October 25, 2017

Got Dependents? That May Depend. And, Can They Ever Re-Write Your Plans!

Three approaches in Western Canada dependency claims. The lingo is confusing, and can spark the whole war!

The Alberta & Saskatchewan dependency problem – Got money? Give some.

Alberta and Saskatchewan subscribe to what is termed the “moral obligation” approach to estate planning, when considering claims advanced by “dependents” (whether a recognised dependent, or one that argues a dependency after the deceased’s death).

What “moral obligation” must be considered?

The Alberta Wills and Succession Act and Saskatchewan Dependants’ Relief Actlook at whether or not “adequate provision for the proper maintenance and support” (in Alberta) or “reasonable provision” (in Saskatchewan) has been made by the deceased, for certain classes of family members / claimants (upon the deceased’s death):

  • Legally married spouse.
  • Adult interdependent partner (a.k.a. “common law” spouse of at least 3 years’ interdependent cohabitation(Alberta) or at least 2 years’ interdependentcohabitation (Saskatchewan)).
  • Children < 18 years.
  • Children > 18 years, if “unable to earn a livelihood by reason of mental or physical disability.”
  • Children between 18-22 years, if a full-time student.
  • Even a grandchild or great-grandchild < 18 years if the grandparent had a parent-like role.

Yes, quite the list of people who can stake their claim!

What does the Court consider, under the above framework, when it determines if a dependent has a legitimate gripe, and how to address it?

  • The overall question is whether the deceased provided adequate maintenance and support to a dependant: “These applications should spawn a wide range of inquiries” (The evidence considered is quite broad): Re Birkenbach Estate.
  • The size of the estate seems to be the first question (practically, as the law is written), Birkenbach:

The extent to which all the legal and moral claims can be met will depend on the size of the estate. On the other hand because there is no longer any need to provide support for the deceasedthe surviving family members may be entitled to more than the support they would have received during the deceased’s lifetime.

  • Where the estate is large, the award is simply far more likely, and larger awards are made. It’s that simple.
  • The law remarks that ‘testamentary autonomy’ is balanced against the claim for more (Birkenbach / Tataryn Estate); but in reality, where a claim is made by someone considered dependent by being “unable to earn a livelihood” due to mental or physical disability and the estate has ‘enough’ in it, the claim succeeds (and note that a claimant doesn’t require proof of need). Dependency due to a disability is, legally speaking, very broadly interpreted in favour of the claimant.
  • The legislation gives whatever power is needed, to “make adequate provision”; the deceased had a chance to make provision, so the legislation ‘fixes’ that error if there wasn’t adequate provision for a dependent from the estate: Birkenbach.
  • It is not necessary to show any actual “need” for the money in Alberta and Saskatchewan, as a threshold to entitlement to get an award.
  • In terms of the amount of an award, “adequate” provision doesn’t mean bare necessities of existence; it requires the deceased to meet the moral expectations of contemporary society, toward the dependent; the amount required to be given must reflect the realistic lifestyle expectations of the deceased and dependent up to the date of the deceased’s death: Birkenbach.
  • Further factors for determining the amount of the award include the following points, from the Alberta Court of Appeal in Boje Estate: a) lifestyle and socio-economic status of parties (claimant and deceased); b) other dependents (balancing competing claims); c) age and health of claimant; d) present cost of living and likelihood of future needs increasing; e) inflation and future-cost calculation; f) other sources of income for claimant.
  • Other factors from Birkenbach include: nature of relationship to the deceased; what moneys or gifts the deceased already gave to the claimant, either before death or through death; the reason for not giving even more, from the estate; whether the award would ‘build up’ wealth for the claimant (which is not the legislation’s purpose); and, interest that will be applied to the award.
  • The Court can refuse an otherwise-worthy applicant, if their “character” or “conduct” disentitles them: Re Birkenbach Estate. This has been done, but very, very rarely. Examples include: having no better a claim than any other beneficiary to “more”: Re Kinsella EstateIt is the character of the applicant as that relates to the claim which causes harm to the deceased or estate(not whether they have simply done wrong generally) — e.g. killing the deceased (to get money) then making the claim, or stealing during their life and then seeking more (hypotheticals the courts considered clear disentitling factors), but lying to CRA together with the deceased about their relationship status, to avoid taxes, was not a disentitling factor: Kiernan v. Stach Estate.

So, how did the Alberta court’s recent Birkenbach decision all work out?

In the Alberta Birkenbach trial, the estate was valued at a reasonably substantial amount of $46 million.

The portion remaining available to the dependency claimant, the deceased’s 23-year old son Phillip, after claims and other specific gifts, was $11.7 million. All other dependency claims were settled, so there was no “competing claim” remaining. Phillip sought $9.5 million of that $11.7 million.

Phillip was in good health, except suffering from severe dyslexia, which limited his scholastic achievements despite the finding that he was intelligent, and articulate; he has not graduated grade 12 (at 23 years). He was employed as an industrial labourer on hydrovac trucks. However, the evidence confirmed that, with programming, he could achieve post-secondary education, which was his goal so he could enter business management and leadership.

Phillip had a good relationship with his father and saw him every day, often helping his dad run the Banff hotel business his dad owned, and he was paid a wage for it. He expected to be involved in the business, eventually. His mother moved him to California a few years before the Deceased’s death, but he saw his dad in Banff as often as he could.

Before his trial to claim more of the estate, Phillip received $469,000 from a settlement with the estate, in addition to his own income. He also got a $200,000 interest in his mother’s Banff residence, in trust until age 25. The Court found as a fact that Phillip’s living expenses were not more than his income from work and the pre-death matrimonial settlement between his parents. In fact, he lived with friends, owned snow machines and had ample leisure.

Phillip lived well. As one example, he filed a budget disclosing an expense of $1,800 a year on “grooming” (haircuts, etc.) and $2,100 a year on “household supplies.” The Court found that his father’s frugality and curtailing unnecessary spending were “certainly life lessons lost on Phillip.”

The Court did consider the need for avoiding sending Phillip on “a voyage to bankruptcy,” and avoiding paying for an extravagant lifestyle, in its deliberations. His father’s frugality operated against letting the claimant live “in an extravagant style.”

And yet, the Court awards Phillip $3 million dollars plus interest from the date of his dad’s death, out of the $11 million remaining, in addition to his prior substantial settlements. Other than these amounts, he was not a beneficiary of his dad’s Will, which was drafted before he was born and left unrevised, despite his advisors telling him to updated it to provide for Phillip. He was waiting until after other claims during his life, advanced by his ex-spouses and others, were all settled.

In Birkenbach, the overall factors seemed to be Phillip’s dyslexia (which held him back from greater education); and his reasonable expectations for future education, given such a large estate, and (it is said) without giving Phillip a “build up” of wealth. Put simply: the estate could ‘afford’ to give Phillip more in life. In the Court’s words: “the size of this estate provides great flexibility to the Court in formulating that solution.”

Saskatchewan law remains similar to Alberta’s, as confirmed by the analysis in the 2016 Adams v. Schmidt case. In Saskatchewan, it is similarly a “moral or societal obligation” question, not a “need” question, to establish the entitlement to advance a claim. The amount is set by a very similar factor-based analysis, where the size of the estate also appears to be the driving factor in that jurisdiction.

So, what is the situation in Alberta and Saskatchewan?

In short: the legislation and established case-law interpreting it gives the courts extremely broad authority to reach inside your estate plan, and re-write it as the courts see fit, in the circumstances. The practical effect of a claim often prevails over the legal, logical connection to the policy’s origins including, it seems, all but ignoring this guidance from the Supreme Court of Canada’s Tataryn decision:

In other words, there will be a wide range of options, any of which might be considered appropriate in the circumstances. Provided that the testator has chosen an option within this range, the will should not be disturbed. Only where the testator has chosen an option which falls below his or her obligations as defined by reference to legal and moral norms, should the court make an order which achieves the justice the testator failed to achieve.

Despite that guidance, the courts often do make an award. One thing is for sure: if your estate is large, then the power to re-draft your estate plan is even more broadly and willingly exercised. The policy that is practically implemented seems to be that giving the claimant money from a citizen’s private estate may avoid placing a burden on public resources (a point noted in Birkenbach).

The Manitoba solution: Do you need money? If so, how much, and can it be paid?

In Manitoba, the law doesn’t stroke blank cheques quite so readily.

Their categories of possible claimants are similar to Alberta and Saskatchewan, although grand-parents and siblings can also claim. And, like Alberta, they have a 3-year cohabitation period before someone is a ‘common law’ spouse (Saskatchewan’s is a 2-year period).

Yet, in stark contrast to their westerly neighbours, the Manitoba legislation (Dependants Relief Act) follows a needs-based approach, not a wants-based approach.

As recently confirmed by the Manitoba Court of Appeal, in McAuley v Genaille, their laws ask, first, whether the alleged dependent is in financial need of maintenance or support, before any further gift or amount is payable by an estate.

The Manitoba shift, when they reformed their legislation, was from a subjective “want” to an objective “need.” The claimant must prove an objectively-justified need for more; not just a ‘want’ or subjective belief they need more to sustain their lifestyle. They have no claim at all without a demonstrated need.

Here is what the Manitoba Court of Appeal in the McAuley case found, when it reviewed the roots of their change to the law:

Present legislation focuses on maintaining the family of the testator, and the courts have established a moral duty of the testator towards his or her family as being the primary test, while looking at the conduct and the character of the applicant and the state of dependency of the applicant as factors affecting the moral duty.  This Bill changes the thrust of the legislation by restricting applicants to those who are truly dependant and do not have reasonable provision for maintenance and support, either from the estate of the [deceased] or from some other source. We submit that if a person has adequate independent means there should be no cause to rewrite their father’s or their mother’s or their relative’s will.

Financial “need,” is not limited to bare-subsistence. Yet, it doesn’t dip into estate money (which would reduce other beneficiaries’ shares) if the claimant has other adequate means of financial support, such as the surviving parent or other source of funds.

The Manitoba Court decided that “need” is also not presumed, simply by using child support guidelines (which do not apply to estate dependency claims). It requires actual evidence of need, not merely that the child lost a parent’s support payments.

If the need is proven, then the amount a court may award in Manitoba is defined by reference to the dependent’s and the deceased’s lifestyle, during the deceased’s lifetime, considering the legislated factors:

  • Size and nature of the estate.
  • Dependent’s present and future assets, means, and earning capacity. Also, any amounts given to the claimant and other dependents, during the deceased’s life.
  • Ability of the dependent to become financially independent and educated (and cost of achieving that).
  • Age and physical and mental health.
  • If the claimant is a spouse: their settlements or payments outside the estate (alimony, support, etc).
  • The claimant’s share inthe estate, without an estate re-write under the dependency legislation.
  • Competing claims by other dependents or others, to estate assets.
  • Sources of support payment from surviving parents. This can potentially entirely offset the claim, in Manitoba

In the McAuley case, the surviving father did not disclose what his income was, nor the alleged dependent child’s resources, so the Court found that the need was not proven. It overturned the lower court’s finding in favour of the claimant (except for a sum where executor conceded a $20,000 settlement for education expenses).

Isn’t it time Alberta & Saskatchewan considered needs, not just wants?

Wanting something has rarely been a good legal, or even logical or practical cause to force someone to hand it over. You might even say it is coercion, or worse.

Unfortunately, the legislation remains as-yet unrefined in Alberta and Saskatchewan (and in other provinces, too) compared to Manitoba’s modern legislative reform.

As shown by the list of Alberta cases cited by the Manitoba court in McAuley(see paragraph 58), this situation has given Alberta, and Saskatchewan to some degree, the distinction of dealing with a rapidly increasing rate of dependency claims.

How may Alberta and Saskatchewan benefit from updating the dependency claim legislation?

  • It would offer a fresh opportunity now, to consider lessons of provinces who have already updated their legislation. It would not necessarily lead to complete overhauls.
  • It may offer some thoughtful input from the legal and accounting professions, planning practitioners, investment advisors, and the public.
  • Perhaps it could avoid litigation, thereby reducing erosion of estates by claimants’ lawsuits. By their nature, such claims require much time and effort by parties (including executors) to work out. This would leave more money in the estate for the other beneficiaries (often including charities whose gift multiplies to help so many more deserving candidates).
  • Court resources could perhaps be focused on other matters, if the case-load of dependency claims against estates were reduced (in Alberta, in particular, court resources are at an all-time difficulty, due to the known shortage of federally-appointed judges).

How can you minimise your risk, under the present laws?

While re-writing the laws in Alberta and Saskatchewan to reduce dependency claim risks would be helpful, it may not be forthcoming without sufficient public prompting (presently, no reform of this nature appears to be in the works).

Here’s some practical advice to attempt to reduce your risks of dependency claims:

  • Create a list of potential dependents, who may look to your estate for financial support upon your death (see list of relations above, whom can make a claim). Consider the types of claims, including the nature of the relationship (some relationships can make stronger claims than others, depending on the situation).
  • Consider whether to create funds outside your main estate, such as life insurance, RRPSs, RESPs, or similar beneficiary-designated funds, with an appropriately-selected administrator (or trustee) for the potential dependent-claimant. This may offset their potential later claim against the estate and thereby perhaps leaving the plan for the other beneficiaries more intact.
  • Consider both present needs and future needs of the dependent. Future needs can include educational or sporting or extracurricular intentions or aptitudes.
  • Obtain expert accounting and financial advice to calculate the future cost of meeting those needs, taking proper considerations into account (e.g. the inflated future value of the lifestyle to which the dependent is accustomed and the likely future lifestyle at the date of the testator’s death).
  • Discuss your concerns with your estate planning counsel. Prepare a proper, comprehensive and strategic plan to address, in advance, the possible future claims against your estate, to protect the plan for all beneficiaries and dependent(s).
  • Consider what aspects you wish to state, in your Will, for future reference to why your plan was done the way it was; this can help avoid court disputes, or minimise the downsides or expedite a decision.

We hope you have enjoyed reading this summary. Enjoy your week!

Have estate litigation or estate planning questions? Walsh LLP’s Trust, Wills, & Estate Litigation and Dispute Resolution Group and our Wills & Estate Planning Group are here to help.  Contact us and read more!