1august 2009disclaimers and doctrine of acceleration note to participants session 4: disclaimers and...

August 2009 Disclaimers and Doctrine of Acceleration1

Note to Participants Note to Participants Session 4: Disclaimers and SurrendersSession 4: Disclaimers and Surrenders

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K. Thomas Grozinger, LL.B., TEP, C.S. (Estates and Trusts Law)

Principal Trust Specialist,

RBC Wealth Management, Estate and Trust Services

Royal Trust Corporation of Canada

August 2009

Disclaimers and Doctrine of Acceleration


Disclaimer

This presentation, together with all information and material distributed or discussed as part of the presentation, is intended to provide general information related to the doctrine of acceleration. It is not intended, nor should it be construed, as legal, tax or other advice. While every effort has been made to ensure the accuracy of the information provided, no guarantees, warranties or representations of any kind are made in this regard. No one should act upon the examples/information presented without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of their own specific case are considered.

The views expressed herein are mine, and do not necessarily express the views of Royal Trust Corporation of Canada/The Royal Trust Company, or their respective employees, directors or officers.

® Registered trademarks of Royal Bank of Canada. Used under licence. © Royal Trust Corporation of Canada 2009


AgendaAgenda

What is acceleration?How might acceleration apply?What is a disclaimer? What is a release/surrender?Statutory considerationsWhen does it apply?Factors suggesting acceleration appliesFactors suggesting acceleration will not apply Destination of disclaimed income Exceptions to application of accelerationPerpetuity legislation (Ontario)A brief note on QuebecSome additional legal considerationsTax considerations


What is Acceleration?

Typical scenario involves a Will in which there is a trust fund set aside for a life tenant who is to receive the income (and perhaps capital) until some stipulated time, usually death, with a gift-over at that time to the issue of the life tenant in equal shares per stirpes. The life tenant desires to disclaim (surrender) his or her interest with a view to effecting the immediate distribution of the trust fund to the residual capital beneficiaries of the trust fund. The issue that arises is whether or not the disclaimer by the life tenant will result in the immediate

distribution of the trust fund to the capital beneficiaries.


What is Acceleration?

The doctrine of acceleration probably had its origins in real property law. In a nutshell, the doctrine provides that where there is a postponement of an interest to allow a prior interest to be enjoyed, then if that prior interest comes to an end, whether because of the death of a prior beneficiary or for any other reason, the reason for the postponement is gone and the prior interest may in certain cases accelerate or vest in the hands of the remainder beneficiaries.

However, jurisprudence indicates that whether or not a gift accelerates following a disclaimer depends on the construction of the instrument creating the trust and the intention of the testator/settlor. It may also depend on whether or not a jurisdiction’s “variation of trust” legislation is considered to apply.


How Might Acceleration Apply?

There are several methods to extinguish a gift, including:– Disclaimer– Release, or – Surrender

Depending on the method of eliminating a right or interest and the provincial law that applies, different results may occur both as to destination of the gift and tax consequences.


What is a Disclaimer?

"Disclaimer" can be defined as the refusal or rejection to accept a gift or other transfer of property and is commonly understood to be an avoidance so as to make the gift void right from the beginning.

However, see Coulson, Re (1977) 1 E.T.R. 1, 16 O.R. (2d) 497, 78 D.L.R. (3d) 435 (Ont. C.A.) in which a beneficiary was able to disclaim an income interest for the future after having already received income for a number of years.*

Disclaimers create a gap in the entitlement to an interest, so that where the disclaimer is of a life interest, the doctrine of acceleration may apply to accelerate the subsequent interests which were to take effect only on the determination of that prior interest.

Ultimate destination of the gift will depend on the testator’s intention evidenced in the Will.


Statutory Considerations re: Disclaimer

Some Canadian jurisdictions* have statutory provisions that describe what happens to either or both an income and capital interest that is disclaimed.

E.g., s.23** of Ontario’s Succession Law Reform Act provides:– 23 Except when a contrary intention appears by the will, property

or an interest therein that is comprised or intended to be comprised in a devise or bequest that fails or becomes void by reason of,

(a) the death of the devisee or donee in the lifetime of the testator; or

(b) the devise or bequest being disclaimed or being contrary to law or otherwise incapable of taking effect,

is included in the residuary devise or bequest, if any, contained in the will. R.S.O. 1990, c. S.26, s. 23.


When will Acceleration Apply?

“There is a presumption in favour of acceleration of remainder interests where a gift of a life interest fails on account of disclaimer.” {Skerrett v. Bigelow Estate [2001] N.S.J. No.304 (N.S.S.C.)^ per Moir J. at para.14}

Presumption rebutted if a contrary intention can be shown in Will/Trust instrument or surrounding circumstances


When will Acceleration apply?

For the doctrine of acceleration to apply, there is some support* indicating that the remainder interest to be accelerated must be vested either absolutely or subject to divestment (i.e., it cannot be a contingent interest), and no contrary intention in the Will must be evident which would preclude the application of the doctrine.

If the remainder interest is vested subject to divestment, then some jurisprudence suggests that distribution will be postponed to determine if the divesting event will occur**.

If the remainder interest is contingent, it has been suggested that the doctrine will not apply.* However, in the B.C. Court of Appeal decision in Brannan v. British Columbia (Public Trustee) [1991] B.C.J. No.1005^ the Court stated: “To limit acceleration only to cases where the testator specifically contemplated that a beneficiary would refuse a gift or to exclude acceleration in any case where there is the contingency of survivorship would be contrary to the weight of authority and to the very concept of acceleration.”


Factors Suggesting Acceleration

Brannan v. British Columbia (Public Trustee) [1991] B.C.J. No.1005^; (1991) 41 E.T.R. 210; 83 D.L.R. (4th) 106 (B.C.C.A.)

Combination of the following factors indicative of an intention that doctrine

of acceleration should apply:

– At time of execution of Will, no remoter issue had been conceived or born, therefore testatrix likely concerned about immediate children and not unborn remoter issue,

– Testatrix’s estate relatively small, especially when divided among potential beneficiaries who would inherit under acceleration (approximately $50,000 to each son). Therefore, unlikely testatrix had dynastic concerns about remoter issue when none existed at time of execution of Will,



Brannan v. British Columbia (Public Trustee), [1991] B.C.J. No.1005^; (1991) 41 E.T.R. 210; 83 D.L.R. (4th) 106 (B.C.C.A.) con’t

Combination of the following factors indicative of an intention that doctrine

of acceleration should apply:

– Although remoter issue were born during the testatrix’s lifetime, she had the opportunity (over several years) to amend the Will to expressly prevent acceleration, but did not do so,

– The life tenant’s interest could be determined not only by his death but by his remarriage. Testatrix thus gave life tenant unilateral ability to end his interest and determine when and for whose benefit the residue would vest absolutely, and

– Trustees under Will could encroach upon corpus to assist one of the testatrix’s three sons, but not remoter issue.



McGavin v. National Trust Co. [1998] B.C.J. No. 810^; (1998) 22 E.T.R. (2d) 36; 158 D.L.R. (4th) 364 (B.C.C.A.)

› Terms of the trust permitted the life tenant’s interest to be determined not only by death but also by remarriage. Life tenant thereby had a unilateral ability to terminate her interest and thus determine for whose benefit the residue would immediately vest.

› The remarriage clause showed an intention on the part of the settlor/testator to defer the distribution only until the life tenant’s interest was determined.



Skerrett v. Bigelow [2001] N.S.J. No.304^; (2001) 195 N.S.R. (2d) 386 (N.S.S.C)

› If no gift-over provisions should first level capital beneficiaries predecease life tenant - Risk of intestacy.

› If terms of Will suggest that Testator did not contemplate additions to the class of first level capital beneficiaries (e.g., no provision for “trust to majority” for new infant members of the class).

› If Estate not so large as to suggest “dynastic concerns.” Trust at issue worth approximately $250,000.

› If remote interests are “very remote” and not likely in testator’s contemplation.

› If broad encroachment powers – no attempt to protect capital (indicates primary intent is to benefit life tenant, not preserve trust for others).



Skerrett v. Bigelow [2001] N.S.J. No.304^; (2001) 195 N.S.R. (2d) 386 (N.S.S.C), con’t

› Little difference to acceleration whether remainder interests are subject to a condition precedent (contingent) or condition subsequent (vested subject to divestment).

› Key criteria is the “nature of the condition and its apparent reason” – e.g., if condition relates to something personal that the remaindermen must attain or achieve (age, marriage, etc.) then court likely to infer that condition must be satisfied and acceleration will not apply. On the other hand, if condition regards circumstances of holder of present interest, then acceleration may more readily be found to apply.



Morrow Estate (Re) [2002] B.C.J. No. 1143^; (2002) 45 E.T.R. (2d) 260 (B.C. S.C.)

› Presumption of acceleration upon determination of life estate by death or disclaimer, unless contrary intention of testator can be shown

› If Trust provides for encroachment upon entire capital for the benefit of the prior interest (i.e., life tenant) - indicates that the Deceased did not intend to preserve the corpus of the Trust for subsequent interests (i.e., no dynastic concerns).

› If terms of Trust provide for immediate distribution of entire capital to subsequent interests if life tenant fails to survive or fails to survive by a certain period. Also, if no other provision for (children), then appears Deceased would have intended children to benefit after life tenant’s interest looked after.

› If it appears that the Deceased only intended to postpone distribution of capital for the time necessary to look after life tenant’s financial needs.



Morrow Estate (Re) [2002] B.C.J. No. 1143^; (2002) 45 E.T.R. (2d) 260 (B.C. S.C.), con’t

› If value of the estate is not so great that it may be said that Deceased had dynastic concerns (i.e., to benefit more than immediate generation of children). Value can, for this purpose, appear to be as high as $900,000, especially if tax and subsequent distribution would result in a division of this value among a number of beneficiaries so that each one’s share was not that great.



Creighton Estate (Re) [2006] B.C.J. No.979 (B.C.S.C.)^

› Terms of Will suggested that life tenant children not expected to benefit much from trust

› Executor could encroach on capital of trust for specified purposes for remoter beneficiaries (i.e., grandchildren)

› No inference from provisions providing for gifts-over in case of a pre-deceased beneficiary that testator intended testamentary scheme to continue– clause inserted to protect against intestacy

› Lack of remarriage clause not determinative of a contrary intention to acceleration, but simply a factor to consider



Even if doctrine applies, will distribution occur immediately?

Re Bogstie Estate (1963) 42 W.W.R. 702 (Alt. S.C.):

› Where the subsequent interest is vested subject to divestment, distribution of the trust property “released” by the disclaimer of the life tenant must be postponed to the time of death of the life tenant presumably to determine who will ultimately become entitled to the trust property.



Summary of Key Factors:

At time of execution of Will/Trust instrument, no remoter issue conceived or born so that Willmaker/Settlor likely primarily concerned with first level capital beneficiaries and not unborn remoter issue

Ability to encroach on capital Ability for life tenant to determine his or her interest (e.g., there is a

remarriage clause) No evidence of dynastic concerns (e.g., value of trust relatively

modest* or gifts-over suggest desire to avoid intestacy) No terms to protect against perpetuities Willmaker or Settlor does not amend Will/Trust instrument to

prevent acceleration where subsequent remoter beneficiaries are born since executing Will or Trust instrument and some time has passed since the date of execution


Factors Suggesting Acceleration Will Not Apply

de la Giraudais v. de la Giroday [1998] B.C.J. No.1575 (B.C.S.C.)^

› No capital encroachment provisions for either life tenant or other beneficiaries entitled to receive income. Demonstrated an intention to preserve the capital of the Trust and defer its ultimate distribution until the date of the life tenant’s death.

› Trust Deed did not expressly provide the life tenant with ability to unilaterally terminate his or her interest by re-marriage or waiver.

› Recital (in inter vivos trust) indicated that the settlor created an “irrevocable trust” for the benefit not only of the Settlor’s wife and children but also for “others” - words demonstrated an intention to benefit not only immediate family but also remoter generations (e.g., inclusion of future “adopted” children)



de la Giraudais v. de la Giroday [1998] B.C.J. No.1575 (B.C.S.C.)^, con’t

› Trust had large monetary value ($30 million). Evidence of dynastic concerns (i.e., benefitting remoter generations) rather than simply the immediate needs of a life tenant and first level capital beneficiaries.

› Absence of any evidence that the testator/settlor had concerns of a “personal nature” * with the life tenant such that these concerns were the reason behind the creation of the trust (in other words, the trust was intended to meet immediate needs of life tenant). Where no such concerns are evident, then settlor/testator may have had other reasons to create trust, e.g., “dynastic” concerns involving remoter issue.



de la Giraudais v. de la Giroday [1998] B.C.J. No.1575 (B.C.S.C.)^, con’t

› Provisions existed to protect against the rule against perpetuities (i.e., terms provided for premature vesting if the rule was violated). Demonstrated an intention that future generations to be given an opportunity to have the trust property vest in them.



Re Jacques (1986) 55 O.R. (2d) 534 (Ont. C.A.)

› Terms of the instrument creating the trust manifested a contrary intention to acceleration (terms defined a “date of distribution” as time at which beneficiary was to receive entitlement)

Re Jacques [1985] O.J. No. 2290 (Ont. H.C.J.)

› Terms of trust provided for a further gift over if first level capital beneficiary was not alive at date of distribution (note: may be more relevant where first level capital beneficiary is entitled to a separate share at same time as life tenant and gift over provisions for share of life tenant and capital beneficiary are different).


Destination of Disclaimed Income When Arising from Residue

Re Jacques (1986) 55 O.R. (2d) 534 (Ont. C.A.)

› trust was part of residue› Court held that disclaimed income was to be distributed as on an

intestacy for period that disclaiming life tenant was alive› Terms of Will “evinced an intention against the accumulation of income”

(life tenant was to receive all income during her lifetime)


Destination of Disclaimed Income When Not Arising from Residue

If trust is not part of residue, but life tenant disclaims all interest (or income interest), then until interest in trust vests absolutely (assuming acceleration does not apply so as to immediately vest interest), the disclaimed income is paid to residuary legatee*

See also relevant legislation, e.g., s.23** of Ontario’s Succession Law Reform Act

See British Columbia (Public Guardian and Trustee of) v. Engen (Litigation guardian of) [2009] B.C.J. No.33 (B.C.S.C.)^ for destination of sale proceeds of real property following disclaimer of life interest in the property given the terms of the Will


Exceptions – Alberta and Manitoba

The Trustee Act of Alberta and The Trustee Act of Manitoba contain specific provisions stating that, subject to any trust terms reserving a power to any person or persons to revoke or in any way vary the trust or trusts, a trust cannot be varied or prematurely terminated without the approval of the court.

This prohibition applies to, among others, any variation or premature termination by consent of all of the beneficiaries or by any beneficiary’s renunciation of the beneficiary’s interest so as to cause an acceleration of remainder or reversionary interests.

See section 42 (and relevant sub-sections) of Alberta’s Trustee Act and section 59 (and relevant sub-sections) of Manitoba’s The Trustee Act.


Exceptions – Saskatchewan and Ontario

In Saskatchewan, jurisprudence suggests that The Variation of Trusts Act takes precedence over the common law principles of disclaimer and acceleration when dealing with contingent interests of infants [see Kist Estate, Re [1993] 8 W.W.R. 107, 114 Sask. R. 53].

In effect, where there is a trust that has minor contingent interests, the law in Saskatchewan relating to the inability of a beneficiary to renounce his or her interest to “vary” or “terminate” a trust without the approval of a court is similar to the statutory regime that exists for Alberta and Manitoba.

The law as described in Kist was approved by Greer, J. in the Ontario decision of Genova v. Giroday [2000] O.J. No. 3396 (Ont. S.C. J.)^.


Exceptions - Ontario

<intentionally left blank> see note below in notes section


Perpetuity Legislation (Ontario)

› The Ontario Trustee Act in section 65 makes reference to the application of the Perpetuities Act that could have some bearing on whether the doctrine of acceleration could apply in certain cases. Section 65 reads:

Application of Perpetuities Act65. Where in the administration of any trust, estate or fund any question relating to the disposition, transmission or devolution of any property arises, including the right of any person to terminate a trust or an accumulation directed under a trust or other disposition, and it becomes relevant to inquire whether any person is or at a relevant date was or will be capable of procreating or giving birth to a child, section 7 of the Perpetuities Act applies to any such question as it applies to questions concerning the rule against perpetuities. R.S.O. 1990, c. T.23, s. 65.



Section 7 of Ontario’s Perpetuities Act reads:

Presumptions and evidence as to future parenthood7. (1) Where, in any proceeding respecting the rule against perpetuities, a question arises that turns on the ability of a person to have a child at some future time, then,(a) it shall be presumed,(i) that a male is able to have a child at the age of fourteen years or over, but not under that age, and(ii) that a female is able to have a child at the age of twelve years or over, but not under that age or over the age of fifty-five years; but(b) in the case of a living person, evidence may be given to show that he or she will or will not be able to have a child at the time in question.



The legislative provisions suggest that where a female life tenant is over 55 years of age, the combination of Ontario’s Trustee Act and Perpetuities Act might be used to justify the argument that the life tenant will have no further children so that her disclaimer should result in the acceleration of her interest to her children if the children are named as the class of capital remaindermen under the terms of the trust in question.

Of course, while the two statutes might be grounds to support a reasonable argument that no further natural born children will in future arrive on the scene, there is still the possibility that the life tenant might adopt children, which would result in those adopted children then being denied what they otherwise might have received had there been no early termination as a result of the doctrine of acceleration. Consequently, it is possible that future adopted children might prevent the acceleration of an interest.

However, see Cullity, J.’s decision in Meredith v. Plaxton (2002), 62 O.R. (3d) 427; [2002] O.J. No.4472^.



<intentionally left blank> see note below in notes section


A Brief Note on Quebec

The Civil Code of Quebec contains provisions that describe what happens when a renunciation is made by a beneficiary. Article 1286 CCQ provides:

– "Art. 1286. If the beneficiary renounces his right, or if his right lapses, it passes, according to whether he is the beneficiary of the fruits and revenues or of the capital, to the co-beneficiaries of the fruits and revenues or of the capital, in proportion to the share of each.

If he is the sole beneficiary of the fruits and revenues of his rank, his right passes, in proportion to the share of each, to the beneficiaries of the fruits and revenues of the second rank, or where there are no such beneficiaries, to the beneficiaries of the capital."


Some Additional Legal Issues*

Is it possible to disclaim an interest arising from an intestacy?

YES!

Can a disclaimer be revoked?

– YES, in relation to a testamentary gift, but only if no change in position of affected parties that would make a revocation inequitable, and apparently only before interest has vested in possession.**

– NO, in relation to an inter vivos gift.


Tax Considerations

Why give a valid disclaimer?

To achieve a tax-deferred rollover of property to a spouse or qualifying spousal trust


Tax Considerations

In order to have a valid disclaimer under subsection 248(9) of the Income Tax Act (Canada), all of the following conditions must be satisfied:

1. The beneficiary cannot disclaim in favour of any person;2. The beneficiary cannot disclaim until he or she "is entitled to

inherit,"3. The beneficiary generally cannot delay making a disclaimer after

the period ending 36 months after the death of the deceased; and4. The beneficiary cannot derive any benefit from the disclaimed

property prior to making the disclaimer.

If all 4 conditions have been satisfied, the beneficiary will be considered, for tax purposes, never to have acquired the interest and no amount will be included in beneficiary’s income


Tax Considerations

If life tenant releases or surrenders income or capital interest in a trust in respect of future payments that were:

(i) not due and payable, and

(ii) NOT in favour of any person (or in favour of those who would otherwise have benefitted as a result of the release or surrender),

– then gifting rules do no apply and proceeds will only need to be included in life tenant’s income to the extent that attribution rules apply.


Tax Considerations

If life tenant for no consideration releases or surrenders income or capital interest in a trust in respect of future payments that were:

(i) not due and payable, and

(ii) in favour of a non-arm’s length person, then:

– Results in immediate tax consequences to life tenant.– Gifting rules apply and life tenant deemed to have received

proceeds equal to FMV of the interest.– Life tenant must include proceeds in his/her income in year of

disposition.


Tax Considerations

In Canada Revenue Agency (the “CRA”) technical interpretation document no. 2003-0046171E5, December 2004, the CRA expressed its views on whether a testamentary spouse trust that retains income at the discretion of a spouse-beneficiary would result in a contribution of property to the trust and “taint” its status as a testamentary trust.

Depends on whether amount has become payable or not


References

Cullity, Maurice C., "Post-Mortem Tax Planning: Renunciations, Disclaimers, Surrenders and Elections", Estates, Trusts & Pensions Journal, vol. 18, 1998, pp.31-51

Hoffstein, Maria Elena and Lee, Julie Y., "Restructuring the Will and the Testamentary Trust: Methods, Underlying Legal Principles and Tax Considerations", Estates and Trusts Journal, vol 13, 1993, p.42-99.

MacKenzie, James, Feeney’s Canadian Law of Wills, 4th ed. (Markham, Ontario: LexisNexis Canada Inc. 2000, including Service Issues 2000-2008), paras.13.32 – 13.37.

^Cases and quotations from cases found on: LexisNexis Quicklaw (LexisNexis Canada Inc., 2009).

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