An estate freeze what is it and why should it be done

Date: 17 Oct, 2019| Author: Fred Streiman

There is a very common tax-planning method called an estate freeze. The tactic is endorsed by the Canada Revenue Agency — as “garden-variety tax planning,”

The following is an example of an estate freeze.

Ms. Successful has built a company, now worth $30 million. She expects it will grow significantly in value by the time of her death, but if she gives the company to her children at that time, they’ll have a huge tax bill. One-half of capital gains are taxable when capital properties are willed to the next-in-line andmore than 25 per cent of accrued capital gains would be owed on the death of a taxpayer in the top income bracket.

So, Ms. Successful freezes the estate. First, she exchanges her $30 million in common shares for $30 million in preferred shares with a fixed redemption amount of $30 million, meaning the value of the preferred shares cannot exceed $30 million. The preferred shares are granted sole voting and control rights.

In exchanging the common shares for preferred shares, the Ms. Successful secures $30 million but denies herself the gains produced as the company grows. Ms. Successful’s children then purchase common shares — initially with zero value — in which that growth is captured. The children “buy” shares for $0, and worth nothing so no tax is triggered.

Ms. Successful continues to control the company and lives off the $30 million, while the company grows to $200 million and the common shares owned by the children increase in value. Without the freeze, that capital transfer would include a $50 million tax bill, but because of the freeze, no common shares are transferred whenshe dies and that’s a tax savings of $45 million. The successors will pay capital gains tax but not until they dispose of their shares, which could be many years later.

Estate freezes are a very valuable tool to assist in legitimate succession planning. Freezes are not reserved for the rich but used by the average business owner.

Estate freezes facilitate the transition of businesses between generations or key employees in an orderly and tax-neutral way.

The mechanics of the estate freeze vary widely, but they usually involve an owner who has enough value in their business to retire on and wants to sell it or bequeath it — either to family, employees, management or others with a connection to the business — allowing them to buy in at a nominal price.

An estate freeze doesnot reduce tax but merely defers it and is a solution to the liquidity issue arising if the shares were sold or transferred and money was owed to Canadian Revenue Agency with all the cash locked up in the shares. These risks result in most businesses not surviving a transition in ownership.

An estate freeze allows one to open the door to new people, who can then get in on that ground floor without having to spend money they do not have.

Remember that most small businesses have access to an exemption of $867,000 for capital gains tax on shares. The societal criticism of estate freezes is it allows high-net-worth families to avoid significant amounts of tax on inter-generational transfers of capital.

Estate freezes can be further embellished by Ms. Successful no longer taking a salary after the freeze. Any payment she receives from the company can be used to redeem or buy back her $30 Million in preferred shares. If she lives long enough, all of her preferred shares will have been redeemed by the company further reducing if not eliminating any tax on her estate’s interest in the company.

How to fix a will after death rectification

Date: 02 Oct, 2019| Author: Fred Streiman

In rare circumstances, the court can repair a Will improperly drafted by a lawyer.

The law can be found in various cases including the Bank of Nova Scotia, the Haugrud 2160NSC 8150 affirmed on appeal, Whittingham v. Crese and Ross v. Caunters. The court has held that it will fix a Will if the lawyer made a mistake in one of these three situations:

  1. The lawyer accidentally make a mistake because of a typographical or clerical error.
  2. The testator (the person making the Will) instructions were not understood.
  3. Where the testator’s instructions were given but for some reason were failed to be carried out.

One usually would have to look at the notes of the lawyer and contrast them with that which had actually been drafted and the Will that was finally signed.

The court has the power to add or remove words if the court is satisfied:

  1. Upon reading the Will, it is clear that a mistake was made in drafting it.
  2. The mistake does not accurately or completely express what the testator’s intentions were.
  3. The testator’s intention must be so clear from the words of the Will that no other contrary intention can be assumed.
  4. The proposed correction by adding or removing words must give effect to what the testator intended from reading the Will as a whole and in light of the surrounding circumstances.
  5. The court will admit outside evidence (that is something other than reading the incorrectly drafted Will) to establish the error when it comes from the lawyer who made the mistake and can swear directly about what the testator intended. It is also old law that a court is to interpret a Will with a presumption against an intestacy. By virtue of an intestacy, one means that there is no proper disposition of the assets and then the testator’s instructions are being frustrated.

While complicated and not frequently done, it is a remedy available and is in sharp contrast to the usual view of the court in Ontario that a Will speaks only within its four corners without looking at outside evidence.

Executors Duties

Date: 24 Jul, 2019| Author: Fred Streiman

The primary purpose of an executor is to bring in the assets of the estate, pay all of its debts and then to distribute those assets in accordance with the terms of the Will. On paper, a relatively straight forward and simplistic set of rules. However, the reality often is far more complicated and can involve conflicts with those nearest and dearest to you. The duty placed upon an executor is a fiduciary duty. In other words, a trust relationship. An executor is placed on a high pedestal, built upon a foundation of trust. If you breach that trust relationship, you can be removed as an executor, forced to pay the unnecessary legal and other costs incurred by the estate as result of your misdeeds and be responsible for your own legal fees. An executor is required to act in a prudent and careful fashion guided by what a prudent business person would do in the same situation.

Duties of executor also known as the estate trustee

Date: 24 Jul, 2019| Author: Fred Streiman

Even if named, do I have to act as an Estate Trustee?

The answer is no. At the outset, even if you have been appointed in a Will or are the most obvious candidate to apply to be appointed as estate trustee in the absence of a Will, you are not bound to take up that responsibility. At the very beginning, you can resign and/or decline to so act. However, if you pick up the mantle and begin to act as an estate trustee, and certainly if you apply and are so appointed by the courts, you can only be removed from that position by an order of the court.

All of the responsibilities of an estate trustee, once you assume that responsibility are yours and you must fulfill them it to the best of your ability.

The most common scenario in which a person will decline their appointment as estate trustee, is for an estate that has a negative value. Even though an estate trustee’s fees are paid in priority to any creditor, it rarely is worth the aggravation and effort to carry out those duties. Often if the net worth of an estate is one that is suspect, a preliminary unofficial inventory will be a prospective executor’s first duty.

The Courts Need To Be Run Like A Business

Date: 14 May, 2019| Author: Fred Streiman

I am a lawyer that has practiced in Brampton Ontario for 40 plus years.

While the judicial system is a fundamental pillar of our democracy, that is no reason for a businesslike approach not be applied to it.

The Government for shortsighted economies has starved the support staff of the courts of funding, which in turn has led to a shortage of qualified clerks able to promptly deal with court filings.

I would propose that except for those litigants that are unable to afford the appropriate fees, that every filing should be accompanied by a fee that properly identifies the true cost to the court for the processing of that document. The Province should retain the services of a cost consultant to determine the proper cost of the processing of the filings that require the court’s attention. That cost should be all inclusive, not only of the clerk required, but the hard facilities that are needed to support that individual. That is the fee that should be charged. Like any business, there must be a cost benefit analysis and the proper burden upon the Province should be alleviated by the fee paid by the individual seeking that relief.

As a result of Government cutbacks which I believe are completely unnecessary and detrimental to all concerned. There are huge backlogs on the processing of mundane applications that my office is involved in.

The processing of an uncontested divorce can literally take months to obtain. We have heard reports of stacks of mail received by the courts that have not been opened as they do not have the manpower to deal with them.

Most egregiously from the Provinces’ financial prospective, the Province is not negotiating cheques that have been submitted. As a specific example, an Application for “Probate” at one time was processed within a reasonable four to six weeks within Peel Region.

That has now climbed to generally exceeding six months. Our office has submitted the appropriate documentation and the government’s estate tax in excess of $9,000.00. Again due to the lack of sufficient staff, the Application has not even been looked at and the cheque has not be negotiated. What business would sit on income of $9,000.00 from a single file without negotiating that cheque? Indeed this has come to my specific attention as our accounting department has pointed out that the cheque is now likely stale dated. The Government is losing vast amounts of money unnecessarily.

I repeat, determine what the true cost is and charge it. At the very least this is a transaction that should be a neutral expenditure.

One must also consider the ripple effect upon the economy. People need to wait hours to file documents, which is a great financial burden to the economy. Similarly, various financial transactions such as selling a home cannot take place until the courts are able to attend to what is often a routine transaction. Again, the Government is losing its land transfer tax that would obviously be earned as a result of such a real estate transaction.

I urge the Government to take a businesslike approach to this problem. If the Province indeed is open for business, then let it at least apply this principle to its own house.

Rest Easy – Multiple Wills Are Just Fine

Date: 03 Feb, 2019| Author: Fred Streiman

Faithful readers of this blog will be aware of the earlier decision of Justice Dunphy of the Ontario Superior Court of Justice, who held as a result of a “basket clause” found in a standard precedent for Primary and Secondary Wills that the Secondary Will was invalid.

All one needs to know is that as a result of Justice Dunphy’s decision, thousands of Wills created across the province by hundreds of law firms may very well have been invalid. This led to lawyers across the province, including our firm, sending out letters and emails to their clients warning that the estate planning that had been done on their behalf may need to be redone. Luckily the executors of the Milne Estate decided to appeal.
On January 24, 2019, the Ontario Divisional Court reaffirmed the validity of the Will that had been criticized and invalidated by Justice Dunphy.

While the precedent that our firm had been using was a slightly different form than that criticized by Justice Dunphy, it is now academic. The court accepted that the very premise of Justice Dunphy’s criticism of the Will in which he stated that a Will was in essence a Trust was undercut by the Divisional Court.

Bottom line, the Estate Bar and its clients across the province can breathe a sigh of relief as there is no need for an update, there is no need for changes, the existing Wills that our firm had prepared for you are as valid as the date upon which they were originally drafted.

That is not to say that reviewing the factual basis upon which your Wills were drafted, is not a valid exercise.

If things have changed, if the people you had initially felt were appropriate executors no longer hold that title in your mind, then you should return and speak to one of our lawyers. Well done to the appeal counsel and to the Divisional Court in pouring oil upon troubled waters.

Estate Complications with Estate Trustees

Date: 17 Oct, 2018| Author: Fred Streiman

Sometimes, third parties who are not related to the deceased may be appointed by the court as an estate trustee.

It has been our experience in highly contested estates when competing parties will not agree on permitting the other acting as estate trustee, the court has the ability to appoint a third party.

On consent, we have even had the situation where a solicitor in our office has been appointed as an estate trustee during litigation.

An example set out in the Taylor Estate decision was a fight between appointed executors/siblings. The Court held that the situation was obviously unworkable, due to the conflict between the siblings.

The court selected and appointed a mutual agreed third party.

Under the Estates Act, a named executor has the ability to nominate a third party to act as estate trustee which can be successful with the court’s authority.

One has to be careful in not looking to a third party who resides outside of Ontario. Looking at S.6 & 29 of the Estates Act, the court can only appoint an estate trustee with a will to a non-resident of Ontario who has the consent of the majority of the persons living in Ontario who otherwise are entitled to apply for such an appointment.

Clearly, there is a considerable expense in having an outside party so appointed as they rarely will act unless they are paid to do so.

This leads back to the author’s own prejudice against naming multiple executors. It is a recipe to create conflict when none is necessary. As we discussed elsewhere, testators often wish to name all of their children as joint executors as an expression of their equal love for them. This is a failed logic for that love should be expressed in the naming of the equal beneficiaries rather than the complication of multiple executors.

Benjamin Orders

Date: 17 Oct, 2018| Author: Fred Streiman

What is an estate to do when a beneficiary cannot be found. While relatively rare, this does occur and it has been the author’s experience that in the absence of specific instructions in the will, this can lead to significant costs. There are specialized beneficiary hunters and as one can imagine they are not cheap. Such an effort is required before the court will assist.

One remedy is an application to the court for what is commonly known as a “Benjamin” order. The name arises from an almost 120 year old decision from England. However it has been adopted by a number of Canadian Courts and most relevantly in Ontario by the decision in Kapousouzian Estate v. Stink.

In a recent decision by Justice Rady in Steele v. Smith the judge examined the circumstances. Suffice it to say, the court looked at numerous factors including the lengths that the executors had gone toto try and find the missing beneficiary. The effect of a “Benjamin” orderis a declaration that the missing beneficiary had pre-deceased the testator and as such the will would be interpreted through that lens. In the Steele decision it would mean that the remaining beneficiary would receive the missing beneficiaries’ share.

The Public Guardian and Trustee, a Government agency opposed the “Benjamin” order asking that the monies be paid into court while further searches were made for the missing beneficiary. In the Steele decision, the executors were ultimately successful. Primarily, because they had made extensive efforts to find the missing beneficiary.

One alternative to consider is when a will is being drafted to provide the executor with discretion, after reasonable and extensive efforts to locate a missing beneficiary to simply have their bequest or interest in the estate eliminated. The circumstances in which such a clause is warranted would include naming a beneficiary that the testator had long been alienated from.

What to do when the bad son will not Move out after mom dies

Date: 17 Oct, 2018| Author: Fred Streiman

We now look at Justice Spiescomments in the 2017 decision relating to the Filippelli estate. In this case, one child lived with mom for two years prior to her death. There was a very loose and rarely observed understanding that the son living with the mother would pay some type of rent. The son rarely did and after mother’s death, continued to live in the family home rent free.

The son remaining in the home was not one of the executors and refused to leave.

The executors then asked the court for an Order for vacant possession and also to require the son in the home to pay occupation rent. The son in the home tried a tactic that everyone was in front of the wrong court and rather that this was a residential tenancy matter akin to a landlord and tenant relationship.

The court did not buy it and ordered that the hold over son move out and pay some type of rent. It is interesting to note that there actually had been four payments over a sixteen month period of $650.00 towards the mother. It is not inconceivable that the decision might have gone the other way and holding that indeed there was a landlord and tenant relationship.

Beneficiaries Gone Wild

Date: 17 Oct, 2018| Author: Fred Streiman

Justice Spies, whose decisions have surfaced in this blog repeatedly,grappled with a group of siblings who suffered delusions as they fought over a $30,000.00 painting. I make no comment about the reasonableness of destroying a sibling relationship for mere money.

In the Newlands decision, the court had earlier found that one brother’s position with respect to a $30,000.00 painting was actually correct. The conclusion was the one brother was to pay the other siblings $30,000.00 and a family painting was his. That is not the point of this particular decision. Rather, it is the astounding fact that the two sides each spent approximately a quarter of a million dollars in legal fees fighting over the rights surrounding the painting.

What was crucial in deciding that the two brothers that failed to recognize at an early stage that their sibling was indeed entitled to purchase the painting for $30,000.00 had caused the parties to waste a combined $500,000.00 for no good financial reason though I am certain emotional and family history played a very large role in the parties’ motivation. When the successful brother asked the court to order costs, the judge carefully looked at all the circumstances. Most importantly the successful brother had made an early offer to settle which in the end reflected almost exactly what the court had done. The court ordered the unsuccessful siblings, out of their own pockets to reimburse almost all of the $250,000.00 spent by the successful brother. Justice Spies held:

“In my view, not ordering them to fully reimburse the successful brother for his legal costs would bring the administration of justice into disrepute.”

Some time ago, the norm was that the estate itself would bear the costs rather than the parties personally but the court has a discretion to order that the parties themselves be personally responsible. In another decision, Tarantino v Galvano, the court looked at the same type of factors and especially the lack of proportionality in deciding that costs should be borne by the contesting parties personally rather than the estate.