On October 29, 2018, Miller Thomson LLP issued an advisory on the recent decision of the Ontario Superior Court in Milne Estate (Re) and its potential impact on multiple Wills. In this decision, Justice Dunphy of the Ontario Superior Court of Justice deemed a Primary Will to be invalid because of the use of a “basket clause”, also known as an “allocation clause”, in the Will, which allowed Estate Trustees to segregate assets into either the Primary Will or the Secondary Will based on whether probate was required for the particular asset. We are pleased to report, as more particularly detailed in this bulletin, that the appeal of Justice Dunphy’s decision has been allowed by the Divisional Court.
Justice Dunphy’s Decision
Justice Dunphy held that a Will is a form of trust and that, in order to be valid, a Will must create a valid trust. That meant that a Will must satisfy the “three certainties” necessary to create a valid trust, namely: (i) the certainty of intent to create the trust; (ii) the certainty of the subject-matter or property given to the trust; and (iii) the certainty of objects or beneficiaries of the trust. Justice Dunphy held that the Primary Will lacked certainty of subject-matter as the property of the trust was not ascertainable at the time of the testator’s death due to the language of the allocation clause, which he characterized as conferring a discretion to the executors to decide which assets would fall under the Primary Will of the testator.
Justice Dunphy’s decision caused serious concern amongst estate practitioners and their clients as the use of allocation clauses in multiple Wills has been common practice in Ontario. The general purpose of the allocation clause is to allow executors of an estate to avoid the payment of the estate administration tax on the value of assets that can be transferred without probate. Justice Dunphy’s decision put into question the validity of existing Wills that included similar allocation clauses that, in his view, operate to carve out a variable subset of property “based upon the subsequent, subjective determinations of the Estate Trustees as to what is desirable”.
Added confusion regarding the state of law arose when a subsequent 2018 decision, Panda Estate (Re), was released in which Justice Penny of the Ontario Superior Court of Justice declined to follow Justice Dunphy’s decision.
Fortunately, the appellate decision of Milne Estate (Re), delivered by Justice Marrocco of the Divisional Court and released January 24, 2019, overturned Justice Dunphy’s decision bringing clarity to estate planners and their clients regarding the legitimacy and effectiveness of multiple Wills that contain allocation clauses (also known as basket clauses). The Divisional Court, referencing Miller Thomson on Estate Planning (Toronto: Thomson Reuters Canada, 2018 at p.2-57), explained that the use of allocation clauses is a common estate planning technique used to overcome the practical problem that testators often execute their Will several years in advance of death and it is therefore often not practical at the time of execution to provide a definitive list of assets that require probate.
A Will is not a Trust
The Divisional Court disagreed with Dunphy’s statement that a Will is a trust, finding this statement to be an “error of law”. Referring to the definition of a Will under s. 1(1) of the Succession Law Reform Act, R.S.O. c. S. 26, Justice Marrocco of the Divisional Court explained that a Will “is an instrument by which a person disposes of property upon death” and although a Will may contain a trust, it is not in and of itself a trust. By establishing that a Will is not a trust, Justice Marrocco held that the three certainties necessary to create a valid trust did not apply.
Certainty of Subject-matter is present in the Primary Will
Justice Marrocco went on to state that, if he were wrong and a Will is a trust, the subject-matter of the Primary Wills in question was certain. The property to be administered under the Primary Wills could be clearly identified as there is an objective basis to determine it. Justice Marrocco held that the allocation clause is essentially a direction given to the executors of the estate to allocate property on an objective basis. That objective standard is, whether “a grant of authority by a court of competent jurisdiction is required for transfer or realization of the property”.
The Divisional Court explained that the executors can determine which assets require probate by consulting the institution concerned. Essentially, the discretion (if there is one) established by the allocation clause in the Primary Will is exercised by the institution concerned, and not by the executors of the estate.
Finally, Justice Marrocco added that if an error is made by the executors of the estate in the allocation of the assets, the error will be on the part of the executors and will be “unrelated to the description of the property that is the subject-matter of the trust”.
The Divisional Court decision brings clarity to estate planners and their clients as it upholds the widely used practice of drafting wills with language that grants executors the power to allocate assets among multiple Wills on an objective basis. It will also provide comfort to many thousands of individuals in the Province of Ontario whose existing Wills contain similar language that, in all likelihood, such Wills are not invalid.
That being said, the whole saga of these Court decisions highlights the need for careful and considerate drafting in all matters pertaining to Wills, trusts and estates. If one of the key objectives of proper and thorough estate planning is to bring certainty to the settlement of one’s affairs, the implementation of the planning through proper legal documentation cannot be consigned to the status of an afterthought. Miller Thomson’s national Private Client Services group brings together a highly specialized team of trusts and estates professionals who are dedicated to delivering outstanding results to their clients. And, the Ontario Divisional Court has now recognized that expertise by referencing our keynote publication, Miller Thomson on Estate Planning.
If you wish to explore further the issues discussed in this release, please feel free to contact a member of our national Private Client Services group.