Restraints to testamentary freedom when drafting a will

A will is a cornerstone of an estate plan, and careful planning is required before drafting one. During that planning process, it’s important to consider any restraint on testamentary freedom. Restraints may be legislative, based on public policy or a result of contractual duties.

Legislative restraint

An example of legislative restraint is Ontario’s Family Law Act, which allows a surviving spouse to choose between the benefits left in the deceased’s will or a right to a family property division, which would’ve been available had the marriage ended in divorce or separation.

Another example is British Columbia’s Wills, Estates and Succession Act, which allows a court to vary a will if, in the court’s opinion, the will doesn’t adequately provide for the deceased’s spouse or children.

Public policy restraint

Public policy restraints were considered in Canada Trust Co. v Ontario Human Rights Commission (Re Leonard Foundation, 1990), where the Ontario Court of Appeal held that a trust that provided a scholarship to recipients who were white, Christian and of British nationality or parentage — and that specified only 25% of recipients could be women — was contrary to public policy and therefore void.

A more recent example is McCorkill vs. Streed (2014), where the New Brunswick Court of Appeal declared a gift to the National Alliance of Virginia to be contrary to public policy and therefore void. The National Alliance was found to be a white supremist organization.

Contractual restraint

Often the ability to dispose of assets is encumbered by agreements the deceased entered during their lifetime. It’s important to review and understand any legal agreements, including separation agreements, custody orders and — in the case of business owners — shareholders’ agreements. Failure to fully understand the terms can lead to expensive litigation, unintended consequences and disruption to family harmony.

For instance, in Frye vs. Frye Estate, five siblings owned an equal number of shares in a family business started by their father. When one of the siblings died, the sibling’s will left his shares to his sister. This was contrary to an existing shareholders’ agreement, which provided that, before shares could be transferred, at least three of the siblings must consent.

Further, the agreement provided that if a shareholder wished to sell, they must first offer the shares to the company. If the company didn’t wish to purchase the shares, the shareholder could offer them on a prorated basis to the other shareholders. The shareholders’ agreement also included a term outlining that the intent of the father was to preserve the company as a family business and that all the children were to share equally.

The court was left to decide the effect of the gift in the deceased sibling’s will. Did the clear terms of the shareholders’ agreement negate the gift to the sister, or was the deceased free to leave his assets as he chose, regardless of the shareholders’ agreement?

The Court of Appeal for Ontario reasoned that contractual obligations, like those set out in the shareholders’ agreement, don’t prevent a person from bequeathing property as they wish in their will. A breach of an agreement may give rise to an action for breach of contract but doesn’t affect the validity of the will or gift. Thus, legal title to the shares vested in the hands of the deceased’s estate, which held them in trust for the sister.

The court also said it was the estate trustee’s duty to attempt to carry out the direction left by the deceased and distribute the shares in specie to the sister. However, the court ruled that the shareholders’ agreement should be honoured, and the estate trustee should attempt to seek the consent required by the agreement. If that weren’t possible, the trustee might wish to exercise discretion and await a change in circumstances.

Lastly, the court reminded the estate trustee that she “retains her duties for life.”  Ironically, as the sister was the estate trustee named in the will and the deceased’s shares were vested in the estate, she controlled twice as many shares as her siblings — her own and her deceased sibling’s. This was the very situation the company’s founder hoped to prevent when he directed that all the children were to share equally.

The result in favour of the deceased’s will doubtfully fully satisfied any of the siblings and defeated the father’s goal of equality among his children. It also ignited family disharmony and caused expensive litigation. These unfortunate consequences could have been mitigated through a more carefully worded shareholders’ agreement or more robust communication within the family.

Ignoring a contractual obligation resulting in expensive litigation isn’t limited to business succession and extends to estate planning in general.

In Birnie v Birnie (2019 ONSC 2152) the court was left to decide a claim by a former spouse against her husband’s estate.

The husband and wife separated after 15 years of marriage. Their separation agreement contained a provision requiring the husband to obtain a $500,000 life insurance policy and name his wife as the irrevocable beneficiary. The policy was to be kept in place so long as the husband was obligated to pay spousal support.

After his death, it came to light that he’d never purchased the policy, and his wife commenced a lawsuit. The husband was clearly in breach of the separation agreement, and the wife could maintain an action against his estate for breach of contract.

However, a question for the court was the quantum of her claim: was she entitled to the entire $500,000 or only an amount equivalent to the future spousal support that remained owing?

The court held she was entitled to claim the entire $500,000, as there was nothing in the separation agreement stating the sole reason for the insurance was to secure her husband’s support obligations.

Further, the agreement didn’t contain a drawdown provision allowing the husband to reduce the amount of the insurance policy as his support obligations diminished.

Again, a thorough review of the agreement prior to drafting his estate plan could have ensured that the family’s expectations were secure and avoided a court battle.

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments. He can be reached at kmasterm@ci.com.

Keith Masterman

Tax & Estate

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. He can be reached at kmasterm@ci.com.