Changes to the Friends and Family & Accredited Investor Exemptions

Subject to certain requirements, private companies can sell shares to friends and family and “accredited investors” without issuing a prospectus or hiring a registered securities dealer. These exemptions have been amended to require that companies take “reasonable steps” to confirm that investors meet the requirements of the exemption. Companies may no longer simply rely on the representations of the investor. In addition, accredited investors must sign a new Risk Acknowledgment Form.

ESTATE LAW CONSIDERATIONS

Executors Proceed Cautiously

We last wrote to you about changes to BC Wills laws. Changes to our laws for processing Estates have also been made. The estate law overhaul doesn’t particularly require any action on your parts. A brief review of our take on today’s handling of estates follows…..

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CAUTION – NEW LAWS PERMIT RISKIER TRUST INVESTMENTS

An amendment to the British Columbia Trustee Act has changed the rules about investments made by trustees. Trustees include people or trust companies appointed to administer certain assets for the benefit of other individuals. The most common example of a trustee is the executor of your will, who is legally appointed to collect in and administer your assets for the benefit of your beneficiaries.

The legal rights and responsibilities of trustees are governed partly by the Trustee Act and partly by Canadian and English court decisions. Traditionally, the Trustee Act restricted a trustee’s ability to invest trust funds. Only low-risk investments (such as Canadian government securities or bonds, bank or trust company guaranteed investment certificates, and Canadian first mortgages for less than 75% of the value of the property) were permitted. The conservative, government-prescribed list of authorized investments was intended to prevent the mismanagement of trust funds by trustees, and minimize potential losses of trust moneys. But over time, the decline of sound returns on these prescribed investments resulted in pressure to relax the rules.

The amendment to the Trustee Act, which came into force on February 28, provides that:

  • there is no longer a list of authorized investments;
  • a trustee can now invest trust funds at will. For example, investments in mutual funds are permitted; and
  • a trustee’s legal responsibility is to act as a ‘reasonable and prudent person’ in considering what investments are appropriate in the specific circumstances.

While many members of the legal and financial communities have welcomed these changes, we caution our readers that there is an increased potential for trust funds to be lost, or significantly reduced, where a trustee lacks the commitment or sophistication to invest prudently. More than ever, careful consideration must be given to the choice of trustees in wills and other legal documents creating trusts. While a trustee can be sued for acting imprudently, and may be liable to the trust beneficiaries for a breach of trust duties, trust funds may be lost and never recovered in the process.

On the positive side, investment powers included in trusts and wills drafted prior to the new laws are likely still effective. If you have questions or concerns, please do not hesitate to contact us.

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.

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.