Estate planning should involve a thorough review of an individual’s financial, moral and legal obligations to ensure they are entrenched and reflected in the individual’s will and estate plan. The most obvious of these obligations is the provision for the ongoing support of a spouse, minor children and children with special needs.
Less obvious obligations can often be uncovered in a wide-ranging conversation with the individual. This will help uncover previously unspoken information about obligations, whether moral, legal or financial, regarding those the individual interacts with or assists financially.
Where a testator has not made adequate provisions for the proper support of a dependent, provincial laws allow the courts to order the estate of the deceased to be responsible for such support obligations. A court order of this nature can reduce the overall value of the estate available for other beneficiaries and/or defer the settlement of the estate until the support obligations are fulfilled.
In determining the amount and duration of a support obligation on the estate, the courts will consider all of the circumstances of the situation. The type of circumstances will include some or all of the following:
- The claimant’s needs as well as the standard of living to which the claimant has become accustomed
- The contributions (both financial and nonfinancial) the claimant made to the deceased’s welfare
- The length of time the claimant and the deceased co-habited
- The claimant’s assets, liabilities and income at the time of the claim for support
- The claimant’s capacity to earn income
- The claimant’s likely future assets/liabilities and income
- The measures that could be taken to enable the claimant to earn more income (i.e., schooling or training programs)
- The claimant’s age and health, both physical and mental
The combination of a wide-ranging set of factors, as outlined above, will influence the courts in arriving at decisions. The financial award that recognizes an individual’s claim for financial support can be satisfied through a lump-sum settlement and/or an income stream, both of which must be financed through the deceased’s estate.
It should be noted that either party can appeal the decision to a higher court. The higher court may decide to confirm the lower court’s finding, reverse the decision or modify the outcome. The emotional turmoil can take a substantial toll on the individuals involved, thus making an already stressful time even more stressful. Not only is there a potential impact financially from the decision, but the cost of mounting a defence by the estate is an unanticipated financial burden.
Even simple facts often make for interesting outcomes, as seen in a June 4, 2012, ruling by the Ontario Superior Court of Justice in the case of Sorkos v. Sorkos Estate:
- Gus, the deceased, married Rena, then age 59; it was a second marriage for both.
- Rena, who had known Gus from childhood, moved overseas to marry Gus, who had suffered a debilitating stroke and required Rena’s daily assistance.
- Gus’s net worth was ascertained to be about $2,300,000.
- Gus’s estate plan provided a bequest of $250,000 to Rena and named Rena as beneficiary of his $287,185 RRIF account.
- After a few other bequests, the remaining assets were to be distributed to Gus’ siblings.
- Rena demonstrated that she had monthly expenses of $6,400 and had an income of $1,200 from the RRIF, $1,100 from her own pension leading to a monthly shortfall of $4,100.
- Rena made a claim against the estate for financial support.
After considering all of the factors, Justice Tausendfreund amended the bequest to Rena. He lowered the $250,000 bequest to $150,000 but, in addition, ordered the estate to purchase an annuity on Rena’s life that would pay Rena $3,000 per month. In addition, she retained her position as named beneficiary of the RRIF. In his commentary, the judge noted that Gus’s estate had an obligation to support Rena in her role as Gus’s spouse, and that this obligation trumped Gus’s right to name his siblings as the beneficiaries of the residue of his estate.
It is interesting to note that the estate was not fully responsible for Rena’s income shortfall, but there was a substantial realignment of the resulting testamentary dispositions. Gus’s testamentary wishes were not fulfilled as he had originally anticipated because the court recognized a support obligation that he did not view as necessary or obvious in setting out his testamentary wishes.
Estate planning must contemplate and provide for as many contingencies as possible. This requires a thorough discussion about the individual’s obligations to dependents and what reasonable/adequate provision should be made in the overall estate plan.
E.O. & E.
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Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.