Prevent problems with bequests

Where there’s a will, there’s … potential for error. As case law demonstrates, a word or a clause out of place can lead to thwarted wishes, costly litigation, family feuds and, often, significant financial loss for the estate and would-be beneficiaries.

Unfortunately, a wide array of errors and oversights can cause a bequest to fail. The good news is, the majority can be overcome with proper thought and careful drafting.

Always name an alternate

A common error is not naming an alternative estate trustee in case a client’s first choice dies or is unable or unwilling to take on the role. Ideally, a testator would designate two alternates in order of preference, says estates lawyer Marcia Green, an associate with Nelligan O’Brien Payne LLP in Ottawa. These should include younger adults who are unlikely to die before the testator.

If no alternative is named and the estate trustee dies, then the dead trustee’s own estate trustee must apply to the court to be appointed.

If the estate trustee renounces the role and there’s no alternative named, then someone must apply for the role. That means the testator’s adult children, family members or other interested parties could potentially fight over who becomes trustee.

Green isn’t a fan, however, of joint trustees. If they disagree, she points out, “that carries the potential for future litigation.” If a testator really wants more than one trustee, it’s better to appoint three rather than two: “You need a tiebreaker.”

Cleaning up the residue

Problems can also come up when a will—often created without the help of a lawyer—doesn’t include a residue clause, or puts it in the wrong place. A residue clause disposes of all assets that remain after specific bequests have been made. Its proper place is after any cash or specific bequests. The absence of such a clause, or placing it before specific bequests, can create a full or partial intestacy.

Charities are often innocent bystanders when bequests or entire wills fail. Megan Doyle Ray manages legacy giving and memorial programs at the Children’s Hospital of Eastern Ontario in Ottawa (CHEO). She recalls a case in which a would-be donor wrote her own will, leaving bequests to 10 charities, including CHEO, but didn’t include a residue clause. The woman left nothing to her relatives, who are challenging the will. “If it’s found invalid,” says Doyle Ray, “then it will be as though she died without a will. The Succession Act goes into effect, and the charities may be written out.”

Charitable bequests can often suffer if an organization isn’t correctly identified in the will—a situation that comes up surprisingly often, says estates lawyer Elena Hoffstein, partner at Fasken in Toronto.

“Many charities have similar names,” Hoffstein points out. Or a testator may fail to distinguish between a charity’s national arm and its provincial branches. “Was the bequest supposed to go to the United Church of Canada, or the testator’s local parish?” She recommends asking will makers to bring in a previous charitable donation receipt so she can verify the organization’s name and registration number, or to simply phone the charity.

On the other hand, spelling a beneficiary’s name correctly, while preferable, isn’t critical, says Green; what’s more important is that the trustee can identify and locate each beneficiary. That said, clarity is imperative when it comes to language around who will benefit.

Take stepchildren, for example. In Ontario, explains Green, “the phrase ‘all my children’ includes stepchildren. If the testator did not intend to leave assets to stepchildren as well as biological children, this can be problematic.” Best practice is to name the specific children who will inherit in each bequest and in the residue clause.

Speaking of children, wealthy clients often prefer to dole out inheritances to their children or grandchildren in stages, perhaps in quarter-shares at the ages of 21, 25, 30 and 35. That won’t happen if the client doesn’t specify the age of inheritance. In addition, says Hoffstein, it’s important to name a trustee who will manage the money until the child receives it—and to include language that allows the trustee to encroach upon the capital to pay for education, maintenance and other discretionary expenses.

It’s also important to include a clause specifying what will happen to the funds if a child doesn’t live to receive them. Not only does that prevent the gift from lapsing, says Hoffstein, but it gets around what’s called the Saunders v Vautier rule. The rule allows all trust beneficiaries to unanimously claim an inheritance once they reach the age of majority, even if that’s before the date stated in the trust terms.

“A ‘gift-over’ clause that specifies, for example, ‘I leave this portion to my grandchild at the age of 30, but if he dies before that age then there’s a gift-over to his siblings or another grandchild’ gets around that rule.” The mention of siblings and other grandchildren means other beneficiaries have an interest in the gift until the intended grandchild turns 30, meaning he can’t use Saunders v Vautier to access the money when he turns the age of majority.

“It’s important to have a gift-over when you’re deferring the age of receipt,” adds Hoffstein, “and it’s sometimes left out.”

Intestacy can also result in minor children ending up as beneficiaries, notes Green. For example, if a single parent dies without a will, or there is an intestacy with all or part of her estate, her children may end up inheriting. Since minors cannot inherit, “automatically the Office of the Children’s Lawyer [in Ontario] has to get involved and manage the gift until the child reaches the age of 18, whereupon it would be paid out to them in a lump sum, which is not necessarily what a parent would’ve wanted.”

Lauren Liang, a partner at Clark Wilson in Vancouver, also likes to include a failure clause in her clients’ wills, stipulating what will happen to assets in the unlikely event that all beneficiaries predecease the will maker—in a plane crash, perhaps, or a car accident. Often, she says, her clients will choose to leave everything to a specific charity, rather than seeing their entire estate end up in the hands of some distant fourth cousin.

Lapsed gifts

A lapsed gift in a will is one where the gift exists but cannot take effect. The most common reason for a lapse, says Liang, is that the beneficiary has died before the testator. If an alternative beneficiary isn’t named, then the gift becomes subject to provincial succession laws. Ontario’s Succession Law Reform Act (SLRA), for example, states that bequests made to a child, grandchild or sibling who predeceases the testator will go to the late beneficiary’s spouse and children. British Columbia’s Wills, Estates and Succession Act (WESA) contains a similar provision. If the gift still cannot be distributed, then it becomes the residue of the estate.

Lapses also occur because of improper witnessing. A gift will lapse if its beneficiary, such as a friend or spouse, witnessed the signing of the will. If this happens, then the alternative beneficiary would receive the gift. If the will names no alternative, then provincial succession laws kick in again, or else the gift becomes a residue of the estate. Through all this, the will remains valid (unless there’s another problem, like a minor witnessed the will, which is not allowed). In some provinces, for example B.C., the will can be saved by the court—but not without the headache and expense of litigation.

Under WESA, Liang points out, a gift to a spouse (married or common-law) automatically lapses upon separation or divorce. Most of the time, she says, former partners don’t object. But if the testator still wants to provide a gift to the ex-spouse, they’d have to make a new will or amend their current one.

Things can get dicier when separated partners reconcile. The reconciliation does not reinstate the gifts that lapsed because of the separation, potentially causing “huge problems for the surviving spouse.”

Liang’s advice? “Look at your will whenever your family situation changes: a separation or divorce, reconciliation, when a child is born or married. Does it effectively protect the people you care about?”

Adeemed gifts

A gift adeems, explains Liang, when it no longer exists at the time of the testator’s death, or exists in a different form than described in the will. The gift—perhaps a car, a piece of jewelry, a house, money held in a specific bank account—may have been lost, sold, destroyed, changed form or simply used up. If that’s the case, the beneficiary is generally out of luck.

It’s not always easy, however, to determine whether a gift has adeemed. For example, if a house has burned down, is a beneficiary entitled to the insurance settlement to replace it? If a testator leaves her “primary residence at 123 Main Street” to her son, and later sells that house and moves to 456 Broadway, is her son entitled to the house on Broadway? Consider a $5,000 bequest to a nephew out of BMO Account #12345: what happens if the will maker closes the account, or transfers the funds to a different bank?

Liang says issues of ademption often come up when the will was created long before the testator’s death. One way to avoid them is to review a will regularly to check for assets that may have adeemed. Another is to avoid wording that can lead to ademption: better, for example, to have that $5,000 bequest come out of the estate without specifying the bank account. If the testator’s intent is to leave the value of whatever single house she owns at the time of her death to her son, it’s best that the house be sold and the money go to the son. That’s a better option, says Green, “than to will things based on their value.”

In the end, a well-designed will allows the deceased’s assets to flow seamlessly, from its beginning with a willing and capable executor, to its end, when nothing remains. Thoughtful conversations between testator and lawyer can clarify the testator’s intentions, and careful drafting can shape a document that honours them.

When one will invalidates another

Lauren Liang, a partner at Clark Wilson in Vancouver, works with many Chinese and Chinese-Canadian clients, many of whom have separate wills governing the assets in each country. When dealing with multiple wills in different countries, she says, it’s particularly important that no will invalidates another. Therefore, the standard clause where the testator “revokes all other wills” cannot be used. Liang will suggest wording along the lines of “This is my last will regarding my Canadian assets, and I revoke all other wills regarding my Canadian assets. I specifically provide that my Chinese will, dated XX, is still valid.”