Set­ting up a trust or buy­ing an in­surance pol­icy could of­fer pro­tec­tion for clients’ fam­i­lies with­out putting as­sets at risk

Investment Executive - - FRONT PAGE - BY PATRI CIA C H IS H O LM

Bonds still serve a key pur­pose in some clients’ port­fo­lios.

a re­cent de­ci­sion from the On­tario Su­pe­rior Court of Jus­tice may make fi­nan­cial ad­vi­sors sound a cau­tion­ary note when clients are con­sid­er­ing mak­ing gen­er­ous fi­nan­cial gifts to fam­ily mem­bers. That’s be­cause there of­ten is an­other way to achieve the same re­sults with­out putting clients’ sig­nif­i­cant as­sets at risk should the re­la­tion­ship be­tween the fam­ily mem­bers break down.

The de­ci­sion i n John­ston v. Song, handed down in mid-Fe­bru­ary, demon­strates what can hap­pen when as­sets are trans­ferred to meet a fam­ily goal, but which lead to un­in­tended re­sults.

In the case, a fa­ther trans­ferred own­er­ship of his home into joint own­er­ship with his part­ner, who also is the mother of his child; the spouses never mar­ried. The trans­fer took place in De­cem­ber 2016. The fa­ther said at trial that he did so to al­lay the mother’s fears that she and their child would be “out on the street” should “some­thing hap­pen” to him. But in Jan­uary 2017, the mother an­nounced she was leav­ing him.

The fa­ther had pur­chased the home in 2003 and be­gan liv­ing there with his spouse in 2005. At trial, the fa­ther claimed that he had not in­tended to make a “no strings at­tached” gift and claimed that the trans­fer should be treated as a re­sult­ing trust be­cause his spouse paid noth­ing for the prop­erty. Un­der the rules of such trusts, the per­son re­ceiv­ing ti­tle to a prop­erty holds it in trust for the ben­e­fit of the per­son trans­fer­ring ti­tle and is re­quired to re­turn it.

How­ever, if a gift is es­tab­lished, no such trust is cre­ated. De­spite the tim­ing of the trans­fer, the court held that the trans­fer was in­tended as a gift and that the fa­ther could not change his mind. The court or­dered that the home be sold, as the mother re­quested.

The court’s de­ci­sion raises ques­tions about al­ter­na­tive strate­gies the fa­ther might have used to pro­vide for his son and spouse with­out trans­fer­ring ti­tle of the home. Paul Trudelle, part­ner with Hull & Hull LLP, a law firm in Toronto that fo­cuses on wills and es­tate-re­lated mat­ters, notes that some fam­i­lies use a will to set up a trust for the life­time of the sur­viv­ing spouse. Upon that spouse’s death, the as­sets pass to the child.

Such an ar­range­ment could in­clude the sur­vivor spouse liv­ing in the house un­til her death. The trustee might be a fi­nan­cial plan­ner or other pro­fes­sional, such as an ac­coun­tant or lawyer, but should not be the spouse. Un­der this struc­ture, “The spouse never re­ally gets con­trol of the as­sets,” Trudelle says.

An in­surance pol­icy payable to the chil­dren also may be used, Trudelle notes. In­surance has the ad­van­tage of pass­ing the pro­ceeds to the child out­side of the es­tate and avoids es­tate ad­min­is­tra­tion costs.

Trudelle adds that the laws re­lat­ing to gifts can lead to un­in­tended con­se­quences when other types of prop­erty are trans­ferred to fam­ily mem­bers, such as the trans­fer of shares in a fam­ily-con­trolled cor­po­ra­tion for tax pur­poses.

The court’s de­ci­sion also il­lus­trates the im­por­tance of con­sult­ing a fam­ily and/or es­tates lawyer prior to mak­ing trans­fers of this kind — es­pe­cially if fam­ily law may come into play, which can com­pli­cate the pic­ture fur­ther. Julie Han­naford, founder of J.K. Han­naford Bar­ris­ters and a fam­ily law spe­cial­ist in Toronto, notes that the hard les­son from this de­ci­sion is that the fa­ther should have ex­plored the le­gal im­pli­ca­tions of the trans­fer thor­oughly first.

Han­naford’s sug­gested al­ter- na­tives in­clude cre­at­ing a will, a reg­is­tered ed­u­ca­tion sav­ings plan for the child or a writ­ten agree­ment that the prop­erty had to be re­turned if there was a break­down in the spouses’ re­la­tion­ship.

“Ad­vi­sors should say [to clients]: ‘If you are mar­ried or in a co­hab­i­ta­tion re­la­tion­ship, there are po­ten­tially se­ri­ous le­gal im­pli­ca­tions to any trans­fer that you do’,” Han­naford cau­tions. “‘Spend $1,000 to talk to a lawyer. At the end of the day, that may save you hun­dreds of thou­sands of dol­lars’.”

There are sev­eral so­lu­tions avail­able to clients who want to help fam­ily mem­bers, such as part­ners or adult chil­dren, with­out los­ing con­trol of as­sets that may have taken a life­time to ac­cu­mu­late. Emma Hamil­ton, an es­tates lawyer with O’Sul­li­van Es­tate Lawyers LLP in Toronto, of­fers an­other sug­ges­tion: amounts trans­ferred to such fam­ily mem­bers to pur­chase a home, for ex­am­ple, can be pro­tected us­ing a loan rather than giv­ing an out­right gift.

“Clients should con­sider un­fore­seen cir­cum­stances, such as a mar­i­tal break­down or sep­a­ra­tion,” Hamil­ton states. “Loans may be more prefer­able than a gift. Upon mar­i­tal break­down, if that lent amount is used to pur­chase the mat­ri­mo­nial home, this is not in­cluded in net fam­ily prop­erty cal­cu­la­tions, whereas a gifted amount is.”

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