Help an elderly woman get her estate in order

The situation

An Arbuckle family gathering should be bursting at the seams—the clan comprises 13 siblings, their spouses, and 25 grandchildren. These days, however, holidays at the family home are quiet.

Hilda and Howard Arbuckle* raised their baker’s dozen in Haliburton County, Ont. Eleven of their children are married and have children of their own. Colleen (aged 45), the youngest, is a widow and childless. Charles Arbuckle, the eldest, died two years ago in a car crash in Calgary, leaving behind his divorced wife, Sara, and three daughters, now in their 20s (none are married). Of the 25 Arbuckle grandchildren, two are married, one is divorced and several are in serious relationships (no great-grandchildren—yet).

Howard died 10 years ago, leaving everything to Hilda. Following his death, the family made less effort to get together. That’s partly because all but two siblings and their families are spread out across Canada; some can’t afford to travel back to Ontario regularly and haven’t returned in years.

Hilda is now 88 years old and in frail health. The second-eldest Arbuckle child, Caroline (67), is a retired accountant and co-executor of Hilda’s will, along with the next three eldest (four co-executors total). Caroline is the only co-executor who lives in Ontario. Caroline and Colleen, who also lives nearby, spend much of their time looking after Hilda, so her healthcare costs are low.

Hilda lives in a farmhouse on a well-maintained 100-acre plot with no mortgage. A developer eyeing the property has offered Hilda $750,000 in cash. Aside from the land, she has $100,000 in a RRIF and $50,000 in a TFSA. Those two accounts, as well as a $500,000 life insurance policy, name her estate as the beneficiary. She also receives CPP and OAS.

Hilda’s will leaves her assets equally to all 13 children and their spouses. She updated it after Howard died and it still includes Charles. Hilda wants to recognize Caroline and Colleen for their efforts with a greater share, and to name Charles’s daughters instead of Charles. She mentioned these ideas to Caroline’s co-executors, and they reacted angrily.

To complicate matters further, Caroline and Colleen are both emotionally attached to their family’s property and don’t want it developed (but nor do they want to farm it). The other children want the money. Taken together, these issues are straining family relations. Hilda despises confrontation and is hesitant to call a family meeting.

Hilda has limited time to revise her will and decide whether to sell the property. What should she do?

* These are hypothetical clients. Any resemblance to real persons is coincidental.

The experts

Avi Charney, Barrister and solicitor, Charney Legal, Toronto

Carol Dalgado, Senior trust advisor, RBC Wealth Management, Toronto

Armando Minicucci, Partner, Grant Thornton LLP, Toronto

Is Hilda capable?

Carol Dalgado: This is a complex situation given that we’re dealing with an older client in frail health. It’s a bit late to convene a family meeting, especially when we know the kids are scattered across the country. Instead, she should sit with her advisors and talk about how best to document her intentions.

One of the things I think about, if someone is older and in frail health, is whether someone might challenge whether she’s in the right frame of mind to make certain decisions.

Avi Charney: Yes, the new will is going to be scrutinized and possibly challenged. She should accompany any changes with a capacity assessment to add validity to the will and make it more difficult to challenge. You can do that by hiring a capacity assessor. A number of them are approved by the attorney general.

Capacity assessors generally charge between $100 and $250 an hour. The total cost for an assessment could be several hundred to a few thousand, depending on factors including the nature and complexity of the person’s condition, the assessor’s experience in conducting assessments, travel expense and the time required to complete the assessment and related forms.

Her legal counsel will also want to sit down in person with her and make sure there aren’t any children who could appear to be influential. You need to understand her reasons and motivation behind any changes to her will. Throughout the process, document everything.

Hilda’s assets

Registered accounts

Armando Minicucci: She might consider naming all of her children equally as beneficiaries for her registered accounts. The biggest advantage is that those assets would flow outside of the estate, so they wouldn’t be subject to the Ontario estate administration tax of 1.5%.

But there are challenges with the RRIF. Say she names Caroline and Colleen as beneficiaries of the RRIF to provide them with that extra share for their help. When Hilda passes away, they go to the bank with the death certificate, collapse the RRIF and receive $100,000. Neither is liable for tax.

When the executors go to file date-of-death tax filing, they need to report that $100,000 as regular income. It will be taxed at a regular tax rate, and that could result in a $35,000 tax liability. That $35,000 is now coming out of her estate assets. So you’ve got all the siblings paying a portion of the tax liability on money that only Caroline and Colleen received.

The key is to make the beneficiary of the RRIF and estate one and the same, so she may want to leave the RRIF in the estate. Then you’re indifferent.

There’s no tax liability on the TFSA or the life insurance, so the estate wouldn’t have to pay tax on those. So Hilda could name Caroline, Colleen or any of her children as beneficiaries.

The property

CD: You’ve had someone already eyeing the property and [offering] a cash deal. It would be prudent to get valuations and come to a determination of the land value. She should also have a conversation with her lawyer, saying two of her daughters have expressed fear that the property may be developed and have sentimental attachment. However, it may be too much for an 88-year-old in frail health to deal with the sale of land, and maybe she should leave it with her executors to address.

One way families might deal with that is having a provision in the will. Once the executor has determined the value of the land using a qualified land appraiser, the provision in the will says, “I’m giving a first right to any of my children to make a bid. If they meet the bid of what the market value is, they should have a right to purchase the property.” If two family members make the same bid, you could have a mechanism for determining who would be the top person.

If no one meets the bid, the executor is then able to sell the property and distribute cash to each of the beneficiaries as part of their share.

AM: There are also tax considerations. The disposition of your principal residence is exempt from tax. If Hilda continues to inhabit the property up until her death, and assuming she owns no other properties, then the gain that results on her death (the deemed disposition) will be sheltered on the basis of her principal residence exemption.

A couple things to note.

• The exemption ceases when she dies. So if the property is worth $1 million when she passes, that’s fully sheltered by the exemption. Let’s say by the time the executors get around to getting probate and putting the property on the market, it sells for $1.2 million. That $200,000 is now subject to tax. The principal residence exemption is not available after death. There are limited circumstances where it is available, but it usually requires that a beneficiary moves into the property and designates that property as their principal residence.
• The exemption only covers the gain on the home and on land up to half a hectare, which is a little over an acre. In this case, you have 100 acres. The gain on the first half-acre is sheltered, but there are situations where you could argue that more than the half-acre should also be exempt on the basis that it was required for use and enjoyment. You need to be arguing that municipal bylaws don’t allow properties smaller than 100 acres, which is quite common in a lot of rural municipalities.

The fact that this is farm property adds another consideration. Each person in Canada has the ability to shelter $1 million in their lifetime on the gain on the disposition of qualified farm property. There’s no restrictions on the size of the property. To qualify, there is a holding period test.

• Hilda would have to have held the property for 24 months, which she passes.
• In any two years of ownership, the gross revenue from the farming business must have exceeded revenue from all other sources.

If the property was owned prior to June 18, 1987, the rules are less restrictive.

• The property had to be used to carry on a farming business at some point.
• And, for at least five years in which the property was owned, the land had to have been used principally in farming by the individual, child or anyone related to them.

Caroline and Colleen

CD: Given that Caroline is retired, she may not be expecting remuneration. She may be providing assistance out of love: she’s retired, she lives nearby, her mom needs help. On the other hand, Colleen is 45 and may be in the workforce, so she may be giving up some income to provide services for her mom.

Still, if either wishes for remuneration, they should get a baseline for what appropriate remuneration would be. Figure out what services they’re providing, go to a third-party provider, and look at how much Hilda would be paying.

AC: Another option if Hilda wants to reward them: consider doing it while she’s alive. She’s got some money in her TFSA. She could compensate them now for dedicating time and money to be with her.

Charles

AC: As mentioned, because of her age, any changes to her will might be contested. To ensure Charles’ children get his share, she could specify in a codicil, which is an addition to the will, that when one of my children dies, it should go to my grandchildren. However, succession law and standard wills already mandate this.

And to make sure Charles’ divorced wife doesn’t inherit, Hilda could put an exclusion that the inheritance is excluded from net family property. So it won’t be included in the net family property of the spouse, and that way it’s protected in the case of a divorce—Charles’ or that of any of her other children.

Too many co-executors

CD: We’re told that Hilda expressed an interest to do a couple things and the co-executors expressed anger. I don’t know that she has a neutral party in place that can make sure that whatever she wants to happen, happens. This is an ideal scenario to have a trust company as executor. The trust company would be transparent to the beneficiaries and could address any conflicts.

AC: If she dies in Ontario, the estate executors should reside in Ontario; otherwise they will be required to post bond. The amount is double the amount of the deceased’s assets, as sworn in the certificate for the appointment of an estate trustee. However, a person can apply to the court for an order dispensing with this requirement. Or they could renounce their right to act as executor and just leave the person in Ontario to do it. A trust company doesn’t have to post bond.

AM: From a tax-filing perspective, the CRA will ask that all executors sign the tax-filing forms. That wasn’t always the case, but they’ve been diligent in the last number of years. Each executor is signing off on the tax returns, so that’s four signatures you’d have to obtain when filing the tax returns for the estate.

And most executors may not be aware that settling an estate doesn’t happen overnight. It’s not uncommon for it to take a couple years. When you have a number of beneficiaries, they’ll be constantly calling the executors, asking what the hold-up is and when they’re getting their distributions. That’s why I also agree this might be the ideal situation for a corporate trustee to step in.

CD: Overall, given that she’s 88 and in frail health, it would’ve been appropriate to do the planning in advance. It may be too late now. On her husband’s passing, she should have dealt with it. Ten years on, does it make sense to have sophisticated planning done?