BCSC 25, the Supreme Court of British Columbia applied the presumption of resulting trust to hold that the annuitant’s brother held the proceeds in trust for her estate.

In a decision of the Alberta Court of Queen’s Bench released last month, Mr. Justice Graesser questioned, without deciding, whether the presumption should properly be applied to designated beneficiaries of Registered Retirement Income Funds and other plans under which the annuitant or owner may appoint a beneficiary on death. The case is Morrison Estate, 2015 ABQB 769 (Canlii).

John Robert Morrison died on November 10, 2011 leaving four children surviving him. In his will, he divided his estate equally among his four children, except that $11,000 was to be deducted from his son Robert Morrison’s share and distributed equally among John Morrison’s grandchildren. John Morrison designated his son Douglas Morrison as the beneficiary of his Registered Retirement Income Fund. As I will discuss in another post on this case, the usual rule is that the taxes on the Registered Retirement Income Fund on death comes out of the estate, which in this case would significantly deplete the estate.

One of John Morrison’s other children, Cameron Morrison, asked the Court to apply the presumption of resulting trust to the beneficiary designation, and declare that Douglas Morrison holds the proceeds of the Registered Retirement Income Fund in trust for their father’s estate to be distributed in accordance with the will.

In considering whether the presumption of resulting trust applies to a beneficiary designation in Alberta, Mr. Justice Graesser set out the problem as follows:
[18]           The results of this application could have significant impact on the investment and brokerage industry. There are undoubtedly millions of RRSPs, RRIFs and life insurance policies that have designated beneficiaries instead of the proceeds going to the owner’s estate.
[19]           I suspect that many owners, as well as many investment advisors and brokers, are unaware of the potential consequences of the Supreme Court’s decision in Pecore as it relates to beneficiary designations, as well as the income tax consequences of an RRIF or RRSP beneficiary being someone other than the owner’s spouse.
[20]           There has always been the potential issue of a resulting trust being imposed in the event of a gratuitous and unexplained beneficiary designation. Until Pecore, the presumption of advancement in favour of children generally prevented the potential application of resulting trusts in most family situations.
[21]           Since the decision in Pecore, however, there is the potential that any non-spousal designated beneficiary (whether under an RRSP, RRIF or life insurance policy) will be deemed to hold proceeds in trust for the donor’s estate unless he or she can prove that a gift was intended.
[22]           It is frequently said that hard cases make bad law, and there is certainly the potential for a hard case such as this to impact many other plan or policy owners and their designated beneficiaries.
Mr. Justice Graesser expressed doubt as to whether the presumption should be applied to designations of beneficiaries of benefit plans, reasoning that designating a beneficiary is more like a will, taking effect on death, and designations can usually be changed before death. This stands in contrast to gratuitous transfers that may confer an immediate property right on the transferee.

He wrote as follows:
[44]           Like designations of beneficiaries under insurance policies, there is a benefit to the owner of an RRSP or RRIF to be able to designate a beneficiary rather than have the plan go to his or her estate. That may be tax roll-over provisions relating to spousal beneficiaries and there may be an element of creditor-proofing if there is designated beneficiary rather than having the plan go to the owner’s estate.
[45]           I can frankly think of no sound policy reason why beneficiary designations under RRSPs, RRIFs and insurance policies should not be treated in a similar fashion to beneficiary designations under a will. None of these “gifts” take effect until the death of the owner of the plan or policy. With the exception of irrevocable beneficiaries under some life insurance policies, the owner is free to change beneficiaries during his or her lifetime, so long as he or she is of sound mind.
[46]           I recognize the historical concerns surrounding the formalities required of testamentary dispositions. The intent of formality was undoubtedly to attempt to add a level of assurance that the donor intended the consequences of his actions and was in fact the author of the testamentary disposition.
[47]           While such designations have been treated as inter vivos transactions and not testamentary transactions, they are certainly much closer to testamentary transactions than to inter vivos gifts such as transferring bank accounts, investment accounts or property into joint names. Such transactions cannot be unilaterally undone, unlike beneficiary designations. I note that RRSP beneficiary designations appear to be “testamentary dispositions” in Ontario as a result of Ontario’s Succession Law Reform Act, RSO 1990, c S.26 (see Amherst Crane Rentals v Perring, 2004 CanLII 18104 (ON CA), 2004 CanLII 18104 (ONCA)).
[48]           It may well be arguable that Alberta’s Wills and Succession Act accomplishes the same thing in s 71. I need not make that finding because of my ultimate conclusion.
[49]           Beneficiary designations are unlike joint ownership of bank accounts or investment accounts, which confer a present property interest. Beneficiary designations do not. Beneficiary designations are essentially powers of appointment conferred on the owner by the terms of the contract.
[50]           If there was some expectation that requiring formalities would ensure that the testator obtained appropriate advice before completing a will or codicil, that is entirely undone by the law respecting holograph wills.
[51]           I ask rhetorically, if a few handwritten notes on the back of a cigarette package signed by the testator is a valid testamentary instrument and not subject to the law relating to resulting trusts, why should a beneficiary designation signed and witnessed (presumably by a knowledgeable investment advisor) be treated differently?
[52]           This may be one of the unintended consequences of Pecore v Pecore and the abolition of the presumption of advancement in favour of able, adult children. I suspect, without knowing, that the vast majority of beneficiary designations under RRSPs, RRIFs and life insurance policies are spouses or adult interdependent partners or children.
[53]           In my view, Pecore and Kerr v Baranow should not be applied to beneficiary designations for RRIFs (and by inference RRSPs and life insurance policies). To apply Kerr v Baranow and Pecore v Pecore to RRSP, RRIF or life insurance beneficiary designations would, in my view, create untold uncertainties in what are likely hundreds of thousands if not millions of beneficiary designations in Canada.
Mr. Justice Graesser did not ultimate decide whether the presumption of resulting trust applies to the designation of a beneficiary designation in Alberta. He found sufficient evidence that John Morrison intended that Douglas Morrison keep the proceeds of the Registered Retirement Income Fund to rule in Douglas Morrison’s favour on this issue. He wrote:
[73]           On the evidence before me, I find that Douglas has established on a balance of probabilities that his father intended to give him the RRIF. I make that finding on the basis of several factors:
1)         The close relationship between Douglas and his father that existed at the time of the beneficiary designation;
2)         The assistance rendered to Mr. Morrison by Douglas in the time surrounding and immediately following Mrs. Morrison’s death; and
3)         The close temporal connection between the making of the will appointing Douglas and Heather joint alternate executors and the signing of the beneficiary designation in favour of Douglas only.
[74]           I recognize that this is a very thin finding. However, the balance of probabilities tips at 50.01%. In this case, there is slightly more evidence of an intention to favour Douglas than to have Douglas hold the RRIF as a resulting trust for the estate or his siblings.
[75]           Thus, Douglas is entitled to the RRIF.

Even if Justice Graesser had held that the presumption of resulting trust does not apply to a beneficiary designation, a decision of the Alberta Court of Queen’s Bench is not binding on British Columbia courts. In British Columbia, the only case I am aware of on point is the Neufeld decision which does apply the presumption of resulting trust to a beneficiary designation. But if this issue comes before the British Columbia Court of Appeal in the future, the Court could find Mr. Justice Graesser’s analysis persuasive. 

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