Thursday, November 27, 2014

Whose life insurance is it anyway?

Sometimes a couple separates and one spouse must pay child support to the other. They usually put the arrangement into a Separation Agreement so that the terms are clear. On occasion, the spouse who is paying the support agrees (or is required by the court) to buy a life insurance policy, the intent of which is to ensure that if the paying spouse dies, there is enough money to pay out the remainder of the child support.

This arrangement isn't as common as it once was, but it's definitely still out there. A policy like that usually names the ex-spouse, the one receiving the payments, as the beneficiary of the policy.

Recently I read an article posted on Estates and Elder Law in Canada, a blog written by lawyer Chris Staples, that addresses an arrangement like this. The article was about the recent BC case of Milne Estate v. Milne. In that case, a man had a separation agreement just like the one I described above. However, he changed the beneficiary of the policy to name his new common law wife. When he died, he still owed child support.

The question that the court had to decide was who should receive the life insurance money. Should it be the common  law wife, who was named on the policy? Should it be the ex-wife, according to the separation agreement? Life insurance policies are normally outside of an estate, so should it affect the policy if his estate owed child support?

The court examined two basic concepts. One was constructive trust, a "fairness" rule under which the courts can order changes where there has been fraud, unjust enrichment, or a breach of the duty of loyalty. The court said that in this case, constructive trust did not apply because once the requirement to hold the life insurance policy is put in a written agreement, it's no longer about fairness, but about contracts. That would mean the common law wife could keep the insurance proceeds.

The court went on to look at the case through the second basic concept, contract law. This applied because the separation agreement is a contract. The court said that the estate had to honour the contract signed by the deceased. This raised a new question - did the estate have to pay the whole insurance policy to the ex-wife, or just the amount of unpaid child support?

The court determined that to answer the last question, it had to look at the specific wording of the separation agreement (meaning that different wording used in a different agreement could have led to a different result). If the separation agreement had specifically said that the policy was only in place to provide security for the child support obligation, the ex-wife should only receive the amount of unpaid support. However, the agreement did not clearly say that; it only said that the husband was to maintain the policy. That meant that the ex-wife was to receive all of the policy proceeds.

 Click here to read Mr. Staples' article, which contains more detail than I have included in this summary.

This was an interesting result, since the court seems to be saying that two different beneficiaries should receive the proceeds of the policy. Possibly there will be more court proceedings to straighten out who is to get what.

This case illustrates one extremely important point: make sure every element of your estate works together. This means your will, powers of attorney, life insurance, beneficiary designations, joint property, and divorce/separation paperwork. Each item might be just fine standing alone, but if they don't work with each other, your estate will be spent on lawsuits to figure out the things  you should have figured out while you had the chance.


Sunday, November 23, 2014

Inheritance tension: why more families may be headed for court

CBC News is carrying an excellent article about inheritance and resulting disputes. I wish I could say it was all doom and gloom, but after 30 years in the industry I have to say that disputes and struggles are the norm, not the exception. The article explains why BC has more estate litigation than other provinces.  Click here to read the article.

Saturday, November 22, 2014

Beneficiary and executor at a stalemate over signing of Release

I often receive questions about the release forms that are to be signed by beneficiaries. Here is one from a reader that I've heard more than once, that should be of interest to many of you.

"Is there a standard release form ? I have obtained one from my Estate lawyer and one of the beneficiaries will not sign - as the form states "Received" and her take is that she has not received the funds, so her lawyer has changed it to "to be received" and added in codicil items. I don't want to accept it with those changes, as it is not a clear release for me, as executor."

There is no standard release form for everyone. In each province and territory, there is a form of release included in the Rules of Court, and this form is supposed to be followed in order for the document to be suitable for filing in the court. However, it is well-accepted law and practice that all legal documents must be tailored to the individual situation. Lawyers are expected to make the documents fit the case, not the other way around.

The situation you're describing is one that I've encountered before. The beneficiary won't sign a document saying they've received something they haven't received, because they don't trust the executor to deliver the funds. The executor doesn't want to sign something saying that the funds are to be delivered because then there is nothing showing that the funds have been paid, and he doesn't trust the beneficiaries not to sue for the supposedly non-received money.

It's a stalemate if nobody is willing to take a leap of faith.

Parents who appoint one of the kids as executor should think about the dynamics between their children, because this lack of trust in each other manifests frequently between siblings.

The only way to protect everybody in this situation is for you to show up with a) the release that says the funds have been paid, and b) the cheque for the beneficiary. There is a simultaneous exchange. If you have to charge travel expenses or the estate lawyer charges additional legal fees to make this happen, it comes out of the general estate and all beneficiaries receive a little bit less.


Saturday, November 15, 2014

It's "Make a Will Month"

Do you have a valid, up-to-date will? If not, why not? The Ontario Bar Association has designated November as "Make a Will" month to encourage people to look into getting wills put into place.

Advocatedaily.com has an article that talks about why people don't make wills, and clearly explains the advantages of having a will that is properly planned and properly put together.  Click here to read the article.

Wednesday, November 12, 2014

What if a trustee of a trust won't pay a beneficiary?

What if the trustee of a trust refuses to pay the beneficiary? Most individuals would not know where to start, as trust law is pretty foreign to most people. A reader recently asked me about this. Below, I outline the steps a person might wish to take in order to address the situation.

"My daughter was left as a beneficiary on a trust fund. The executor will not pay my daughter. What can we do?"

I assume for the purposes of answering this question that you want your daughter to be paid in accordance with the terms of the trust, as opposed to being paid immediately and ignoring the trust. I'm also assuming from the word "left" that this was a trust set up by a will.

You need to start by gathering facts and information. Get a copy of the document or will that sets up the trust, and make sure you understand exactly what it means for your daughter. The first question to be answered is the amount of discretion the trustee has in deciding whether or not to make payments to the beneficiaries. This will be set out in the document. Most wills provide for "an absolute, unfettered discretion", meaning that the trustee can pay the beneficiaries or not, as he sees fit, and in any amounts he sees fit.

Also make sure that you understand the type of expense that is meant to be covered by the trust. For example, was the trust set up to pay for your daughter's education? Was it set up to cover basic living expenses? Medical emergencies? Some trusts are restricted so that payments may only be made for the purposes named, while others do not limit the type of expense that may be covered.

You do not mention whether your daughter is disabled. If she is, make sure that you understand how the trust will affect her in terms of her government benefits.

Determine whether payments to your daughter must come from the income of the trust only, or from the capital as well. This may make a difference in terms of what is available to be paid.

Find out by reading the trust whether there are conditions that need to be met before she may be paid. For example, does she have to reach a certain age? Perhaps all of the beneficiaries must reach a certain age before anyone is paid. Does the trust provide for an annual payment (which would mean waiting a year after the deceased's death)? It could also be that your daughter is a contingent beneficiary, meaning that she only receives a share of the trust if another beneficiary has passed away or has failed to meet a condition.

If you find that you simply cannot glean all of this information from the will by yourself, sit down with an experienced estate lawyer to read the will and talk about the trust. You simply have to understand the terms of the trust thoroughly before you go any further.

Assuming that you have established that your daughter is eligible to be paid, and the expenses she wants covered do fall within the intent of the trust, it's time to talk frankly with the trustee. If he is refusing to make payments, he must have a reason. Has the estate proceeded to the point that all debts are paid, a clearance certificate has been received, and the trust has been funded? If all of that hasn't happened, the trustee may simply not yet be ready to make payments, and rightly so. In that case, you must simply wait a little longer before funds are available to be paid out. Understand that this could easily be 18 months after the death of the deceased.

If funding the trust is not the issue, is there a procedural difficulty that may be addressed? For example, if your daughter is a  minor, she cannot receive money directly so perhaps the trustee is not sure how to proceed. Even if your daughter is not a minor, the trustee may want a written budget from your daughter. If it's a specific purpose trust (such as for education), he may want your daughter to produce receipts. Most trustees want some kind of paper trail.

If it turns out that your daughter meets all requirements and the trustee is withholding legitimate payments for no apparent reason - or simply refuses to discuss any of this with you - your daughter may take the trustee to court to compel payments. She will need a lawyer for that, and if she is a minor she will need a parent or the Public Trustee to speak for her. She should be prepared to cover the costs. If she is successful in court and the judge orders the trustee to make payments, the judge may also order the trustee to pay some of your daughter's legal bill (from the trustee's own money, not the trust funds), but that is not a given. Don't be too hasty to proceed to court, as your daughter could be penalized if the judge thinks this is a dispute that could have been settled without the courts.

Finally, is there any bad blood between the trustee and your daughter, or between the trustee and you? Is this all happening because of personality clashes? If so, and if it appears that your daughter is never going to get future payments without resorting to the courts for help, perhaps she should ask the court to appoint a different trustee. This could be a trust company, or the Office of the Public Trustee, depending on the amount of the trust, your daughter's age, and the terms of the trust.

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