This blog was written by Veronique Thomas-Ewen, Associate Estate and Trust Consultant with Scotia Wealth Management
In a carefully planned will, the testator names the spouse as the executor, leaves the family residence and residue to that spouse, but directs the family cottage be held in trust. The spouse has the use and enjoyment of the property and on the spouse’s passing the cottage is to be transferred to the grandchildren. It was well known that the spouse struggled with finances, which is why the testator’s wealth was kept separate. That being said, the testator felt it would be unfair to not let the estate flow directly to the spouse upon death. At the same time, the testator wanted to ensure that at least the family cottage would stay in the family.
Fast-forward a few years and the surviving spouse is now living in the cottage and renting out the family residence. The estate assets have all been spent and a large mortgage and home equity line of credit have been taken out against the cottage in the spouse’s name personally. Time passes, and payments go into arrears. Bank accounts are overdrawn and more loans are taken out. There is now a court order for a power of sale on the cottage. Finally, the surviving spouse passes away.
Many questions come to mind here, such as how did the surviving spouse obtain a mortgage and line of credit on the cottage? But the more pressing question is how does an executor, who has no personal assets or liquidity, undertake the administration of a complicated estate which may very well be insolvent? Did I mention that the executor is from out of town and that the cottage is no longer fit to live in?
The estate lawyer advises that the cottage be sold. But wait, those proceeds can only be used to pay off the debt directly associated with it.
This will still not provide the executor with the funds required to administer the estate. Unfortunately, very little help is available in this scenario and the administration of the estate will be a battle every step of the way.
The testator had initially set out a plan and told family members that there would always be money there to take care of them, about $2 million. Had the estate flowed into a trust, there would likely have been some value left and the cottage could have remained with the family. Little did the testator realize that by leaving the estate directly to the spouse who was known to be unable to manage the assets, the plan went off the rails and the family cottage would ultimately be lost.