A recently released decision of the British Columbia Supreme Court may have brought some clarity to a thorny issue faced by many estate planners: Is it possible for a person to divest themselves of all their assets prior to death if the effect of doing so is to disinherit a spouse or child?
The recent decision of Mawdsley v. Meshen (2010 BCSC 1099) answers this question with a qualified “Yes” while dealing with a spouse’s challenge to changes made in the estate plan of his long time wife, and in particular a claim by the husband that the creation of an alter ego trust constituted a fraudulent conveyance.
This case is important because it’s one of the first in British Columbia to consider, in the context of estate planning, a 2009 Court of Appeal decision that considered the BC Fraudulent Conveyance Act and held that certain transactions may be set aside if there’s an intention to place the assets outside of the reach of a present or future creditor of the transferor (Botham Holdings Ltd. (Trustee of) v. Braydon Investments Ltd. 2009 BCCA 521.)
Joan Meshen (“Joan”) died June 17, 2006, a few months after entering into a series of transactions that effectively denuded her estate. As a result of the transactions and a fresh Will made at the same time, Joan left nothing to her spouse of 18 years Dennis Mawdsley.
Dennis challenged all of the transactions and brought a claim to vary Joan’s Will under the Wills Variation Act.
The Transactions
The impugned transactions which effectively divested Joan of all of her assets, included:
- Joan placing the bulk of her assets (approximately $3,250,000) in an alter ego trust to benefit her children and brother in law on her death
- Joan transferring her residential premises into the joint names of herself and her son Michael
- Joan transferring other real properties outright into the name of Michael and her two other children
- Joan placing cash in a joint safety deposit box with her daughter, Shirley
- Joan placing Shirley as a joint owner on three of her bank accounts
- Joan making a Will bequeathing the remainder of her estate to her children and making no provision for Dennis.
The Challenge to the Alter Ego Trust
With respect to the alter ego trust, the Court held that it did not have to answer the question as to whether Dennis was a “creditor or other” of Joan or her estate. The Court held, after an extensive review of the evidence, that Joan did not possess the fraudulent intent of the kind required under the Fraudulent Conveyance Act when she carried out the impugned dispositions.
The Court found that Joan and Dennis had an explicit agreement to keep their day to day expenses and finances and assets separate from each other, and that Dennis was well aware of the nature and effect of the bulk of the transactions. He knew he wasn’t going to be a beneficiary of the alter ego trust or Joan’s Will, and he knew that the real properties were intended to be owned by Joan’s children, and not by him. Joan genuinely believed that Dennis would not challenge her estate plan or Will.
Accordingly, the Court found that Joan was not in any way motivated or influenced by a desire to defeat a potential Wills Variation Act claim by Dennis when she settled the alter ego trust. Rather, she was motivated by savings in probate fees, potential tax advantages, the privacy of the trust provisions, isolating estate assets from the creditors of her children, and the trustee’s ability to control her children’s access to the trust funds and safeguard them for years to come. The Court held that Joan lacked the requisite intention required under the Fraudulent Conveyance Act to void the transactions Dennis was attacking, and in particular to set aside the alter ego trust.
The transfers of the real property were also upheld as constituting valid gifts to Joan’s children.
The Safe Deposit Box Cash and the Joint Accounts
The Court did find, with respect to the placing of Shirley’s name on the safe deposit box, and the joint bank accounts, that this was done as a matter of convenience and not so that Shirley could retain the proceeds of the box or the joint bank accounts for herself on her mother’s death. Accordingly, the cash in the box (approximately $180,000) and the monies in the joint accounts (approximately $138,000) were found to be part of Joan’s estate.
Dennis’s Wills Variation Act claim
Dennis’s Wills Variation Act claim was allowed primarily on the basis that Joan owed a moral duty to Dennis to provide for him on her death. Her estate was, at the end of the day, rather small.
Having regard to the length of Dennis and Joan’s relationship, the lack of any legal obligation by Joan to her children, the magnitude of the assets passing to the Meshen children under the alter ego trust, the other pre-death transactions undertaken by Joan, and Dennis’s inferior financial circumstances and age, the Court awarded Dennis all of the residue of Joan’s estate.
Although Dennis was entitled to the residue of Joan’s estate (the safe deposit cash and the joint accounts monies), his victory, such as it was, may be hollow. The Court noted that Joan’s estate had been assessed an income tax liability of $219,759.10 on her death, with the potential for further potentially adverse tax consequence. It’s not inconceivable that the entirety of the residue of the estate could be eroded by income tax liabilties, and Dennis would, again, be left with nothing from Joan’s estate.
The (Big) Unanswered Question
A significant question that remains to be answered by our Courts is whether a spouse in Dennis’s situation can even be characterized as a “creditor or other” under the Fraudulent Conveyance Act. That issue of standing to bring the claim was described as being “complex” and “nuanced” yet the Court chose not to address the issue of Dennis’s standing on its merits.
For the purposes of this case the Court assumed Dennis had standing to bring his claim. But at the same time the Court commented that based on the current state of the law it’s not clear whether Dennis could be characterized as an “other” who has been deprived of a post-death remedy simply because Joan’s pre-death planning and dispositions largely deprived him of a meaningful remedy under the Wills Variation Act.
For any questions on this or any other estate litigation or Wills Variation Act issues, contact PM partner Joni Metherell at [email protected] or (250) 869-1200.
