Legally speaking: Goodwill undone

(March 2007) Identical wills, mutual wills, mirror wills — as long as clients have a will at all they’re ahead of the game, right?

Wrong.

Couples, whether they’re married couples, business partners, life partners, relatives or friends who have shared assets, often create wills that are intended to protect and benefit the surviving spouse or partner, then distribute the estate to beneficiaries once the second spouse or partner passes away.

Examples like this should be familiar for advisors, tax and estate planners in particular: A couple is encouraged by their lawyers to draw up two matching or identical wills that say their estate or shared assets should pass to the surviving spouse or partner and then be distributed to a list of beneficiaries after the second partner dies — Mom and Dad want each other to continue enjoying what they’ve built together if one of them dies, but once they’ve both passed on they want their estates to be distributed to their children, in-laws and a few select charities.

This is a common scenario. In order to make good on their intentions, they may enter into identical wills. Identical wills are “mirror” documents where the terms in one will are reflected in the other. Often these wills are drafted and executed simultaneously. The wills may leave the first deceased’s assets to the second to die, with the resulting estate being distributed to identical beneficiaries after the survivor’s passing. Either party may revoke their identical will before their incapacity or death and thus end the contract of “mutuality.”

Absent an express agreement, the survivor may not change or revoke his or her will after the death of the first deceased, but sometimes seemingly small word changes can have unintended but substantial legal ramifications that result in dramatic changes to the distribution of assets from what was planned. Small changes can undo best intentions. Family wars can result.

An example of how things go wrong can be found in two very different Ontario cases: Hall v. McLaughlin Estate (2006) and Edell v. Sitzer (2001).

The issue in both cases was whether a binding agreement (a contract) was created by the respective couples when they drafted their identical wills.

The court needed to decide whether the couples with “precision and certainty” (a fundamental contract principle — in order for a Court to impose a binding agreement the Claimant must show a definite agreement and not “some loose understanding or sense of moral obligation”) had intended an enforceable contract dictating how the survivor’s estate would be distributed.

If the couple had a precise and certain intention, the agreement is fixed and neither party can vary from this agreement once either party dies or becomes mentally incapacitated. In Hall v. McLaughlin the Court reviewed historical facts leading up to and following the execution of the identical wills and found that the parties’ intentions were unequivocal — their mutual intentions were apparent with “precision and certainty.” Once the wife became incapacitated, the terms of the husband’s wills and his list of beneficiaries were permanently fixed.

Of course, this mutuality and contract is not commonly known to most people making their mutual wills. Usually when entering into identical wills the parties have the best of intentions. While they may foresee the possibility of changing circumstances, they may also fail to clearly consider the problems that may come with being bound to a permanently fixed arrangement for distribution — once either party becomes incapacitated or dies, the other spouse’s will cannot be altered or even updated if the new will is substantially different from the original.

So what if a beneficiary develops additional needs? What if a divorce occurs between a child and their spouse and both are beneficiaries? What if re-marriage occurs? What if a surviving spouse wishes to make special arrangements for a caregiver or charity that helped either party in a time of need? The variations are endless. To avoid this outcome, mutual wills should include identical provisions granting an ambit of discretion to the surviving spouse, permitting the survivor to provide for future unforeseeable events. A wills and estate expert should be consulted in order to incorporate such non-standard provisions.

After the death or incapacity of one party, a will revision by the other can have unanticipated impact and can undo good intentions, as is clearly illustrated in the Hall v. McLaughlin case.

In this case, Emily and John “Johnnie” McLaughlin married late in life. Both had grown children. Promptly after their marriage the couple executed identical wills. After his wife’s onset of dementia, the husband attempted to update his will. Emily died and her estate became Johnnie’s property.

After trying to update his will to account for seemingly minor changes in the family, evidence also suggests he might have been trying to protect Emily in the event he passed away first. Johnnie inadvertently cut his wife’s children out of his will and the estate was initially distributed to his children from an earlier marriage.

In redrafting his will, Johnnie asked his heirs to renounce, in writing, any claim that they might have on Emily’s estate, and instructed his executor “to divide the rest and residue of my estate then remaining, into equal shares” for each of his beneficiaries. Unfortunately, when Emily died first, Johnnie’s accountant pressured him to settle her affairs and “deal with a large sum of money.” When Johnnie died 11 months later, no assets remained in Emily’s name.

After his death the two sides of the family went to war. In the end, the Court found that the couple’s original identical wills became a fixed intention once Emily became mentally incapacitated. The husband’s later changes were not possible because they went against the original agreement (and obvious intention) the couple entered into with their original identical wills (the agreement was not revoked before Emily became incapacitated); this agreement is known as a mutual will.

The lessons in these cases are practical ones: 1. Couples should seek legal advice when planning their wills;

2. Identical wills may result in unintended consequences if the survivor chooses to change her/his will;

3. Identical wills may result in unintended consequences if the survivor is unable to change the will, or to adapt the will to the couples’ overarching intentions as opposed to legal phrasing adopted in the will;

4. Mutual wills should include identical provisions granting an ambit of discretion to the surviving spouse, permitting the survivor to provide for future unforeseeable events. A wills and estate expert should be consulted in order to incorporate such non-standard provisions; and

5. An advisor should inform clients about the risks of pro forma will drafting and advise clients to seek out will and estate legal expertise when planning their estates. This caution should be advised in most circumstances as there is always the potential for problems when clients plan for their joint estate.

Harold Geller is an expert on legal issues affecting financial intermediaries. Harold assists and represents dealers, MGAs, branch managers, compliance officers and advisors dealing with their compliance, regulatory and negligence issues. Harold also helps financial intermediaries with internal business and their clients’ legal issues. Harold is a well-known industry commentator, a CE provider and administrator with foradvisorsonly.com. Harold can be reached at hgeller@miltongeller.com.

(03/16/07)