The right to challenge a will vs the right to win.

I'm often asked about the ins and outs of leaving an individual out of a will. Whether the person omitted from the will is an adult child, a friend, or even a spouse, the topic of whether that person can legally be left out comes up repeatedly.

I've recently come across an excellent article written by Isabelle Cadotte, a lawyer with Scotia Wealth Management, on a blog called All About Estates. In the article, Ms. Cadotte talks about this very topic. It's very clearly written and I recommend it to all readers. Click here to read it. I fully support Ms. Cadotte's information given in this article. In particular, I support her statement that if you are a person who believes that he or she should have been included in the will, such as a child of the deceased, the law might give you a right to apply to challenge the will. It does not necessarily guarantee you a win.

This is an important point. Much of the time, when someone is left out of a will, the question they ask me is "can they do that?" It's much too simple a question, really. The implication is that I should be able to say yes or no, and that's the end of it and a "no" should mean it's a slam-dunk win and that's that. Nothing could be further from the truth. If you have the right to challenge the will, then you have the right to start a lawsuit, to bring evidence, to question the evidence brought by the other side, and to have a judge decide whether you have to be included or not. So if I say "no they can't do that", what I mean is that you have the right to bring a challenge. You are not automatically going to win.

Nor, of course, are you automatically going to lose. The point is, your right is to have the issue heard and decided.

We're closed due to major snowstorm

Things have come to a virtual stand-still here in St. John's. Our office is closed due to the state of emergency, and will remain closed until we know it's safe for our clients and for us to get around town. In the meantime, I now have extra time to answer some questions here on this blog, and  hopefully will get through them all.

Attached photo from vocm.com and credited to Earl Noble.

A transgender beneficiary now has a different gender and name from the will. Is that a problem?

Sometimes the logistics of wills and estates procedures may appear to be more complicated than they really are. For example, a reader recently asked me an excellent question about any problems that might arise because a beneficiary named in a will has changed gender and name from that shown in the will.

Here is the question:

"I'm transgender, so I might be listed under a different name in the will, referred to with the wrong pronouns, etc., would that change anything?"

The good news is that even though very little has changed fundamentally with wills in the last 100 years or so, the processes and procedures do get updated (slowly, I admit, but we get there). The change in gender and name will not prevent the beneficiary from inheriting the share given in the will. There is a simple way to deal with this reader's dilemma.

Let's say the beneficiary was named in the will as "my niece, Sara Smith." Since the will was made, Sara has become Sam Smith, a male. Everything about this gift seems different from what's in the will, but it's the same person. The important part of the gift is not the designation as a female. The important part is that the aunt wanted to give a gift to a specific person. The obligation of the executor of the will is to carry out the intentions of the testator (the person whose will it is). This is also the goal of any judges who may be involved in the case; the testator's intentions are paramount, so ways and means must be found to make those intentions happen.

The easy solution is for the executor to describe the change in the affidavit that accompanies the application to the court for probate. Every probate application contains such an affidavit; all the executor has to do is modify it to ensure that the beneficiary's situation is made clear. This is the same sort of procedure that is used when a woman who was single when the will was drawn up later marries and takes her husband's surname. Her name might be different from what shows in the will as well, but it is easily explained.

The affidavit I have mentioned is, like all affidavits, sworn under oath before it is given to the judge. Because it is sworn, its contents are evidence before the court.

If the will is not probated and the estate is administered without ever going in front of a judge, the changes can (and should) still be addressed. The most likely time and place to address this is at the end of the estate administration when the executor provides his or her written accounting to the beneficiaries. To explain to the rest of the beneficiaries why a gift to Sara was given to someone called Sam, the executor would include a sentence indicating the changed circumstances.

Court says that beneficiaries don't have to indemnify executor who pays them before paying taxes

What if you were the executor of an estate, and when it came time to distribute the estate, you held back what you thought was enough money to pay the deceased's tax, but it wasn't enough? What if you then paid all the extra tax yourself, and planned to get the beneficiaries who received the estate to repay you for their shares of the tax? Would they have to repay you?

This question was recently the subject of a court decision in Alberta. In the Muth Estate, the executor  distributed the estate to the beneficiaries before receiving a Tax Clearance Certificate. This is not an unusual situation at all. The executor took the very reasonable step of consulting an accountant for an estimate of how much to hold back from the estate for outstanding income tax. Based on that advice, she held back $25,000 and paid out the rest of the estate.

As it turns out, the outstanding tax was about $50,000. In order to avoid penalties and interest from CRA, the executor paid the whole tax bill herself from her personal funds. She then turned to the beneficiaries of the estate and asked them each to repay some of the money to cover the tax. They refused.

The executor then turned to the court, hoping to force the beneficiaries to pay their shares. She argued that they were obligated to indemnify her for their proportionate share of the taxes.

The court did not agree. The judge said that the payment of the estate without paying taxes first was a breach of the executor's duty as a trustee. A beneficiary is not required to indemnify the executor where the beneficiary didn't request or instigate the breach. The obligation is all on the executor.

Most executors know that they will run into trouble if they pay out an estate without paying taxes first (or getting a Tax Clearance Certificate from CRA). Most of the time, executors are under pressure by the beneficiaries to hurry up and pay them their money. The Muth Estate shows exactly what can happen if the executor makes a mistake. The beneficiaries can't be forced to repay an executor when they didn't cause the error. In this case, the outcome seems a bit unfair because the executor did consult an accountant and rely on his advice. Whether there will be a further lawsuit involving the accountant remains to be seen.

This case makes perfect sense to me and I cannot see how a court would reach a different conclusion. However, I expect that this case won't make it any easier for beneficiaries who are trying to persuade a reluctant executor to make an interim distribution. Executors should exercise caution when thinking about paying out the estate before that all-important Tax Clearance Certificate has arrived.

Estate Planning Misconceptions (Part 4) is now online

Part 4 of our 5-part series about Estate Misconceptions is now up on our YouTube channel. Click the link below to watch Chelsea host this video. Yes that little teacup Pomeranian in the video works in our office as our official client greeter. We have tons more videos of all kinds coming up this new year, so why not subscribe to the channel to make sure you don't miss them.