Is a gift in a will to a fake name valid?

Written on September 21, 2016 – 6:57 am | by Michael Rosen

In a recent episode of the Starz TV show The Girlfriend Experience, an unusual estate administration issue arose (mild spoilers ahead). The show tells the story of Christine Reade (Riley Keough), a law student and intern who secretly moonlights as a high end escort in Chicago (a thinly disguised Toronto serves as the shooting location).

One night, Christine gets a call from Peter Gramercy, a lawyer for the estate of one of her now former clients, Michael Cilic (played by Nicholas Campbell, recognizable to Canadian TV viewers as the titular character on CBC’s Da Vinci’s Inquest). Michael has died from cardiac arrest, she is told, and Christine was named as a beneficiary in his will. The catch is that the bequest is for “Chelsea Rain.” That name is Christine’s professional pseudonym, which she uses to protect her privacy and her nascent legal career. Michael left only the pseudonym and a cell phone number to reach Christine.

Christine speaks with her lawyer, Martin Bayley. Martin informs her that if she were to accept the gift, she would have to prove her identity, and the will becomes public record when it’s probated. Christine says she’ll have to consider whether she wants to pursue the gift (the  show isn’t clear on how Christine’s name would become public if the will is probated).

The law in Ontario is that a misspelling or inaccurate description in a will does not necessarily void a gift. After all, many wills contain typos and other drafting errors. Instead, the primary goal, for a court in a will interpretation application and an executor, is to determine the intention of the testator. A court will interpret a will generously, so as to avoid a bequest failing for uncertainty.

Many cases where the testator misnamed a beneficiary involve charitable organizations. For example, in National Trust v. Northside United Church,[1] a testator imprecisely described six of seven residuary beneficiaries. The executor was able to identify five of the ambiguous beneficiaries (the court blessed the testator’s interpretation, although it appears none of the five were in dispute). However, the sixth beneficiary was for “The Institute for Crippled Children,” a charity which did not exist. The executor instead applied to court for directions. Three separate organizations claimed entitlement. Based on the available evidence, the court determined that the testator’s “clear intention” was to benefit the “Ontario Society for Crippled Children.”

Christine is clearly the intended beneficiary. But an estate trustee may not agree to distribute such a significant bequest based only on a name and phone number to an unknown person, risking a claim by another beneficiary. Instead, an estate trustee may elect to bring an application for directions under Ontario’s Rule 75.06 and ask a court to decide. Undoubtedly, Christine would not want to be involved in a court application, which would require her to prove she is Chelsea Rain. Some creative estate planning may have avoided the problem.

For Christine, her legal entitlement ended in a decidedly non-legal fashion. Michael’s children, angry at the prospect of a stranger receiving $500,000 of their father’s $22 million estate, hire a private investigator who tracks Christine down and threatens to expose her secret to her family, friends, and law professors. Christine agrees to disclaim her interest in the estate in exchange for the children signing a gag clause, which is to be enforced by keeping the money in escrow for one year, and is to be paid to Christine if they disclose that she is an escort.

[1] National Trust v. Northside United Church, 1994 CarswellOnt 667, 5 E.T.R. (2d) 193 (O.C.J. (G.D.))

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Post Mortem Pipeline Planning – Business Continuity

Written on September 20, 2016 – 7:00 am | by Steven Frye

Recently, a fellow blogger wrote about the benefit of post-mortem pipeline transactions to avoid double tax on disposition of certain assets.

Briefly, a pipeline transaction is a form of transaction whereby the assets of a corporation are distributed to shareholders utilizing the high adjusted cost base resulting from the capital gains realized on death, rather than as a distribution in the form of a dividend. In this sense, the use of a pipeline is often justified as avoiding “double-tax” in the sense that there has been tax imposed as a capital gain on the death of the shareholder followed by further tax in the form of a dividend realized when the assets are distributed.

The steps in the proposed plan include the issuance of promissory notes equal to the fair market value of the deceased’s shares upon the sale of those shares to another corporation and then a subsequent combination of the companies to complete the pipeline. For tax reasons outlined in my colleague’s blog, it is commonplace to wait a year from the time of the share transfer before the distribution of the assets and that the Canada Revenue Agency (“CRA”) appears to support this approach in recent rulings.

However, CRA rulings also included a requirement for the continual carrying on of the business for a period of one year. In a conference several years ago, the CRA noted that the pipeline strategy would not work if the original corporation had no business assets, holding mostly cash. In fact, it appeared the CRA would not consider portfolio investments as business assets.

This is a problem for a growing number of taxpayers, because they may have had businesses inside their corporation which they sold upon retirement. They would have replaced the business assets inside their corporation with an investment portfolio from the cash proceeds on sale to support their retirement.

Good news. In early 2016, the CRA provided a favorable ruling to a taxpayer’s pipeline strategy which, involved a company the CRA acknowledged was engaged in the business of managing an investment portfolio. Here’s hoping that future rulings confirm this result.

Happy reading

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