Your clients’ son fell in with a bad crowd in his late teens. Every attempt to set him straight failed, and for the past 20 years he’s been in and out of jail for drug offenses and petty crimes. Your clients are so upset, they’ve decided to disinherit him.
How they do it depends on the province where they live, because inheritance rules vary. Here’s how Alberta, B.C. and Ontario differ.
Alberta grants the greatest leeway for allocating assets upon death, while B.C. offers the least. Ontario sits in between, says Floyd Gradley, an estate and trust lawyer with Mackenzie Investments.
In Alberta, leaving adult independent children out of the will disinherits them. “They have no right to dispute under dependant’s relief legislation,” he says.
“The only way they could mount a challenge is to argue the deceased didn’t have the necessary mental capacity when he or she made the will; or they could try to prove the deceased was under duress or was unduly influenced when the will was made.” This applies in all provinces, but proving these claims is quite difficult, says Gradley.
People protected by dependant relief legislation—spouses, minor children, dependent adult children—who challenge the will can only receive estate assets. They can’t touch anything that bypasses the estate due to beneficiary designation, as is common with insurance policies or RRSPs, or joint tenancy, which is common for spouses holding real estate.
And if the person dies without a will, the child or spouse has few legal options for influencing how the assets are distributed, Gradley explains.
In contrast, B.C. law protects spouses and minor children, as well as all biological and adopted children. A will must be in place for an heir to issue a challenge, and only estate assets can be gone after—proceeds from insurance and other policies where beneficiaries are named remain outside the estate.
Ontario’s legislation protects spouses and minor children, as well as dependent adult children, siblings and parents. “While the legislation’s coverage is broad, as in Alberta, it doesn’t include independent adult children. So it’s quite easy for Ontario residents to disinherit a black sheep,” he notes, provided the person’s grown up and self-supporting.
Ontario courts can also draw from assets given away during a testator’s lifetime, as well as those for which beneficiaries are designated that distribute outside the estate—including proceeds from life insurance.
“The court can go to the policy’s beneficiary and order him or her
to return part or all of its proceeds to the estate, which will then be reallocated to the claimant,” Gradley explains.
And unlike Alberta and B.C., Ontario’s rules apply in the case of intestacy. “Protected individuals can still apply for reallocation of the deceased’s assets if they feel the intestate allocation is unfair,” he notes.
Disinheriting strategies for B.C. residents
Despite B.C.’s restrictive laws, residents have a few options for disinheriting an independent adult child. Gradley says one is alter ego trusts. The client has to be 65 years old and reside in Canada. She’ll move assets she wants to keep from the black sheep into the trust. The trust holds those assets, but the client is the trustee and retains control. Tax rules let the owner be the only person who can receive or use income from trust assets while she’s alive.
“It’s a win-win situation,” says Gradley. “And because she doesn’t own them, they don’t fall under her will. Beneficiaries she appoints will receive the trust assets upon her death, and there’s nothing the black sheep can do because his only legal tool is to contest the will.”
Setting up an alter ego trust costs between $3,000 to $10,000, depending on complexity, he notes. The lower number applies to trusts with assets going to only one person.
Joint tenancy is also effective. “The asset is jointly held with the person or people the client wants to pass it to upon death. It’s not in the estate, so the black sheep can’t get at it through a legal challenge,” says Gradley.
He emphasizes the process is complex. “It’s not just a matter of putting someone else’s name on titles as a joint tenant.”
There are three types of joint tenancy: true, resulting trust, and right of survivorship. All joint tenancy registrations look alike, and if the testator doesn’t document her intentions, heirs could fight over the estate. (For more, see “The pitfalls of joint tenancy,”.)
A third strategy is to leave money using beneficiary designations. “If a client has a segregated fund, the beneficiary would receive it upon death and the funds couldn’t be targeted by an adult independent child in B.C.,”
Acting out of spite
Say you have a Calgary client who wants to stick it to her black-sheep son. Instead of leaving him out of the will, she plans a $50 inheritance, while setting aside hundreds of thousands for other children.
While this doesn’t give the black sheep a legitimate opening to press for more in court, advise clients against being malicious.
“Leaving a nominal amount, accompanied by a spiteful explanation in the will itself, can incite the offended party to take some form of aggressive action,” says Margaret O’Sullivan, principal at O’Sullivan Estate Lawyers. “Even if he doesn’t have a strong legal case, it doesn’t mean he won’t try.” Robert Mendenhall, vice president of tax and estate planning at Richardson GMP in Edmonton, Alta., says, even in extreme cases of family discord, shutting out the black sheep completely isn’t the best option.
“I advise clients to push the gift amount for the black sheep as close to the expected amount as possible, while suggesting conditions or controls as a trade-off,” he says. “It acknowledges the person as a family member and likely prevents pushback.”
A client who insists on disinheriting the black sheep should draft a memorandum explaining his reasons. This can pre-empt the black sheep’s attempt to claim the deceased was under undue influence or duress when he drafted his will.
Gradley says the memorandum “is private information for the executor, unless the black sheep launches a legal challenge. In that case it’s entered as evidence.”
Read: To tell or not to tell
Mendenhall adds clients should communicate with heirs and the executor in advance. “When someone’s considering a distribution that’s out of the norm, it’s important to get everyone united behind the plan, if possible.
“Even if they can’t find consensus, communicating clearly with the heirs keeps them informed, and helps them adjust to that new reality. Otherwise the beneficiaries will be left to deal with the emotional outbursts and court battles.”
Originally published in Advisor's Edge Report
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