The pitfalls of pre-death transfers to estate beneficiaries
In estate administrations, it is not uncommon for beneficiaries to receive substantial amounts of money, or property, from the deceased before death. This is particularly the case when the deceased is the sole surviving parent and there are several children who are beneficiaries.
This can take the form of gifts, loans, or in certain cases, a trust. It is important for the estate trustee to identify and categorize the effect of each of these property transfers when conducting the estate administration. Below, I highlight some common pitfalls with each:
To be a valid gift, there must be proof of the intention to make a gift and delivery of that gift. Evidence can come from a variety of sources, including the time and manner in which the gift was made, or a written document showing the intention to make a gift (a birthday card, or the memo in a cheque).
The ability to show that intention can be very important. The Supreme Court of Canada held in Pecore v. Pecore (2007 SCC 17) that the court should presume that a gratuitous transfer actually results with the transferee holding the property on "resulting trust" for the transferor unless there is evidence to demonstrate that it was intended to be a gift.
This rule applies to transfers between parents and their independent adult children. However, when examining transfers between spouses, or between parents and dependent children, the reverse presumption applies, and the transfer is presumed to be a gift.
In some cases, a transferee can end up holding property that was in fact beneficially owned by the deceased, due to the existence of a resulting trust. This often happens where an adult child, who is assisting an elderly parent, is added as a joint holder of their bank account. When the parent passes away, the remaining account holder retains the balance, or at least a portion thereof, on resulting trust for the estate, unless there was an intention to make a gift.
For this reason, if the intention is to only have a child help manage their parent's affairs, it is almost always preferable to authorize them to deal with the account; making withdrawals and deposits, and paying bills; by appointing him or her as an attorney for property, rather than naming them as an account holder. Doing so should not create an ownership interest in the account. It is a subtle, but important distinction.
It is not uncommon for the deceased to have made loans to family members during the course of their lifetime. Practically speaking, the value of those loans form part of the estate, and family members are liable to pay back the debt to the estate.
Recently, in Johnston Estate, Re, (2017 BCSC 272), Justice Marguerite Church of the B.C. Supreme Court held that a loan made by the deceased to one of the estate's beneficiaries for approximately $70,000 had to be repaid before that beneficiary could inherit a legacy under the estate. It didn't matter that the loan was made 12 years before the deceased's death, that the deceased had taken no steps to enforce the loan during their lifetime, and that the applicable limitation period had run out.
The court applied the rule in Cherry v. Boultbee, which has its roots in a 19th Century case, and does not empower the estate trustees to pursue the debt past the limitation period. Instead, it operates to ensure fairness amongst the beneficiaries so they each receive their inheritance from the estate on the same footing. The existence of this rule is a powerful tool for trustees who wish to ensure debts are collected and the beneficiaries are treated fairly. The rule has not been specifically applied in Ontario in the context of an estate proceeding since Ontario's "new" Limitation Act, 2002 came into force, but it has been cited with approval in subsequent decisions, in other contexts.
Practically speaking, it is often understood between family members when a gift was meant to be a gift, and when a loan is a loan, and when there is no conflict, that understanding will suffice. However, when an estate administration becomes contentious, parties may recall the intentions of the deceased differently and conflict can ensue.
In those cases, it is helpful for the estate trustee, and the beneficiaries, to be aware of the legal framework in which these pre-death transfers operate.