Estate planning has only become more complicated in today’s modern society of remarriages, second families, and non-traditional relationships.
The desire to ensure the well-being of a second spouse or common-law partner after your death may conflict with your goals to ultimately benefit and provide for your children from previous relationships. And you will no doubt want to avoid a scenario where your loved ones are left fighting over money after your death.
How do you do this
Well, any lawyer of course is going to tell you to have a good estate plan in place. This does not mean going onto Google and printing a free Will kit. Like many things in life, you get what you pay for when it comes to estate planning.
Bequeathing a life interest
One of the most common ways in which individuals balance their goals in the modern family structure is to provide their spouse or partner with a life interest in real property – i.e. the house where the couple was residing at the time of death. This may include instructions that the property ultimately be sold after the spouse’s death and the proceeds given to the deceased’s children or other loved ones. Your spouse in this example would be considered the life tenant, while your children would be called the “remainderman” or capital beneficiaries.
One issue that can arise in these estate plans is the payment of property expenses, including utilities, property tax, house insurance, and repairs. Should they be paid by your spouse, or paid by your children who will ultimately receive the benefit of the asset? If your spouse or children are not in a financial position to pay some of these expenses, have you left them sufficient assets from your estate to pay for them?
There’s no right way to apportion expenses between the life tenant and the capital beneficiaries, but what’s important for avoiding litigation is that your intentions are made clear in your Will.
Who pays for what?
If your Will doesn’t specify otherwise, then the general rule is that expenses of a recurring nature are the responsibility of the life tenant, while those that are not “ordinary outgoings”, also called capital expenses, should be borne by the ultimate beneficiaries of the asset.
However, there are no hard and fast rules in the case law. In interpreting your Will, the court will look at your Will as a whole to ascertain your intention with respect to the apportioning of expenses. Variations in the wording of Wills have resulted in a variety of decisions in the case law regarding who is responsible for paying what type of expense.
Typically, recurring expenses paid by the life tenant may include things like utilities and house insurance, whereas repairs that would benefit the property beyond the life of the spouse or common-law partner, such as new roof, would be paid by the capital beneficiaries. Unless the Will specifies that the life tenant has an obligation to do repairs, repairs have generally been categorized as a capital expense. However, property maintenance such as snow removal or lawn maintenance may be categorized as a recurring expense as the life tenant is receiving a benefit from those services.
Historically, courts have held that a life tenant pay the interest on a mortgage while the capital beneficiaries are responsible for the principal. Of course, if the value of your Estate allows it, the simplest approach may be to direct your estate trustee to pay off the mortgage in full after your death, as a debt of your Estate.
Even if your Will is clear as to who is responsible for paying what expense, it is also important to consider the relationship dynamics within your family.
For example, if you decide you want your Estate to pay some of the house expenses for your spouse during his or her lifetime, you may consider setting up a trust to cover these expenses, with the remaining money to go to your children upon your spouse’s death. Consider carefully who you appoint to be the trustee of that trust.
Appointing one of your children to manage that trust puts them in an inherent conflict of interest between the spouse’s interest and their own eventual interest in the funds, and even appointing a sibling may not be a good idea if your spouse doesn’t get along well with other members of your family.
Appointing your spouse to manage their own trust may be an ideal option, but it’s not always practical if your spouse is easily overwhelmed by financial management, or if they do not get along with your children and the leftover funds are meant to go to the children.
When the court gets involved
A failure to consider family dynamics when setting up these sort of estate plans may lead to litigation to have a trustee removed, which can be a costly expense for all involved.
In the 2015 Ottawa case of Holgate v Sheehan Estate, which went to Ontario’s Court of Appeal, the deceased husband left his wife a life interest in two trusts under his Will, for her care and support. One of the trusts specifically stated that it’s main goal was to provide for the needs of the wife and that it need not be conserved for the future use of his children or stepchildren. The second trust authorized the trustee, being the wife and the deceased’s solicitor jointly, to draw on the income of the trust, with the capital to be transferred to the deceased’s two biological sons upon his wife’s death. The wife also had children from a previous marriage.
An issue arose when the wife not only used money from the trusts for her own expenses, but used money to top up the savings in her own Estate, which she then left to her biological children. The deceased’s sons argued that the wife had violated the terms of the trusts by accumulating wealth from them, as the terms of both trusts stated it was for “the sole use and benefit” of his wife during her lifetime. The sons argued the wife was going beyond the scope of “using” the trust by saving money from it.
With respect to the first trust, the trial judge concluded a depletion of the capital of the trust was contemplated and it was clear there was no restriction on the wife’s ability to save money.
Likewise, with respect to the second trust, the judge found there was no limitation on the discretion of the trustees to draw on the income earned in the trust for the use and benefit of the wife. Also influential to the judge’s interpretation of the deceased’s intention was the fact that the deceased had previously made an absolute gift of the funds in the second trust to his sons, but later amended his Will by Codicil to allow his wife to benefit from the income of that trust.
The Court of Appeal upheld this decision.
It’s therefore important to turn your mind to these potential issues when estate planning around complex family structures and dynamics. A clear, comprehensive Will can save your Estate and loved ones both legal fees and the stress that comes with litigation.
[This article originally appeared in the October 2018 issue of Fifty-Five Plus Magazine.]
For any questions on preparing your Will, please contact our Wills and Estate Planning group.