August 1, 2022
If you make a gift, whether to a trust or an individual, even a family member, you cannot simply take it back without consent.
THE ISSUE
There is a distinction in law between a gift, which is absolute, and a resulting trust by which legal title is transferred, but you retain the true or beneficial ownership. As beneficial owner, you may be able to require that the trust property be paid to you.
Distinguishing between a gift and a resulting trust is a fact-based inquiry that can be tricky. The difference depends upon the intention of the person making the transfer, and that intention can sometimes be difficult to determine, because often the transferor is deceased. When the transferor is alive, courts are reluctant to rely strictly on their evidence because sometimes people just change their mind.
The Supreme Court of Canada helped us a little bit in 2007 when they released a decision known as Pecore v. Pecore, which departed from relying upon ancient English law and decided that when you give a gift to an adult child, the presumption in law is that you are transferring only the legal title and that you are still the beneficial owner. Because this is a presumption and not a rule, the outcome will still depend upon the facts of the individual case. Some situations are obvious, such as when you give your daughter a wedding gift. Others are more complex.
So complex that Charles Dickens wrote an 800 page novel, Bleak House, in the 1850s, about an estate which was totally spent paying the lawyers. Bleak House had such an impact in its day that it contributed to the decision to merge the courts of law and the courts of equity to at least reduce the cost. The cost has not been eliminated, and with more wealth being concentrated in older generations, or transferred to younger generations, we anticipate that more issues will arise.
Planning to avoid the cost of litigation is as important as the rest of your planning.
THE CASE
One such complex situation arose in the Superior Court of Justice decision in Strauss v. Wright. A somewhat condensed version of the facts is that Mr. Wright was a wealthy individual who owned a variety of assets, including being the lender under a number of mortgages. The most significant of these was a $4.8 million farm mortgage called the Johnson mortgage. On the advice of his financial planners and lawyers, Mr. Wright created a family trust in which the beneficiaries were his adult children and their heirs.
For tax reasons, the Johnson mortgage was only transferred into the trust about four years after most of the other assets.
About a year later, Mr. Wright wanted to make an investment using proceeds from the Johnson mortgage but was informed that he did not have control of it because it was in the family trust. He then claimed that the transfer to the family trust created a resulting trust rather than a gift. His daughters disagreed and they ended up in court.
In addition to the question of resulting trust, Mr. Wright argued that his daughters had exercised undue influence on him, making the gift invalid.
Was there a resulting trust or a gift?
Because no consideration was paid by the trust for the transfer, the presumption of resulting trust applied.
Could the daughters rebut that presumption?
Mr. Wright relied upon some evidence that he wanted to place the Johnson mortgage into the trust to protect it from claims by his common-law spouse (who he later married). However, he retained several million dollars worth of assets in his own name.
The judge was satisfied that Mr. Wright, despite his advanced age, was competent and experienced with mortgages. On this point, the judge relied a great deal on evidence from the lawyers involved with Mr. Wright’s estate planning and the signing of the Deed of Gift, which was contemplated as part of the planning.
Mr. Wright was still able to drive. He attended meetings with his lawyers without his daughters. He did not discuss the gift with his daughters. The lawyers typically received their instructions from Mr. Wright directly. The lawyers’ evidence was that Mr. Wright had a good grasp of his assets and his investments, although he lost some of his sharpness over time. This led to measures being put in place for the daughters to play a more controlling role in the business. Mr. Wright was aware that he did not control the family trust and was not a beneficiary.
An intention to benefit subsequent generations of his family was consistent with and corroborated by the wills prepared by Mr. and Mrs. Wright as part of their estate planning. The accountant who assisted with the estate planning had extensive notes confirming Mr. Wright’s decision.
The judge determined that Mr. Wright intended to give his interest in the Johnson mortgage to the family trust because it was documented by the Deed of Gift prepared at his specific request by a lawyer he had dealt with for 30 years, as part of a larger estate and tax plan. The registration of a transfer of charge with his knowledge completed the gift.
The daughters succeeded in rebutting the presumption of resulting trust. The transfer of the mortgage was an absolute gift.
What about undue influence?
Even when assets are transferred from an elderly parent to an adult child, there is not automatically a presumption of undue influence. The presumption may arise depending upon the facts, but usually there must be a relationship characterized by the parent placing trust in the child and dependency by parent upon the child.
The judge found that there was no evidence that the daughters had exerted any actual influence on Mr. Wright. There was no domination by them over Mr. Wright or even the potential for domination. Again, the evidence of the lawyers and accountant was central to this result.
The growing role of the daughters in managing the business, and even helping Mr. Wright with his own finances, did not amount to domination or undue influence.
THE RESULT
The daughters won the case. The Johnson mortgage remained an asset of the family trust.
Much money was spent on lawyers.
TAKEAWAYS
If you are transferring assets into a trust or to family members as part of your tax or estate planning, you need to realize that unless the presumption of resulting trust applies, a gift is absolute and final and you cannot take it back if your desires change. This may apply whether it is your needs that change, or as appears to be the case with Mr. Wright, his new relationship influenced his subsequent intentions.
Although the dispute with Mr. Wright happened while he was alive, many of these disputes arise after death, or after mental incapacity. In those cases, proof of intention depends upon the surrounding evidence.
The key issue is your intentions at the time you make the gift. It is important that those intentions be clear. The best way to do this is documentation through your lawyer or other professional advisors. That evidence was a great benefit to the daughters in Mr. Wright’s case.
If your age, infirmity, or family situation might create any suggestions of undue influence, you will also want to make sure that your professional advisors and others have notes and evidence available to clarify that your decision was truly your own. If your actual desire is to create a resulting trust, it may be difficult or unwise to document your intention, because it may affect other legal outcomes. The presumption of resulting trust works in your favour.
HOW WEILERS LLP CAN HELP YOU
The estate planning lawyers at Weilers LLP have many years of experience drafting family trusts and giving affect to corporate, estate, and tax planning in the transfer of assets. We can work closely with your other professional advisors to make sure that your true intentions are carried out properly so that your assets are not wasted on the cost of a contentious dispute.
But if you do find yourself involved in a contentious estates or trusts dispute, the litigation team at Weilers LLP includes the adjunct professor who teaches trusts law at the Bora Laskin School of Law. We are well skilled in settling or litigating estate and trust disputes. If you have a gift that someone wants to take back, or that your trustee refuses to transfer to you, Weilers LLP may be the right lawyers for you.