family-generations

Client profile

Brenda Paulson* was driving her ailing father, 92-year-old Adam Bodenheimer, to a hospital in Ajax, Ont., when they were struck by a truck running a red light. Adam was pronounced dead on the scene, while Brenda died in hospital 6 days later. It didn’t take long for two estate battles to erupt.

*This is a hypothetical scenario. Any resemblance to real persons is coincidental.

The expert

Keith Masterman

Keith Masterman

vice-president, wealth planning at CI Investments in Toronto

The situation

Adam outlived his wife by three years. They had four children: Brenda (69), Charles (67), Diane (66) and Steve (61). All are married, most have children. Steve’s the executor of Adam’s estate. Adam was a small-business owner whose estate, after his terminal return is filed and paid, will amount to about $2 million. He liked keeping things simple; his will divides his assets equally among his four children.

Brenda’s first marriage ended 15 years ago with the death of her husband. Seven years ago, she married George Paulson (69). He has twin children, Eve and Farley (44), from a previous marriage. The twins have a strained relationship with their father due to their career choice. George wanted them to become doctors or lawyers, and was ready to bankroll their educations.

But the pair had other plans: as kids, they were always glued to the TV whenever Antiques Roadshow came on; as adults, they turned their passion for dusty treasures into a career by jointly opening a high-end antiques shop.

At the time of her death, Brenda was a retired chemistry professor. She earned six figures for two decades and, on retiring, received a generous pension. She was frugal and had a knack for investing, so her net worth—apart from assets shared with George—was about $2.4 million. When she turned 60 (two years before marrying George), she created a will naming various charities as beneficiaries. Like so many others, she didn’t know marriage usually invalidates a will, but she would’ve found out had she acted on her intention to update the document. She procrastinated and died intestate.

The issues

George stands to gain the most, financially, from Brenda and Adam’s deaths. Brenda’s siblings don’t like the result, and George’s children, to whom Brenda had promised some of her inheritance, are similarly upset.

Adam’s estate

The key to administering Adam’s estate is determining whether Brenda’s right to her inheritance has vested, says Keith Masterman, vice-president of wealth planning at CI Investments.

“Often, a will has a provision stating that a beneficiary must survive the testator for a certain period of time (typically 30 days) before she becomes entitled to her share. If there is such a clause, and if Brenda died before the period expired, Adam’s will would dictate who inherits Brenda’s share.”

Masterman explains the logic of these holdover periods. Say a husband and wife die one day apart, with the husband dying first. Both named each other and the kids as beneficiaries. With no holdover period, funds from the husband’s estate would have to be funnelled into his wife’s estate, and from there to the kids. The holdover period allows the husband’s executor to bypass the wife’s estate and pass the funds directly to the children, removing a significant administrative burden.

Adam’s will didn’t include a holdover clause, so “Brenda’s estate has an absolute right to any inheritance she would have received from her father,” explains Masterman. That means George will ultimately get his late wife’s cut of Adam’s $2 million. Brenda’s siblings say Adam disliked George.

Their father was also clear about his wishes: he wanted his estate to go to the kids. He would turn in his grave, they claim, if he knew George had walked off with a quarter of his estate. They’ve heard of cases where courts have altered wills post-death, so they plan to consult a lawyer. They want to petition the court to change the terms of Adam’s will to reflect what they claim are their father’s wishes, which would mean distributing Brenda’s share evenly among the surviving children.

Brenda’s estate

7

Degree of difficulty

7 out of 10

Situations like this are either easy or difficult, depending on when you tackle them. Brenda’s siblings’ frustrations could have been avoided had their father expressed his intentions clearly in his will. And, the court battle Eve and Farley initiated wouldn’t have happened had Brenda updated her estate plan. Advisors can add value by warning clients about such outcomes, and urging them to take preventive action.

Masterman says Brenda’s estate needs a trustee, and George is the most appropriate candidate under statutory guidelines. Intestacy laws will shape the distribution of Brenda’s estate. At a bare minimum, George will receive the first $200,000. The law then says, since Brenda has no surviving children of her own, that George is entitled to the remainder of the estate. If she did have children, the following would apply:

  • 1 child: George gets the first $200,000, plus one-half of the remainder of the estate; the child gets the other half.
  • 2 children: George gets the first $200,000, plus one-third of the remainder of the estate; the children get one-third each. (If there are more than two children, George still gets $200,000 plus one-third; the children divide the remaining two-thirds of the estate equally among themselves.)

Unlike George, Brenda had a warm relationship with her stepchildren—any observer would have concluded she was the twins’ birthmother, based on their strong familial rapport. But the law sees things differently, says Masterman. Only blood relations and adoptees are considered children—stepchildren don’t count. That means George is in line to get the entire estate.

But Eve and Farley plan to fight for what they believe is their rightful share of Brenda’s estate.

The struggling entrepreneurs had an ally in Brenda, who, sharing their passion for historical artifacts, was eager to support them. The twins claim their stepmother told them she’d soon be inheriting part of her father’s estate, and promised to use the money to help them rejuvenate their business. They also claim Brenda urged them to hold off on taking out an expensive business loan in anticipation of receiving these funds. They took her advice. Now Eve and Farley feel they’ve lost valuable time and money from not acting sooner to prop up their business.

Their legal cases will rest on what experts call promissory estoppel. That’s where someone can, under certain conditions, claim a right to assets not specifically bequeathed to him or her in the deceased’s will (if there was one), but were verbally or otherwise promised to the claimant during the deceased’s lifetime.

The solution

George comes out on top in both cases.

Adam’s estate

Adam’s children meet with a lawyer to float their idea of asking a judge to amend Adam’s will, but the lawyer won’t take their case. “If we were in B.C.,” she says, “you may have had a shot because its Wills, Estates and Succession Act allows for such claims. Ontario law doesn’t.”

Masterman explains that, because of this, Brenda’s one-quarter share of Adam’s bequest will flow into her estate.

Brenda’s estate

The case goes to court. A key hurdle for Eve and Farley is the lack of evidence to support their self-serving claim (true though it may be) that Brenda promised to use her share of Adam’s estate to prop up their ailing antiques business. George claims Brenda never mentioned this to him.

And there’s another problem for Eve and Farley. Adam, despite expectations to the contrary, could have lived another 10 years. Waiting on an old man to die is hardly a prudent business strategy. In line with intestacy rules, the court rules George gets all of Brenda’s estate.

Client acceptance

1/10

Adam’s children and George’s twins are bitter. They feel legal technicalities have prevailed over common sense. Masterman says such cases illustrate how critical it is to keep wills updated and ensure they’re drafted to account for situations that can arise from multiple-death incidents, such as auto accidents.

Dean DiSpalatro is senior editor of Advisor Group.

Originally published in Advisor's Edge

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