POWERS OF ATTORNEY – THEY’RE HERE TO STAY

In 2000, new estate planning laws increased the ability for British Columbians to plan for a potential future disability through injury or illness. Using a new type of agreement, called a Representation Agreement, you could make legally valid instructions for another adult to manage not only your financial, property and legal matters, but also your health care and medical matters. Traditional enduring powers of attorney (useful only for property, financial and legal matters) were scheduled to be phased out.

While the opportunity to make legal plans for future health care and medical needs was widely embraced and long overdue, the legal and financial community were concerned about the proposed cancellation of enduring powers of attorney. The new laws imposed significant restrictions on the financial powers that could be granted under a Representation Agreement. There was concern about the recognition of Representation Agreements outside B.C. Representation Agreements would be more costly to make.

In light of these concerns, the BC government commissioned a review of the effectiveness of Representation Agreements in relation to financial, property and legal matters. This spring the BC government published an information bulletin indicating that it accepts the recommendations and will revise the laws. As a result:

  • Enduring powers of attorney will not be phased out, but will be the main planning tool to appoint someone to manage your financial, property and legal matters
  • Representation Agreements will remain as the only planning tool to appoint someone to manage your health and medical needs
  • Existing Representation Agreements that authorize a representative to manage financial, property and legal matters will remain valid

Powers of attorney are instruments that allow you to appoint another adult, called the attorney, to act on your behalf in relation to financial, property and legal matters. Powers of attorney can be very specific (for example, limiting the attorney’s authority to make bank deposits and bill payments only), or very broad (empowering the attorney to manage all financial, property and legal matters). Enduring powers of attorney are effective both before and after any loss of mental capacity and are by far the most common form of power of attorney made today. An enduring power of attorney is a simple, effective and inexpensive tool that should be considered in all estate plans.

If you have questions about your Power of Attorney or Representation Agreement, please contact us.

NEW TRUSTS CREATE NEW ESTATE PLANNING OPPORTUNITIES

If you are over 65, proposed amendments to the Income Tax Act permit you to use two new types of inter vivos trusts to achieve your estate planning goals. (An inter vivos trust is a trust created during your lifetime, as opposed to a testamentary trust, which takes effect upon death.)

A trust is a legal relationship and, for tax purposes, is a separate legal entity. When you transfer property to a trust, you no longer legally own it, even though you can continue to control and benefit from it. Inter vivos trusts have always been available as a tool for estate planning. However, because of the tax rules that apply to inter vivos trusts, they have not been widely used.

Those rules provided that a transfer of assets to an inter vivos trust (except a “spousal trust”) was, for tax purposes, a disposition of the assets at their fair market value, which could result in capital gains tax. As a result, inter vivos trusts have normally been created only in the following situations:

  • to create an inter vivos “spousal trust”, where the spouse is entitled to all of the income, and is the only person who can receive any capital, of the trust during the spouse’s lifetime;
  • to create an inter vivos trust with assets that do not trigger a capital gain (such as cash, unappreciated stocks or a principal residence)
  • to create an inter vivos trust to acquire future growth shares of a corporation as part of an estate freeze transaction.

The proposed amendments to the Income Tax Act create two new inter vivos trusts, the Alter Ego (meaning “other self”) Trust and the Joint Spousal Trust. These trusts enjoy the same benefits of other inter vivos trusts, with the added advantage that transferring assets to these trusts will not trigger any liability for income tax.

To create an Alter Ego Trust, you must meet the following conditions:

  • you must be over the age of 65
  • you must be entitled to receive all of the income of the trust before your death
  • no one else can receive the capital of the trust before your death.

The Joint Spousal Trust has the same requirements except that you and your spouse must be entitled to all of the income of the trust, and no one other than you and your spouse can receive any of the capital while either of you are still living.

If you transfer assets to one of these new trusts, you will no longer legally own them (the trust will), so they will not form part of your estate when you die. During your lifetime you can continue to control the assets as the trustee of the trust, or you can name other trustees to manage the assets for you. You can name beneficiaries who will receive the assets after your death. The trust can be changed or even revoked as long as you have the capacity to make those decisions.

The use of these trusts can be advantageous for many reasons:

1) Probate Avoidance
A trust can avoid probate and probate fees. Because the trust owns the assets, they are not part of your estate when you die. Probate, and the payment of probate taxes, applies only to assets that are part of your estate (click here for more information about avoiding probate fees).

2) Asset Protection
The Wills Variation Act allows your spouse or children to apply to the court to vary your Will if they have not been adequately provided for. Because assets in a trust are not part of your estate, the use of a trust can avoid these claims. This could be useful if you wish to treat your children differently, or if you are in a second marriage and wish to provide for your spouse while also preserving the assets for your children from a previous marriage.

For the same reasons, the use of a trust can potentially protect assets from claims by creditors.

3) Centralized Ownership and Management
While you will likely want to control the assets in the trust, you can name other trustees, such as family members or friends, to manage the assets for you. For example, the trust could provide that if you become incapable, your spouse or another trusted family member would act as trustee in your place. As a result, you will not require a power of attorney for the assets in the trust.

4) Privacy
If your Will is probated, it will become a public document, along with the value of all of the assets that formed your estate. Certain people are entitled by law to receive a copy of your Will after your death. A trust is a private document and can be used to keep your affairs confidential.

To avoid probate and protect assets from claims, many people are giving assets away before they die or putting assets into joint tenancy. This can result in many unintended consequences, including taxes. The Alter Ego Trust and Joint Spousal Trust can help you avoid probate and claims against your estate without the problems that can arise by giving away your assets or putting them into joint tenancy.

So should everyone over age 65 create an Alter Ego or Joint Spousal Trust? Definitely not. Although they have many advantages, other factors must also be considered, including:

  • the transfer of trust assets to other beneficiaries after your death may not qualify as a testamentary trust, so the ability to save taxes using testamentary trusts for income-splitting may not be available
  • for tax purposes, charitable bequests from the trust will not be treated as favourably as charitable bequests under a Will
  • transferring real estate into the trust may require payment of provincial Property Transfer Tax
  • a trust costs more than a Will, and the preparation and filing of an annual tax return for the trust will be an extra cost
  • a Will may still be required if any assets are not transferred to the trust or if assets are acquired after the trust was created
  • it is more difficult to change a trust than a Will.

While these new trusts are not for everyone over 65, they have considerable potential as an estate-planning tool. For a personal review of your estate plan, including whether a trust might be right for you, call us to arrange a consultation (656-3280).

LOOKING AFTER YOUR LITTLE ONES – Appointing a Guardian

One of the most difficult decisions for parents is choosing a guardian for their children. Most of us do not like to think about our death, especially if we have young children who would be left behind.

Many parents don’t choose a guardian because they don’t want to think about the possibility of dying before their children are grown. Others put off the decision because they can’t agree on who the guardian should be. In doing so, they may be leaving open the possibility of costly custody battles and further trauma to their children. 

In B.C., with some exceptions discussed below, a parent can appoint a guardian for children under 19 years in a will. For parents with young children, this is one of the most important reasons for making a will.

There are two types of guardians:

  • the guardian of the person of the child – who has custody of the child and is responsible for the child’s health, education and upbringing
  • the guardian of the estate of the child – who manages the assets of the child

Often the guardian of the person and of the estate is the same person. However, many parents appoint a separate trustee in their will (who is usually also the executor of the will) to manage and disburse the child’s share of the estate.

The trustee should be someone with common sense and sound judgment. Being a financial wizard is not required, since the trustee can hire a professional investment advisor if necessary. The guardian of the person of the child should be someone who shares your values and ideals.

Not every parent is able to appoint a guardian. In order to appoint a guardian upon death, a parent must have been the child’s guardian while the parent was living. The law about guardianship is explained in the following scenarios:

Parents together
A mother and father are joint guardians for so long as they live together. On the death of one parent, the surviving parent becomes the sole guardian. On the death of the surviving parent, the guardian will be the person(s) appointed by the surviving parent.

Parents apart but married or previously married
If a mother and father are or were married to each other but are living separate and apart, they are joint guardians of the estate of the child, but only the parent with whom the child resides is guardian of the person of the child.

As a result, if the custodial parent dies first, the guardian of the person of the child will be the person appointed in the custodial parent’s will. The surviving parent will become the sole guardian of the estate of the child, but will not be the guardian of the person of the child unless appointed by the custodial parent.

In blended families, where children of different parents are living under the same roof, the death of one of the parents in the blended family may result in an unexpected, but forced, separation of the children if guardianship appointments were not updated.

If a mother and father are divorced, the parent granted custody in the divorce proceeding is the sole guardian, unless the court otherwise orders (generally the court will order joint guardianship).

Parents apart and never married
If a mother and father were never married and are living separate and apart, but previously lived together with the child, they are joint guardians of the estate of the child but the custodial parent is the sole guardian of the person of the child, as above.

Parents never together
If a mother and father never lived together with the child, and were not married during the child’s life or 10 months before the child’s birth, the mother is the sole guardian unless the court otherwise orders.

Of course, each of these scenarios is subject to what the court may order, based on the best interests of the child. In addition, in some cases, parents may make a written agreement providing that they are joint guardians or that one of them is the sole guardian.

If a child has no guardian, or the person appointed under a will is unable or refuses to act as guardian, the Public Guardian and Trustee is the guardian of the estate of the child, and the Director under the Child, Family and Community Service Act is the guardian of the person of the child, until a court otherwise orders. For this reason, it may be a good idea to appoint an alternate guardian in case your first choice is not able to act.

If you have been putting off the appointment of a guardian for your children, please use this information to get your affairs in order. We would be happy to provide further guidance.

NEW DEFINITION OF SPOUSE MAY AFFECT YOUR ESTATE

For those in common law or same-sex relationships, changes to the meaning of “spouse” in many federal and provincial laws will affect your estate planning.

Much of the Modernization of Benefits and Obligations Act came into force on July 31, 2000, giving same-sex partners the same rights and obligations of common law couples under dozens of federal statutes.

Many amendments to provincial laws also came into force in 2000. The amendments modify the definition of spouse in 32 provincial statutes, including the Family Maintenance Enforcement Act, Home Owner Grant Act, Property Transfer Tax Act, Estate Administration Act and Wills Variation Act.

Wills Variation Act
Earlier this year, the Wills Variation Act was found to violate the Charter of Rights because it excluded common law and same-sex spouses from the benefits and protection of the Act. It now provides that “spouse” means (in addition to a legally married person) a person who has lived in a “marriage-like relationship” with another person, including a person of the same gender, for at least two years. As a result, common law and same-sex partners may now challenge the will of their partner if it does not adequately provide for them. The two-year period of residing together can be at any time during the life of the deceased partner. As a result, a deceased person may have multiple “spouses”, and there is the potential for multiple claims. The Act is not clear about how the court should proceed in situations involving multiple spouses.

Estate Administration Act
When a person dies without a will, the estate is divided between the spouse and children, if any. Previously, only married spouses were counted, although common law spouses had the right to apply for support from the estate. The Estate Administration Act no longer allows common law spouses to apply for support, but instead provides that the share of a surviving spouse in the estate of a person who dies without a will belongs not only to a spouse married to the deceased, but also to any common law or same-sex spouse who lived with the deceased for at least 2 years immediately prior to the death of the deceased. If there is more than one spouse, the spouses are to share the spousal share in the proportion determined by the court, so that the share for any surviving children is not affected.

If you have questions about how these changes may affect your estate planning, please call us.

Adult Guardianship Law Overhauled

Adult guardianship legislation that was pending for years came into force on February 28, 2000. The legislation gives adults more power to determine their future and provides more support and protection for those who are vulnerable to abuse or no longer capable of making their own decisions.

Four acts make up the adult guardianship legislation. They are summarized below:

Representation Agreement Act
The Representation Agreement Act allows adults to make representation agreements permitting a representative to make important life decisions. Representatives can be given authority to make decisions about personal care, health care, and legal and financial affairs, should the adult become mentally incapable. A monitor can be named to oversee the activities of the representative.

A representation agreement can be customized. Simple agreements authorizing a representative to look after routine financial affairs may be completed and signed without the involvement of a lawyer. Agreements containing specific and more complex decisions (for example, authorizing a representative to refuse to consent to life support treatment or to manage a business) will require prior consultation with a lawyer or qualified paralegal.

Representation agreements will replace enduring powers of attorney. Existing enduring powers of attorney will remain valid, but these only authorize a person to manage someone else’s financial affairs; they do not authorize people to make health or personal care decisions. It will not be possible to make enduring powers of attorney after September 5, 2000, when section 8 of the Power of Attorney Act will be repealed (this date has been extended to September 5, 2001). Ordinary (or commercial) powers of attorney can still be made, but they become void if the person becomes mentally incapable.

Representation agreements will provide a type of “living will”. Some people have prepared living wills to express their wishes regarding life support and health care should they not be able to communicate their wishes at the time, but such documents were not legally effective in B.C.

Adult Guardianship Act
The Adult Guardianship Act promotes the coordination of support and assistance for abused or neglected adults. It authorizes the Public Trustee to designate various agencies to receive reports about, and arrange assistance for, such persons. These agencies also have the power to undertake comprehensive inquiries after receiving a report.

Provisions of the Adult Guardianship Act dealing with court ordered decision-making will not come into force at this time. As a result, the Patients Property Act will remain in force, which provides for the court ordered appointment of a committee for someone who is incapable.

Health Care (Consent) and Care Facility (Admission) Act
The health care consent provisions of this act confirm existing common law and customary practices concerning health care decision-making. The act confirms an adult’s right to refuse to consent to health care on moral, religious or other grounds regardless of the consequences.

It also sets out:
· The circumstances under which health care can be provided without consent (for example, in emergencies when the patient is incapable of making a decision)
· The rules for obtaining consent
· The procedure for obtaining consent from a patient’s family when the patient is incapable and no representative has been appointed.

Public Guardian and Trustee Act
This act changed the name “Public Trustee” to “Public Guardian and Trustee”, and created an advisory board and new investment powers for the Public Guardian and Trustee. It also clarified and improved the ability of the Public Guardian and Trustee to deal with cases where individuals are financially abused.

These four acts were passed in 1993 but not proclaimed because they would have cost the government $12 million a year to implement and administer. After years of review and consultation, the legislation has been substantially pared down and will cost about $2.8 million a year to administer.

Living Wills

Thanks to the adult guardianship legislation that became law on February 28, 2000, “living wills” are now legally valid in BC. A living will is a written statement that expresses your wishes regarding medical treatment and personal care in case you are unable to express your wishes at the relevant time. Living wills are also referred to as advance directives, health care authorizations or declarations of belief.

A living will specifies the treatments that should or should not be given in specified circumstances. For example, many living wills provide that “heroic measures”, such as cardiopulmonary resuscitation (CPR), should not be used to prolong life if the person suffers from a severe irreversible condition. However, it may direct that medication be administered to alleviate suffering in those circumstances.

Living wills can prevent conflict and guilt among family members. If family members ask the doctors to do “everything” to keep a loved one alive and that person dies, the family may feel guilt for putting the person through needless tests and treatments. On the other hand, if they let their loved one “die with dignity”, they may feel later that they should have done more.

Conflict can also arise if family members cannot agree. Children who have been out of contact for years may return and want the doctors to do “everything” to try to bring a parent back so they can make peace. Other family members who remained in close contact are more likely to accept the person’s death, and want only palliative care for the parent. Further complications can arise when children from divorced marriages resent stepparents or common law spouses from making decisions. These conflicts can leave lasting bitterness.

If you have stated your wishes clearly in a living will, your doctor and family won’t have to second-guess what kind of treatment you would want. You will receive the treatment you want and your family will be “off the hook”.

Under the new Representation Agreement Act, you may make a Representation Agreement authorizing a representative to give consent or refuse consent to specified kinds of health care, including life-supporting care. This authorization is valid only if you consult with a lawyer before making the Representation Agreement, and the lawyer completes a certificate to that effect. (Representation Agreements replace enduring powers of attorney in B.C.)

Although a Representation Agreement is the most effective form of living will, other less formal methods of leaving directions are available which still have legal effect. A living will that is not a Representation Agreement is given effect under the new (and unfortunately named) Health Care (Consent) and Care Facility (Admission) Act. Under this Act, if a patient is incapable of giving or refusing consent to medical treatment, the health care provider is to go to the highest ranking of the following people who are available and willing to decide:

  • the patient’s court appointed guardian (committee), if any, or representative under a Representation Agreement, if any
  • the patient’s spouse (including common law or same sex spouse)
  • adult children
  • a parent
  • a sibling
  • anyone else related by birth or adoption
  • if no one else is available, someone authorized by the Public Guardian and Trustee.

The person making the decision will be bound to comply with any wishes expressed by the patient while the patient was still capable. Accordingly, a living will that is not a Representation Agreement can still be binding (although it won’t authorize who can make the decision for the patient – that can only be done in a Representation Agreement). If no wishes are expressed, the person must decide on the basis of the patient’s known beliefs and values. If the patient’s beliefs and values are not known, then the decision must be made on the basis of the best interests of the patient.

In the past we recommended that our clients plan for the possibility of disability by considering an enduring power of attorney. A Representation Agreement is an even more effective tool, as it gives you the ability to include legally valid instructions for your future medical treatment and health care. The ability to make these decisions is long overdue in B.C. For more information about living wills and Representation Agreements, please contact us.

Income Splitting – New Rules

In the last federal budget, the government announced plans for a special tax to discourage income splitting with minor children.

Presently, dividends paid on shares owned by minor children are taxed at the child’s marginal tax rate. The new rules introduced in the budget will impose tax at the top marginal rate on certain types of income received by children age 17 and under. The type of income subject to the tax will include:

· dividends on unlisted shares (whether received directly or through a family trust or partnership); and

· income from a partnership or trust arising from the trust or partnership providing goods or services to a business carried on by a relative of the child.

The tax will apply for the 2000 and later taxation years, with no exceptions for existing structures. It will not affect income splitting plans involving spouses or children age 18 and over.

STRATEGIES TO AVOID PROBATE FEES

What are Probate Fees?

Probate fees are payable to obtain a Grant of Letters Probate (or, if there is not a Will, Letters of Administration). Letters Probate means the court has confirmed the validity of a Will and the authority of the executor of the Will. An executor’s authority, however, comes from the Will and not the Letters Probate. There is, therefore, no requirement that every Will be submitted to probate. In fact, with proper planning, many estates can be processed without a probate application, saving thousands of dollars in probate fees. Some of the strategies to achieve this are discussed below.

 

Probate usually becomes necessary because third parties, such as financial institutions,ICBCor the Land Title Office, want assurance that the executor has the authority to deal with a particular asset. If probate is required, the entire value of estate assets located within B.C. is subject to probate fees. This is true even if probate is required because of only one asset, such as a car or term deposit.

The fee is 1.4% of that portion of an estate in excess of $50,000 of value, and 0.6% for that portion of an estate valued between $25,000 and $50,000. For example, the probate and filing fees for an estate worth $250,000 are just over $3,000.

Strategies to Reduce or Avoid Probate Fees

The following strategies can be used to reduce or avoid probate fees:

Gifts Prior to Death

You can reduce the value of your estate by giving assets away prior to death. Certain legal requirements must be met for the gift to be valid. For example, you must actually give up control of the gift. You should also remember that if the fair market value of the gift exceeds its cost, the accrued gain may be subject to tax. Gifts of real estate may also require payment of property transfer tax.

Joint Tenancy

Property can be owned jointly in two ways: joint tenancy or tenancy in common. On the death of one joint owner, property held in joint tenancy normally passes by right of survivorship to the surviving joint owner(s). It is normally not considered part of the estate of the deceased joint owner, can be transferred without probate and is not subject to probate fees.

However, joint tenancy, especially when not between spouses, may have disadvantages, including the following:

  • loss of control – co-operation of the other joint owner will be required to sell or mortgage the property;
  • future litigation – if the surviving joint owner is not the only beneficiary of the estate of the deceased joint owner, the other beneficiaries may claim that the surviving joint owner holds the property in trust for all of the beneficiaries while the surviving joint owner may claim that the right of survivorship applies. This is most common where the deceased joint owner is a parent and the surviving joint owner is a child, and there are other children;
  • tax consequences – capital gains tax and property transfer tax may become payable when property is transferred into joint tenancy. If the property is a principal residence and the new joint owner does not live there, that owner’s share of any future increase in value of the home will not be exempt from capital gains tax;
  • exposure to creditors – joint property may be subject to claims by creditors, or the spouse, of the other joint owner;
  • death of joint owner – the new joint owner may pass away before the original owner;
  • the new joint owner can sever the joint tenancy, and create a tenancy in common, without notifying the other owner.

As well, recent decisions of the Supreme Court of Canada have changed the law regarding the transfer of property by a parent into joint names with their child.

In these cases the law presumes that a child who contributed nothing toward the property holds his or her interest in trust for the contributing parent. An exception is the presumption of advancement (meaning that the transfer will be presumed to be a gift). However, the presumption of advancement only applies to transfers of property from one spouse to both spouses, or from a parent to a minor child.  The 2007 decisions of the  Supreme Court of Canada in  Pecore v. Pecore and Madsen Estate v. Saylor have stated that the presumption of advancement does not apply to transfers between parents and adult children.  An adult child who holds assets jointly with a parent can no longer rely on the presumption that the parent wanted the child to take the asset at death. Additional evidence is required to prove that a transfer into joint tenancy was intended to be a gift and that the survivor was intended to receive the asset on the death of the deceased.

For more detailed information about the pros and cons of joint tenancy, click here.

Corporate Debt

Probate fees are based on the gross value of estate assets (except for real estate for which the amount of outstanding mortgages may be deducted). Outstanding debts, other than mortgage debts, are not deducted to determine the value your estate. If you purchase an asset with borrowed money that is not secured by a mortgage, transferring the asset and the debt to a limited company will reduce the gross value of your estate. The asset and the debt are no longer owned by you, but by your company. While the company’s shares will be part of your estate and subject to probate fees, the share value would be the value of the asset less the debt to acquire the asset.

Named Beneficiaries

Designating a beneficiary under insurance policies, RRSPs, RRIFs, TSFAs and pensions will allow the proceeds to be paid directly to the named beneficiary. The proceeds will not form part of your estate and are not subject to probate fees. Probate fees are only payable if the proceeds are payable to the estate, or if the named beneficiary dies before you. In some cases you may want to designate an alternate beneficiary to avoid the proceeds being paid to your estate.

Property Transferred to a Trust

A trust can be created to hold property on your behalf, with provisions providing for the distribution of the property after your death. Because the property is owned by the trust, it is not considered part of your estate, and is not subject to probate fees. Trusts are generally taxed at high rates and the cost of creating and administering the trust may be prohibitive. However, two new types of trusts, called alter ego and joint spousal trusts, are now available thanks to recent changes to Canada’s Income Tax Act. For more information, click here for our article on these new trusts.

These strategies will result in probate fees being reduced or avoided. However, caution must be exercised to ensure that unintended or undesirable consequences do not outweigh the savings in probate fees. As well, any strategy should only be considered in the context of an overall estate plan.

For more information on this or any other estate planning issue, please contact us at your convenience.