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Estates & Wills & Trusts

Joint property cannot be clawed back to satisfy deceased's debt

As jointly held real property is not actually ‘transferred’ to the surviving owner, it cannot be recovered to satisfy the debts of the deceased if the estate is later found to be bankrupt, Toronto estates and trusts lawyers Suzana Popovic-Montag and Stuart Clark write in The Lawyer’s Daily.

In this 2011 case, explain Popovic-Montag, managing partner of Hull & Hull LLP, and Clark, associate with the firm, the Ontario Superior Court of Justice was asked to consider whether a matrimonial home which passed to the surviving spouse by right of survivorship could be clawed back into a bankrupt estate to satisfy the debts of the deceased spouse.

“In this case, after the deceased spouse's death, it was discovered that there were insufficient assets in the estate to pay all liabilities, and the estate went into bankruptcy,” they write.

The deceased’s most significant asset was his matrimonial home, which he owned as joint-tenants with his wife. However, at the time of his death, he also owed money on a line of credit, says the article.

“As there were now insufficient assets in the estate to pay this debt in full, the bank took the position that the matrimonial home passing to the surviving spouse by right of survivorship was a ‘transfer undervalue’ in accordance with s. 96 of the Bankruptcy and Insolvency Act, such that the matrimonial home should be available to be clawed back into the bankrupt estate to pay for the deceased's debts,” write Popovic-Montag and Clark.

However, the court ruled that there is no “transfer” when a property passes on joint-tenancy by right of survivorship, but instead, the deceased joint owner's interest in the property is “extinguished,” with the effect of the surviving joint-owner now owning the whole.

“As there is no ‘transfer,’ there could be no ‘transfer undervalue,’ and thus s. 96 of the Bankruptcy and Insolvency Act could not be invoked to claw the matrimonial home back into the estate,” write Popovic-Montag and Clark.

Although the bank made the alternative argument that the matrimonial home was now held on a constructive trust by the surviving spouse for the benefit of the estate, the court rejected this, noting that “constructive trusts are imposed to prevent unjust enrichment, and that to impose a constructive trust the court must find that there has been an enrichment, a corresponding deprivation, and the absence of any juristic reason for the enrichment,” they say.

This case, write Popovic-Montag and Clark, is the “authority for the proposition that, absent extraordinary circumstances, jointly held real property which passes to a surviving joint-owner by right of survivorship is not available to satisfy the debts of the deceased joint-owner should their estate later be pushed into bankruptcy. Presuming that the debt itself is not registered against the property, the property passes to the surviving joint-owner upon death free and clear of the deceased joint-owner's debts.”

The question remains of whether a creditor in a similar situation could have taken the position that the property was held by the surviving spouse on a resulting trust for the benefit of the deceased spouse's estate, write Popovic-Montag and Clark.

“While s. 14 of the Family Law Act provides that there is a presumption that property that is held jointly between married spouses passes to the surviving spouse by right of survivorship, it is a rebuttable presumption.

“If there is evidence which shows that it was the deceased spouse's intention that the property not pass by right of survivorship, the presumption can be rebutted, and the court may conclude that the property is held by the surviving spouse on a resulting trust for the benefit of the deceased spouse's estate,” they write.

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