Previous Issues of The Posner Page

In This Issue of the Posner Page

THE ALTER EGO TRUST- YAY OR NAY

ANOTHER LOOK AT EXECUTOR'S FEES

EX-WIFE HIT HARD BY ONTARIO COURT

BITS AND PIECES

THE ALTER EGO TRUST- YAY OR NAY?

I have had various people, usually seniors, {people that I am starting to identify with more and more} ask me about a relatively new planning device known as an Alter Ego Trust. In truth, this new scheme is accompanied by the joint partner trust and they are both alike. The legislation for these trusts was actually introduced in 1999 and they were to be effective after December 31, 1999. In fact, the legislation was only passed in the summer of 2001. But, now they are a reality. These trusts can be established without causing any tax liability at birth so long as the taxpayer creating the trust is over 65 and all of the income and capital is payable only to the settlor {the one creating the trust} in the case of an alter ego and to the settlor and his/her spouse in the case of a joint partner trust. The trust lasts the lifetime of the taxpayer or during the joint lives of the taxpayer and spouse in the joint partner situation. The law deems that the assets in the trust are to be disposed of at death and the income tax that may arise as a result of the deemed disposition is then payable at death. This would be similar to having no trust and having the assets held personally disposed of or deemed disposed of at death. For those that qualify, this estate planning tool allows you to put into the trust all of your assets and not incur liability when you do so. That is a significant exception to the usual rule that would have a disposition triggered immediately. It may even remove some of the concern over a possible incapacity and also eliminate probate tax. The Alter Ego Trust will state exactly who will manage the assets and how that management will be done; the trust can identify how the assets should be distributed after the death of the settlor. And thus, you have basically eliminated the will. The saving in Probate costs is not enough of a factor in my opinion to justify making this kind of structure, as the cost in Manitoba is about $ 6.00 per thousand. In Ontario however, it can get to be a big hit as the amount to be paid is $ 250.00 on the first $ 50, 000.00 and $ 15.00 per thousand thereafter. Not to be forgotten also is the fact that by using the trust and thereby avoiding probate, you do not need to disclose your assets. . Another bonus of the Alter Ego is that with large trusts, there can be some significant tax savings especially in jurisdictions that have lower provincial tax rates {not likely Manitoba}. In that case, some of the income is taxed in the trust during the lifetime of the taxpayer. However, and you knew there had to be one, this kind of trust is not a perfect fit for all. If you are creating such a trust and you have a spouse who would have been entitled to receive your estate or a large part of it, this may not be appropriate. Consider the consequences of the trust. If the trust provides for a distribution of the funds in it to someone other than a spouse when the taxpayer dies, well then it seems to me that the surviving spouse will have a legitimate cause of action against the estate. In fact there was such a case in Ontario recently that dealt with this issue. In Stone v Stone, a case involving a London Ontario family, the Ontario Court of Appeal held that a wife was a creditor of her husband's estate. As a result, she was able to have a trust {which contained most of the husband's assets} set aside as a fraudulent conveyance intended to defeat her claim as a creditor. Now that case did not deal specifically with the Alter Ego Trust but it did have the same kind of principles involved. The assets in an Alter Ego Trust could likely be returned to the estate for the benefit of a surviving spouse under the relevant Family Law statute. If spousal obligations are not an issue, even then an Alter Ego or Joint Partner is not suitable if there are children or grandchildren that have to be considered as part of a continuing trust or for that matter disabled dependents. A continuing trust created by way of an Alter Ego or Joint Partner is treated as inter vivos trust with the result that maximum tax rates apply rather than marginal rates for what are known as testamentary trusts. Moreover the creation of an Alter Ego trust may well prevent the taxpayer from making a charitable gift on death or at the death of the second spouse. He or she could still make the gift but lose the tax benefits that would be available under the will. The fact is that charitable gifts through an inter vivos trust, like an Alter Ego or Joint Partner, are considered not to be a gift made by will. Hence, there are no tax credits against the income of the deceased in the year of his death. The trust gets the credit but that may be of no use if there is not enough income in the trust in that year. And too, the taxpayer is in fact subject to income tax caused by the deemed disposition of all of his assets at death. Thus, any tax arising from the deemed disposition of the assets contained in the Alter Ego or Joint Trust will be payable by the estate of the deceased without any credits permitted by the charitable gifts. Not to be forgotten is the fact that if there is a cottage associated with the trust, it is likely the case that when the property is put into the trust, there will be Land Transfer Tax to be paid unlike inter family transactions which are exempt. This tax is close to the Probate costs. The message is therefore to consider this kind of estate planning carefully before you do it.

ANOTHER LOOK AT EXECUTOR'S FEES

A case in Saskatchewan recently explored once more that uncertain area of proper compensation for executor's fees. Although this was a case in Saskatchewan, I suggest the principles enunciated are not much different than those that a Manitoba court would consider. In Saskatchewan, the law governing the amount to be paid is set out in the Trustee Act. The pertinent section states that an executor is entitled to "such reasonable allowance for his care, pains, and trouble and his time expended in and about the trust estate as may be allowed the Court of Queen's Bench". In the particular fact of the case, Mr. Justice Ian McLellan reduced the executor's fees from $48,000.00 to about $18,000.00. Not an insignificant drop. What he said in his judgment was that just following trust company guidelines couldn't be justified because in this case, accountants retained by the executors performed most of the actual work. Still, based on the size of the trust and the responsibilities involved, he did allow fees of 1.5 % of the value as being fair and reasonable. What was presented to the court was an estate of a 98-year-old spinster Daphne Dimmock. She left 1. 2 million comprised of her ranch near Tomkins, Saskatchewan, cattle, short-term investments, farm inventory and equipment. The estate was left mainly to her brother who predeceased her. The alternate beneficiaries were a niece who was bequeathed $100,000.00 and some chattels and a hired man, who worked for the deceased, Urbain Paul. He was given the remainder. The executors were two former bookkeepers for the ranch. The executors asked the accountants to put together a statement of assets, notify creditors, pay accounts and remit tax returns. The accountants obviously did a lot as there work took 13 pages to set out and it reflected 74 hours and was over $15,000.00. The solicitors also charged over $14,000.00. Yet the executors billed their job out at just over $48,000.00. This figure was based on trust company guidelines and was based on 39.7 hours of billable time between May 1999 and August 2002. They listed the details of what they had done. Still, Mr. Paul objected to their bill. The court looked at a case known as Gerrard for assistance since it that case had examined allowances to executors. The principles to be followed in exercising discretion by the court were the magnitude of the estate, the responsibility arising from it, the time expended, the skill and ability applied and the success attained. The court also gave its approval to the notion of following the formula of fees as a percentage of the value of the estate. But, they did here impose a limit on the formula. Thus, in the case before Mr. Justice McLellan, he came to a form of compromise with these various principles.

EX-WIFE HIT HARD BY ONTARIO COURT

It is not wise to be vengeful. Aside from the question as whether or not being vengeful has any redeeming value at all, an Ontario lady found out that her determination to take revenge was, shall I say, costly. What she did was to take her husband to court for 5 weeks in messy divorce trial. She accused him of adulterous gay sex and hiding enormous amounts of money. That would be ok but for the fact that the court found as fact that she knew these allegations were untrue. For going that route, she was levied $200,000.00 in court costs. This award essentially wiped out Louise Hockey Sweeney, 47. The judgment illustrates very clearly to those that want to test the courts that there is a substantial risk out there awaiting the party who ignores reasonable offers to settle and then uses the courtroom as a mudslinging forum. To give you an idea of the extent to which the wife battled, let it be noted that she used no less than 8 lawyers from 1999 in her litigation. Yet at trial, after all of these lawyers either resigned or were fired, she represented herself. The trial judge, Mr. Justice Peter Hambly described her as " emotionally unstable" and her husband having " infinite patience". What the husband received was an equalization payment of over $550,000.00. plus costs. Yet, the same husband had offered his wife to give up the any equalization entitlement and to pay her $5,000.00 per month, to pay his own legal costs. What the court ordered was $3,500.00 per month in maintenance and at the same time it dismissed the wife's claim for intentional infliction of mental suffering. What the trial judge was particularly instructive. Of the wife he said, "Her conduct was so outrageous that an order of costs against her is required, " and that was despite her financial plight. And then in a message to anyone who goes to court, he uttered this gem. "Any litigant who attempts to use the court for a purpose other than the resolution of honest differences must suffer the consequences in costs". In this case the wife had not followed this principle but had in fact used the courts for the purpose of bringing revenge on her spouse based on her perception that her husband had destroyed her relationship with another man. The court found that the wife's sole objective was to get her husband to spend money on legal fees and to embarrass him. " Louise's objective throughout these proceedings was to embarrass her husband and to cause him to incur substantial legal fees. She made allegations of assault, intentional infliction of mental suffering, and a homosexual relationship against Lawrence {her husband} She alleged that he was hiding assets and income. She had no credible evidence to support any of these allegations". Since the husband had made genuine offers to settle which were refused, he then asked the court to indemnify him for his legal costs of over $500,000.00. The court did not go that far but did give an award of a large part of it. The trial judge summed it up when he said: It might be argued that she is a vulnerable person. However, the combination of her enormous anger and her very considerable communication skills give her the capacity to cause substantial injury to her husband ". This kind of talk from a judge of a court in Ontario ought, I submit, to be mandatory reading to those individuals who want to go to court at the drop of a hat. There are consequences and people should be aware of them

BITS AND PIECES

I am asking those of you who are on Email to please forward to me your Email address as I would like to use that medium to deliver these newsletters in the future. My address is on Page 1.

My secretary Dee Walker has moved to Toronto as at the end of October and I certainly will miss her a lot. I am in the midst of trying to get a suitable replacement.

This year the Manitoba Bar Association is doing another play. It is: "YOU CAN'T TAKE IT WITH YOU ". I am not in it but if they return to a musical next year, I think I will go back.

This past year was a very busy one at least in so far as real estate transactions were concerned both here in Winnipeg and in cottage country in Ontario. There has been, I perceive, a jump in the prices of the properties particularly in certain pockets of Lake of the Woods.