Define your children in your will

Clarity matters when preparing your will and estate plan in Alberta.  Even a seemingly simple direction to divide your estate equally between your children may run into unexpected problems if you have a complex family structure and are not clear enough about your wishes in your Will.  In recent Alberta Court of Queen’s Bench decision, the question arose whether a foster child was included in the definition of “children” in the deceased’s Will.  While it was not at issue in this case, the same kind of issue could arise in the context of step-children.

Briefly, the deceased died in early 2016 with a Will.  She was survived by three biological daughters, a legally adopted son and a foster child.  All of the individuals were adults at the date of the deceased’s death. Her Will stated that the residue of the estate was to be divided equally between her children.  Other than the personal representatives, the Will did not refer to anyone else by name.  The biological daughters brought a Court application seeking a judicial interpretation of the residuary gift clause.  Specifically, the issue was whether the foster child was included in the definition of “children” and entitled to a share of the residue.

The Justice first considered the applicable legislation and the wording of the Will itself.   He determined that they were of little assistance in this case.  The significant conclusion about the applicable legislative provision was that generally, a reference to children in a Will must be interpreted to include biological children of the testator, unless a contrary intention could be found in the Will.  In contrast, the legislation does not automatically exclude non-biological children from that definition.

The Justice then turned to external evidence of the deceased’s intentions at the time she signed her Will.  In Alberta, such evidence is admissible to interpret a will in a manner that gives effect to the intent of the testator.

The key evidence before the Court was that the deceased signed a Power of Attorney and a Personal Directive on the same day as the Will.  She appointed the foster child as one of her attorneys and agents, respectively.  In both documents, the deceased specifically referred to the foster child as “my daughter”.  The deceased named one of her biological daughters as the other attorney and agent and also referred to her as “my daughter”.  That evidence was sufficient for the Court to conclude that the deceased intended to include the foster child as one of her children in the Will.

The Court considered other evidence, both in support of, and adverse to, the foster child provision, including a prior Will that specifically named the children in the residue clause and included the foster child.  For the Court, none of the additional evidence undermined the conclusion that the deceased intended to include the foster child in the definition of her children at the time she made her last Will.  The foster child was thus entitled to an equal share of the residue.

Your Will is your chance to specify how you want your estate to devolve after your death.  The takeaway point from the above case is that the drafting of the Will should be as clear and unambiguous as possible, particularly if you have a complex family structure, to avoid the risk of future disputes between the beneficiaries.

Thank you for reading.

The King of Pop on death and taxes

Today is the eighth anniversary of the death of Michael Jackson, the undisputed King of Pop. Albertans preparing wills and estate plans should look beyond the sensational headlines about the singer’s life and the circumstances of his death and consider the issues faced by Jackson’s estate when creating their own estate plans. Using Jackson’s estate as an illustration, this blog post will focus on general tax considerations for estate planning in Alberta.

The Jackson Estate’s tax troubles

This is a highly simplified summary of the issues that Jackson’s estate faced following his death. The King of Pop passed away unexpectedly on June 25, 2009. He left behind a will which established a testamentary trust for the benefit of his mother and three children. It was alleged that Jackson died with significant debts, such that the estate was essentially worthless. The Internal Revenue Service (IRS) disagreed and identified a lengthy list of allegedly incorrect valuations and deficiencies by the personal representatives of the estate. The IRS took the position that Jackson’s name, likeness and other intangible assets were worth $434 million. With penalties, arrears and legal fees, it was estimated that tax-related estate administration costs would approach $1 billion. The matter went to trial in February 2017, and as far as we have been able to uncover, the decision is still pending. In the meantime, Jackson’s executors managed to generate significant income within the estate by monetizing his catalogue, name and image.

What does this mean for me?

In Canada, when someone passes away, the Income Tax Act deems them to have disposed of all of their assets at fair market value. Those deemed dispositions are reported on the Terminal Tax Return, which has to be prepared and filed by the personal representatives of the estate.

If you pass away while employed, with a business, investments or other assets that appreciate over time, there is a strong likelihood that your estate will have to pay some tax. However, there are a number of ways to plan during your lifetime to either minimize the tax your estate will have to pay, or at least to ensure that your estate will have sufficient resources to pay the tax after your death. A full review is beyond the scope of this blog post, but below is a list of things to consider when updating your estate plan:

  • If you gift property to your spouse or common law partner, the tax that your estate would have otherwise owed can be deferred to the death of the second spouse or partner
  • RRSPs and RRIFs can be rolled over to spouses and common law partners, minor children or disabled adult children who are your dependants, so that the tax is deferred until their deaths
  • A beneficiary of an RRSP or RRIF typically receives those proceeds directly outside of the estate. If you designate someone other than a spouse, common law partner, minor child or disabled adult child, no tax deferral is available, and your estate will pay the full tax on that asset. If the beneficiaries of the RRSP/RRIF are different from the beneficiaries of the residue under your will, you may be giving a windfall to one set of beneficiaries to the detriment of the others
  • If you have multiple properties, consider claiming the principal residence exemption on the property with the highest capital gain
  • If you own a family business, it may be appropriate to implement an estate freeze at a time that you are prepared to transition the growth in the business to the next generation – an estate freeze will allow you to crystallize your tax liability on the business assets so that you can plan for its payment accordingly
  • If you own property in multiple jurisdictions, make sure to organize your affairs so that your estate is not paying tax in both jurisdictions
  • Consider purchasing life insurance in a sufficient amount to cover the estate’s anticipated tax liabilities. Properly document your wishes with respect to the life insurance proceeds so that they are used in the manner in which you envisioned
  • If you are a creative individual who has tangible or intangible assets such as copyrights, trademarks, artistic works and licensing agreements, those assets carry a fair market value and will need to be addressed as part of your planning process

These are only some examples of the tax planning considerations that you may wish to consider or access in your estate plan. The best results usually arrive from a competent team of professional advisors including your accountant, lawyer and financial/insurance advisor who work together and with you to achieve your objectives.

Estate planning is an important task at any stage of adult life. If you are thinking about implementing your first estate plan or updating your existing one, Field Law can help you identify your needs and implement a plan that gives effect to your wishes. Give us a call at 403.260.8511 or email to ptomic@fieldlaw.com to start the discussion.