Estate planning centres on one main goal: preserving estate assets. While advisors offer planning advice and employ various strategies to reduce the tax liability of the deceased’s estate, even the best efforts can be fruitless if the estate faces claims that wind up in court.
Family dynamics, which can include sibling rivalry, favouritism, second marriages or blended families, tend to spark estate litigation. Often, estate litigation stems from disgruntled family members, friends or others who believe they’re entitled to some – if not all – of an estate, or that they didn’t receive their fair share.
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The dangers of estate litigation go far beyond the threat of legal fees – thousands, and sometimes hundreds of thousands of dollars – that can deplete estate assets. Estate litigation also destroys families, straining relationships to the point where family members often end up estranged – all amidst great emotional stress and grief. At a time when family members need each other’s support the most, loss and estate litigation often separates them further.
High net worth = high risk estate
Every estate is susceptible to claims, but high-net-worth estates are at particular risk, since there is literally a lot more to fight over. Former Maple Leaf’s owner Harold Ballard’s estate, reportedly valued at $50 million, was subject to litigation in the 1980s by various individuals, including Ballard’s longtime companion, Yolanda Ballard.
Given the horrors estate litigation represents, what can a high-net-worth client do? No strategy can guarantee that an estate remain litigation-free, but advisors should share the following strategies with their clients to reduce the likelihood of litigation:
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Make a will:
Studies show up to 50% of Canadians don’t have a will. A will documents how you wish to distribute your estate upon your death. Clients without a will open up the risk of claims against the estate, because without one, there is no evidence of testamentary intentions.
Include an in terrorem clause in your will:
An in terrorem clause states that any beneficiary who contests the will automatically forfeits their gift. This can be an effective deterrent to litigation, because the beneficiary challenging the will automatically loses their gift or inheritance. Keep in mind, for an in terrorem clause to be effective, the beneficiary’s gift must be valuable enough to merit serious consideration about pursuing litigation.
Have capacity test/notes by doctor and lawyer:
Capacity tests are used to certify that an individual has the requisite mental capacity. Anytime someone is making a will and their capacity or mental fitness is a concern, a capacity test – along with doctors’ notes on their mental condition – is essential. In addition, a request should be made to the lawyer drafting the will to make notes about the individual’s mental state and capacity. Dementia and Alzheimer’s disease affect seniors in greater numbers, so when an older client makes a will for the first time – or revises it significantly – either to include or disinherit a family member, or to substantially increase or decrease a gift, they should have a capacity test administered by a health care practitioner.
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Communicate with your heirs and beneficiaries:
Often, family members proceed with litigation because they don’t believe the will reflects the true intentions of the testator. It’s essential the testator communicate with heirs and beneficiaries about intentions for distribution of the estate. This will clear up any misunderstanding or misinformation, and in the process, can help the individual find out what preferences beneficiaries and heirs may have.
Have a professionally mediated family meeting:
A professionally mediated meeting, sometimes called a family conference, between the testator, his beneficiaries and other estate planning professionals is one way to keep everyone informed. The meeting advises the beneficiaries of the testator’s intentions and seeks their input in developing the estate plan. At the end of the family conference, the beneficiaries and the testator are invited to sign an agreement not to contest the will. While the family conference may not work for all families, it can be very beneficial for some, especially if the testator is aware of litigious family members or strained family relationships.
Avoid homemade wills:
Does it matter if someone drafts their own will as opposed to having a lawyer prepare it? A will drafted in your own handwriting – known as a holograph will – is legal in Ontario. It is also possible to use a will kit. However, I have seen litigation arise from problems with homemade or handwritten wills. A properly drafted will requires specific legal language and terms that the average person wouldn’t know or use. Homemade wills are fertile breeding grounds for estate litigation.
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In the 2007 Ontario Superior Court case, Rudling Estate v. Rudling, 2007 CanLii 51794 (ON S.C.), a seven-day trial ensued as a result of litigation between two brothers who had differing interpretations of their mother’s will, which she had prepared using a will kit.
Choose your estate trustee carefully:
The estate trustee is responsible for administering the deceased’s estate. Often, the deceased will appoint a spouse or eldest child to fulfill this role. The choice of estate trustee should be made after much consideration, since the final decision affects the administration of the estate and the potential for litigation. In many litigation cases, beneficiaries have commenced legal action against the estate trustee. The estate trustee’s job is extremely important and requires a certain level of skill and understanding. If the trustee doesn’t do his or her job correctly, or is negligent, legal consequences may follow, and they may become personally liable. The estate trustee acts as a fiduciary to the beneficiaries, and is expected to act in their best interests. This includes acting with an even hand before all the beneficiaries, investing estate assets prudently, not benefiting personally from the estate and avoiding any conflict-of-interest situations.
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Unresolved conflicts between the estate trustee and the beneficiaries can also be sources of litigation. Appointing a spouse or sibling with longstanding conflicts with intended beneficiaries may invite litigation– the beneficiary might feel the trustee isn’t treating her fairly or acting in her best interests, and may decide to commence court action to remove the estate trustee. Where the chance of conflict between an estate trustee and beneficiaries is high, it is advisable to consider appointing a corporate trustee in place of, or in addition to the original estate trustee. A corporate trustee can be a neutral third party who stabilizes the conflict.
Update and Review your will regularly:
Clients should update their will following any major event: the birth or death of a child, a significant change in financial status, the death of a spouse or remarriage, unexpected changes in tax or other legislation that affect the estate plan. This list is by no means exhaustive. Barring any major changes, a will should be reviewed approximately every three years. Failing to do so can lead to claims against the estate as the testator may unintentionally disinherit a family member, or unknowingly leave a portion of the estate to an unintended beneficiary.