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.

Does a Person with a Medical Condition Affecting His Mind Have the Mental Capacity to Make a Will?

One of the grounds for challenging the validity of a Will is that the person who made the Will did not have the mental capacity to understand his actions.  With an aging population and higher rates of medical conditions, such as Dementia and Alzheimer’s Disease, which may affect a person’s memory and other mental functions, questions about testamentary capacity arise more frequently.

In a recent case Bull Estate v. Bull, the Supreme Court of BC provided further guidance on the issue of testamentary capacity. In Bull Estate, the deceased made a Will in 2010 leaving more assets to her daughter than her son. The deceased died in September 2012. Her son challenged the Will on the basis that, amongst other things, the deceased’s progressive dementia made her incapable of making the Will.

The Court found that the deceased had the requisite testamentary capacity when she executed the Will in 2010, and the Court further stated that sufficient mental capacity to make a Will may exist despite the presence of cognitive deterioration, and a will-maker may have sufficient mental capacity even if his/her ability to manage other aspects of his/her affairs is impaired.

In reaching its conclusion, the Court summarized the following non-exhaustive principles that have been established by courts over the years:

  • the test for testamentary capacity is not overly onerous;
  • simply having an imperfect or impaired memory does not in of itself absent testamentary capacity unless it is so great as to leave no disposing memory;
  • the will-maker needs to have an appreciation of the claims of the persons who are natural objects of his/her estate and the extent of his/her property of which he/she is disposing;
  • because testamentary capacity is a legal question and not a medical question, a medical opinion, although valuable and relevant, is not determinative of testamentary capacity;
  • a will-maker cannot be found not to have testamentary capacity simply because he/she chose to leave his/her estate in a manner that some might think unkind.

While each case of testamentary capacity turns on its own unique facts and evidence presented, the Bull Estate decision sets a high bar for a person challenging a Will to establish that the will-maker did not have the requisite mental capacity to make the Will, even if the will-maker suffered from medical conditions affecting his or her mental functions when the Will was made.

Court Removes “Ill-Mannered” Administrator, Sanctions Him With Special Costs

While BC Courts have the power to remove executors and administrators, it is rarely exercised.  Our Courts have held that “not every act of misconduct should result in removal”.  You may wonder, then, what misconduct would result in removal of an executor or administrator?  The BC Supreme Court answered this question last Friday, in the Estate of Forbes McTavish Campbell.

Mr. Campbell died intestate in 2011.  As he was divorced at the time, his three children were appointed as co-administrators in April 2012.  The estate in BC was modest, and appeared to have been reduced in size by Mr. Campbell’s caregiver.  Apparently, the caregiver absconded with $175,000 in cash, the deceased’s car, proceeds of a mortgage against real property (allegedly obtained through forgery), and certain other assets.  The administrators reported the losses to the police, and investigations were made but had not resulted in an arrest at the time of the application.

The administration of the estate had come to a halt.  Two of the administrators wished to move forward with administration, but the third refused to do so.  The two administrators’ lawyer made a detailed and reasonable written plan to move forward with the administration of the estate.  The third administrator’s response email advised that he would communicate with the lawyer, but at a cost of $300 per email, $500 per telephone call, and $1,500 per letter.  As you may imagine, this offer was not accepted by the two administrators (and  was not well received by the Court either).

Ultimately, the two administrators brought an application to have the third removed.  The Court found that the third administrator’s behaviour was so unreasonable and uncooperative that he must be removed.  Some (but by no means all) examples of the improper behaviour included:

  • advising the Court at the hearing that he was holding an envelope containing evidence he had uncovered demonstrating that the two administrators had colluded with the caregiver in defrauding the deceased, but refusing to allow the two administrators to know the contents of the envelope;
  • insisting that he need not communicate with his co-administrators until they each first paid him almost $40,000;
  • showing himself to be “unable to communicate in a mature and civil fashion”.  Rather, his emails were “condescending and thoroughly disrespectful in tone and content”  and “relentlessly juvenile, profane and intemperate”.

The Court noted that the test on a removal application was the welfare of the beneficiaries of the estate.  The Court then referenced section 158 of the new Wills, Estates and Succession Act, which permits a Court to remove an administrator.  The specific grounds for removal referenced in this case were in s. 158(3)(f):

  • unable to make the decisions necessary to discharge the office of personal representative;
  • not responsive; or
  • otherwise unwilling or unable to or unreasonably [refusing] to carry out the duties of a personal representative.

The Court found that the third administrator’s behaviour met these grounds, and ordered that the third administrator be removed.

The Court found the third administrator’s “reprehensible behaviour” was so egregious as to be deserving of an order that he personally pay the costs of the co-administrators on a special costs basis.  The Court did so not only as a form of “punishment of a wayward party”, but also to “serve as a warning to others entrusted with the important duties of administering estates: trustees who engage in this sort of nonsense will pay a high price.”

I understand that the third administrator has indicated he will be appealing this order.  If so, stay tuned for the next chapter…