Vested versus Contingent Interests

Courts have guidelines for interpreting ambiguous provisions in contracts, Wills, and other documents.  With respect to Wills, where the will-maker’s Will contains clauses that can either be interpreted as:

  • giving an interest that is vested (owned by the beneficiary at the will-maker’s death); or
  • giving an interest that is contingent (ownership is conditional on another event after the will-maker’s death),

the Court prefers to find a vested interest, which in some circumstances avoids an intestacy.  However, the Court’s preference is subordinate to the will-maker’s intentions.  The will-maker’s freedom to distribute his/her estate according to his/her wishes is paramount.

In Fargey v. Fargey, 2015 BCSC 721 [“Fargey”], the Court considered this issue.  The Will provided that, in the event that Bruce Fargey (Matthew and Joseph Fargey’s father) predeceased the will-maker (which he did), his share would be divided among his children.   The will-maker’s grandsons, Matthew and Joseph, sought orders terminating a trust and encroaching on a trust, respectively.  Matthew, relying on the rule in Saunders v. Vautier (1841) 41 ER 482 [“Saunders”], argued that because he was an adult of sound mind and entitled to the beneficial interest of the trust, the trust ought to be terminated.  Joseph’s litigation guardian petitioned for permission to encroach on Joseph’s interest, arguing that it was in his best interests.  For either petition to be successful, the grandson’s beneficial interests had to be categorized as vested rather than contingent.  Therefore, the issue for the Court was whether the interests conferred to the grandson’s had vested upon the will-maker’s death or whether the interests remained contingent on the grandson’s attaining the age of twenty-five.

According to the terms of the trust, the trustees were not to distribute the capital until the grandsons reached the age of twenty-five.  The relevant clause of the Will read that the trustee was to:

invest and keep invested each such sub-share and to pay the income therefrom or so much thereof as may be necessary or advisable in my Trustee’s discretion for the grandchild’s maintenance, education or benefit during his or her minority, (any income not so paid in any year to be added to the capital of the share) and upon my grandchild attaining the age of twenty-five (25) years to distribute the capital of the sub-share to him or her

Based on the language of the clause, the Court held that the will-maker intended that the grandsons’ interests would vest at the time of the will-maker’s death, but that the distribution would be postponed until they reached the age of twenty-five.  The use of the word “distribution” implies that the interest vested, but would be distributed at the later date.  Accordingly, the grandsons’ interests were vested interests rather than contingent interests.

The Court then considered the specific petitions of each grandson.  Matthew’s request for early termination of the trust was successful under the rule in Saunders as he is an adult and of sound mind, and there was no opposition from those in charge of Joseph’s affairs.

Joseph’s petition was also successful.  The Court held there was no controversy as to whether an encroachment was in his best interests, focusing on educational purposes, which were expressly considered in the Will. Further, the Court held that encroachment was permitted under the Trust and Settlement Variation Act.

Ultimately, the Court endorsed the longstanding preference of holding that an interest has vested, if the language of the Will can support such an interpretation.

Does the Court Have Power to Cure a Defective Will?

The Wills, Estates and Succession Act (“WESA”) implements a variety of changes. One of the most significant changes is to empower the Court to order that a record, document, writing, or marking on a Will or document is fully effective as a Will even though the formal requirements for the format and execution of the Will have not been met.

There have been a few reported cases of the Court’s curative power under Section 58 of WESA. The most recent judgment on this issue was just released on June 30, 2015.

In Re Yaremkewich Estate, the Deceased died leaving documents that did not comply with the statutory execution requirements. Prior to her death, the Deceased executed a pre-printed will template form titled “Last Will and Testament” (the “Template”). The Deceased filled out the Template by appointing executors, setting out burial arrangements, directing certain expenses and taxes to be paid from her estate, and providing a number of gifts to relatives, friends and charities.

She also referred to three other documents in the Template by directing the readers to “see attached instructions” and “see attached for other bequests”.  She left the Template and the three documents in an unsealed envelope.  Two of the documents were handwritten lists of bequests. The third document was care instructions for her dog.

The Template was signed by two witnesses; however, the two witnesses testified that the Template was blank and there were no attached pages when they signed as witnesses. One of the named executors applied for an Order that all of the noncompliant documents or some portion of them be treated as a fully effective Will pursuant to Section 58 of WESA.

After hearing all of the evidence, the Court found that the Template and the two documents detailing lists of bequests were fully effective as the Will of the Deceased. In making that decision, the Court emphasized that the applicant in a Section 58 application must prove on the balance of probabilities that the record at issue is authentic and that it represents the testamentary intentions of the will-maker.

The Court further stated that the types of evidence that are relevant to prove testamentary intent will vary from case to case. In this particular case, the contents, the detailed wording of the Template and its attachments, and the circumstances in which they were found militate in favour of finding that the Template and two of the accompanying documents, the bequest lists, represent the Deceased’s testamentary intention. This means that they represent her fixed and final expression of intention as to the disposal of her property on death.

It is important to note that even though a defective Will may be cured by the Court, it is expensive to go through the court application process. The best practice is to engage an estate planning professional to have the Will properly prepared and executed.

Qualified Disability Trusts

Beginning in 2016, all trusts (whether created during an individual’s lifetime, or in their will) will be subject to tax at the highest marginal rate unless the trust meets one of two exceptions. The first exception applies if the trust qualifies as a “graduated rate estate” (GRE). This exception, which has been discussed in previous posts, will allow most estates to have access to graduated rates of taxation for up to 36 months, if certain requirements are met. The second exception applies where the trust qualifies as a “qualified disability trust” (QDT). This exception will allow certain trusts that are created for the benefit of a person with a disability to have access to graduated rates of taxation.

The requirements that must be met in order for a trust to qualify as a QDT are as follows:

  1. The trust must be a testamentary trust that arose on and as a consequence of death. This means that a trust created during the lifetime of the taxpayer for the benefit of a disabled child will not qualify.
  2. The trust must be resident in Canada. This requirement should be easy to meet where the trustees all reside in Canada and manage the trust from Canada.
  3. The trust must elect jointly with the eligible beneficiary to be a QDT. This may be difficult in cases where the beneficiary does not have capacity to make the election. In this case, a court appointed committee may be required to make the election on behalf of the beneficiary.
  4. The beneficiary must qualify for a disability tax credit under the Income Tax Act. Only individuals with a severe mental or physical impairment that impacts their basic activities of daily living, and that has lasted for over a year, will qualify for the disability tax credit.
  5. The beneficiary cannot make a QDT election in respect of any other trust. This means that if the parents of a disabled child each created a testamentary trust for the benefit of their child, and died at the same time, only one of the trusts would qualify as a QDT. The second trust would get taxed at the highest marginal rate.

It may be worth revisiting estate plans that involve a disabled beneficiary to make use of this new planning opportunity, where appropriate.