Today’s blog was written by Karen La Caprara, Counsel, at Fasken LLP.

Pour-over clauses in wills are a staple in U.S. estate planning, used to direct estate assets into an existing trust. But in Ontario and British Columbia, these clauses can lead to invalid testamentary gifts, intestacy, and costly litigation.

What Is a Pour-Over Clause—and Why Is It Problematic?

A pour-over clause is a provision in a will that transfers assets from the testator’s estate to the trustees of an existing trust, to be held under the terms of that trust. While this approach is common and effective in the United States, Canadian courts have taken a stricter stance.

Courts in Ontario[i] and B.C.[ii] have invalidated pour-over clauses that reference revocable or amendable trusts. The concern is that such clauses would effectively permit the testator’s testamentary dispositions to be changed by amending the trust—without following the formal requirements for altering a will. These safeguards exist, in part, to prevent fraud and undue influence. Further, the ability to amend the trust creates uncertainty as to the actual disposition made by the testator.

The Risks of Using Pour-Over Clauses

Including a pour-over clause in your will—especially one that references a revocable or amendable trust—can result in:

• Intestacy, if no valid alternative disposition is included
• Litigation, with financial and emotional costs for your estate and beneficiaries
• Tax inefficiencies in certain cross-border scenarios

Case Study: When a Pour-Over Clause Seems Ideal

Despite the risks, pour-over clauses can be appealing for administrative efficiency, privacy, and, in certain circumstances, to help mitigate adverse tax outcomes and probate in foreign jurisdictions. How can estate planners achieve these goals without running afoul of Canadian law?

By way of example, consider a client who wants to leave part of their estate to a child and grandchildren living in a jurisdiction where there is a substantial inheritance tax. The ideal solution for this gift might be to utilize a pour-over clause directing the relevant residual share into a foreign trust for those beneficiaries—either an existing trust or one created for this purpose.

However, a review of the existing foreign trust may reveal, as is often the case, that it allows for the addition and removal of beneficiaries and the amendment of trustee powers. A pour-over clause directing the relevant residual share into such a trust would be invalid under the applicable case law.

How best to approach this issue will be dependent on consultation with the client, legal counsel in all relevant jurisdictions and, if the client agrees, the beneficiaries. It may be that the residual gift for these beneficiaries could be drafted using a multi-pronged strategy. For example, the following options could be included in the will:

1. Executor Discretion: Provide the executors with the power to appoint the residue portion to another trust for the same beneficiaries, including the existing foreign trust.
2. Fallback Testamentary Trust: If the executors don’t exercise this power, direct that the residue portion be held in a testamentary trust with terms mirroring the foreign trust—excluding any amendable provisions.
3. Trustee Discretion: Also provide the trustees of the testamentary trust with the power to appoint the capital of the testamentary trust to another trust for the same beneficiaries, including the existing foreign trust.
4. Legal and Tax Advice: Direct the executors and trustees to obtain legal and tax advice prior to the exercise of their discretionary power to appoint the residue or trust capital to another trust.
5. Broad Powers: Include in the will robust executor and trustee powers, covering the appointment of additional/replacement trustees, resettlement of testamentary trusts and transfer of trust situs.

Key Takeaways for Estate Planners

This plan isn’t a one-size-fits-all workaround. It must be tailored to the jurisdictions involved, the client’s specific goals and the structure of the existing trust.

But it does show that with careful planning, you can achieve similar outcomes to a pour-over clause, while staying within the bounds of the currently applicable law in Ontario.

The law continues to evolve on this issue. So, similar to the plan above, consider including a flexible approach with multiple options, and always include a fallback that you know will work in case the desired option does not. And, of course, always get advice from estate planning and tax professionals in all relevant jurisdictions.

[i] Vilenski v. Weinrib-Wolfman, 2022 ONSC 2116

[ii] Quinn Estate v. Rydland, 2019 BCCA 91; Waslenchuk Estate, 2020 BCSC 1929