Creative planning for incapacity

Your client may have a will and PoAs but if he becomes incapacitated or changing circumstances affect his estate, further planning may be required.

A 2013 B.C. case, Easingwood v. Cockroft, demonstrates that it’s possible to conduct creative planning after incapacity.

In that case, the court upheld an alter ego trust created by joint attorneys—a brother and sister—to settle their incapacitated father’s estate before his death. They created the trust because the brother was dying, and the trust allowed a successor trustee to be appointed.

Under the PoA’s terms, neither sibling could act as the sole attorney. So the PoA would’ve been ineffective after the brother’s death, and the estate would’ve been subject to probate. The father hadn’t accounted for the possibility of one of his children dying before he became incapacitated, so the children needed an alternative plan to take care of their father’s financial affairs.

It’s the first time a court has approved a plan of distribution through a trust separate from the estate. “Easingwood confirmed what some practitioners had been doing already,” says Richard Niedermayer, partner at Stewart McKelvey in Halifax, “which is to take the principles from earlier cases and say, ‘If attorneys under an enduring power of attorney can do something that’s in the best interests of the [incapable] donor, […] why shouldn’t [they]?’ ”

Kimberly Whaley, principal at Whaley Estate Litigation in Toronto, says valid reasons for attorneys to create trusts for settling the estates of incapacitated clients include:

• avoiding probate fees (as in Easingwood); and
• protecting against claims under the Wills, Estates and Succession Act in B.C., or against other spousal claims in other provinces.

Alison Oxtoby, partner at Entrust LLP in Kelowna, suggests advisors first determine if the incapacitated client’s PoA expressly allows attorneys to transfer assets or gifts into a trust.

But implementing such a plan requires legal advice and caution, warns Whaley.

Incapacity planning tips for clients

• Spend as much time on a PoA as a will. With the potential for longer-term incapacity, PoAs are “an integral part of the overall estate plan,” says Richard Niedermayer, partner at Stewart McKelvey.
• To protect after incapacity, ensure the PoA for property is continuing (or enduring) and is under the applicable provincial law, says Ed Esposto, partner at Blaney McMurtry.
• Choose trusted attorneys or appoint trust companies. “If you have two or three kids fighting among each other, it’s not going to improve by picking one of them to be the attorney,” says Niedermayer.
• Consider provisions in the PoA for gifting and settling funds into a trust. But beware gifting legislation. Alison Oxtoby, partner at Entrust LLP in Kelowna, says that, in B.C., “if you want to make any significant gift, the authorization has to be in the PoA. Check the legislation in your jurisdiction if this is the case.”
• Beware inadvertent revocation of the PoA. Oxtoby says clients may be asked to sign banks’ own PoA documents. “But in doing so, clients can revoke the nicely drafted power of attorney that we planned to allow them to carry out further planning after their loss of capacity. It happens all the time.”

For example, planning initiatives can’t depend on the death of the donor. (Attorneys can’t make wills, for example.) Whaley also refers to Ontario’s Testa v. Testa. In that case, the attorney, a son, transferred title of his incapacitated mother’s home to his brother in trust, which the court ruled was a breach of fiduciary duty.

Limitations and statutes

Niedermayer notes fiduciary duty as the first of two general planning limitations for attorneys:

• They must act in the donor’s best interests.
• They must act in accordance with the donor’s estate plans.

Thus, attorneys can protect a donor’s estate with a trust as long as the trust’s terms mirror the donor’s will.

Ed Esposto, partner at Blaney McMurtry in Toronto, points out that in Easingwood the trust was drafted so beneficiaries received exactly what they were entitled to under the will, which was key.

“You always have to look at the will,” agrees Whaley. “As long as [attorneys] are consistent with what the will says—in other words, [they]’re not cutting out any beneficiaries—[they] can [do] similar planning.”

Further statutory restrictions, such as those for gifting, vary by province, says Niedermayer. (B.C.’s Power of Attorney Act restricts gifting.) Like Whaley, he stresses attorneys should discuss potential statutory limitations with legal counsel when considering a course of action.

Niedermayer says a challenge for advisors is beneficiary designations—something Easingwood doesn’t address.

For example, when an RRSP automatically converts to an RRIF after incapacity, can the attorney designate the same beneficiary? Likewise, what if the attorney’s dissatisfied with an institution’s financial management of an RRIF and decides to go elsewhere?

“Absent a specific power to that effect in the power of attorney itself, you’ll find financial institutions will push back on that,” he says. “[…] Same thing if you move institutions.”

He suggests the PoA make clear when such beneficiary designations by attorneys are acceptable, because in practice, banks want the attorney to be able to confirm the beneficiary when an RRSP rolls over to a RRIF.

Esposto adds that problems with financial institutions can be avoided if the PoA expressly states the attorney can delegate and sub-delegate investment management.

Ideally, attorneys need the ability to make estate planning transactions that are in the donor’s best interests and consistent with the estate plan.

But because it’s difficult to anticipate all those transactions, Niedermayer says he uses general language when drafting PoAs, and specifically adds settling trusts and preserving beneficiary designations.

Call to action for advisors

While Easingwood allows for flexibility, Niedermayer says drafting airtight PoAs long before someone’s at risk of incapacity is best.

He recommends PoAs for older clients, as well as for situations where there are children involved, or significant assets.

But if you missed that window, at the very least, Easingwood makes clear probate fees can be avoided by settling an alter ego trust.

Says Oxtoby, “Advisors should look at whether the option of settling a trust is there, simply to avoid probate fees. […] In Ontario and B.C. and other jurisdictions where probate fees are high, we’ve used trusts to avoid significant fees and distributed to the same individuals as […] set up in the will.”

But he adds this is only in the case of a high-net-worth client with a large estate. It’s not for the average client, he says.

Esposto notes that incapacity is often gradual, which creates another challenge for advisors and firms as they navigate uncertain terrain with clients and their family members.

He describes a situation sure to become more familiar: an aging client starts to show signs of dementia—but only sometimes.

The aging client now brings his daughter to your meetings, and sometimes you give information to her when the client asks you to. Eventually the daughter alone starts to contact you to transfer funds. The problem becomes: Should you take instructions from the daughter?

To answer that question, he says, advisors must know the terms of a client’s PoA: when it takes effect, how incapacity is defined and who is the appointed attorney. Make sure you ask for it early and often.

by Michelle Schriver, assistant editor of Advisor Group.