A recent case, decided in the BC Supreme Court, examines the interplay among three important BC laws: the Wills Variation Act (“WVA”), the Family Relations Act (“FRA”) and the Fraudulent Conveyance Act (“FCA”). The case is Easingwood v. Cockroft, 2011 BCSC 1154

Very briefly, the WVA allows a disappointed spouse or child to challenge a will on the basis that the deceased failed his or her legal or moral duty to adequately provide for the spouse or child in the will. The FRA allows one spouse to claim against the assets of the other in the event of a breakdown of the marital relationship (whether a legal or common-law marriage). And finally, the FCA allows a creditor to claim that property which should have been used to satisfy or secure a debt has been improperly transferred out of the debtor’s name. Obviously there is a lot more to each of these laws, and whether a claimant will be successful depends on the circumstances of each situation, but to understand the Easingwood case, this is enough.

Reg Easingwood had four adult children when he married Kay Easingwood, who had two adult children. It was a second marriage for both, and as they both had significant assets, they signed a marriage agreement saying they would keep their property separate and not claim against each other’s estates. They each wanted to ensure their assets went to their own children. Reg and Kay remained married from 1983 until his death in 2009.

In 2001, Reg gave power of attorney to one of his daughters and his son Hank (a lawyer). The power required the two of them to act together, so that if one died, the power would terminate altogether. This was later to become an issue.

In 2004 Reg made a Will. Kay would have an income for her life, and she was allowed to remain in the family home (registered only in Reg’s name) during her life. Reg also left money to pay house expenses so long as Kay lived in the house.

The rest of Reg’s estate was divided among his surviving children and grandchildren. Kay knew about the Will and approved of it.

Reg had a number of business interests, including rental properties. Kay also had her own business, which she operated out of Reg’s offices, and later, as Reg developed dementia, Kay took over some of the duties in operating Reg’s businesses.

When it became clear that Reg was suffering from Alzheimer’s, Hank and his sister started using the power of attorney to manage Reg’s business affairs, with Kay’s blessing. However, in 2005, Hank was diagnosed with cancer, and by 2007 it was clear that he might not survive his father. In order to ensure that Reg’s affairs could continue to be managed after Hank’s death, and for tax planning purposes, Hank and his sister created and settled an Alter Ego Trust on Reg’s behalf. They transferred all of his assets into that trust, except his residence and his Canada Pension benefits. In all, about $5M in value went into the Trust, leaving about $550,000 in the Will. The terms of the Trust tracked Reg’s Will exactly, so that the income fund and the house operation fund were in the Trust.

Reg died in 2009, and Kay filed her first law suit within weeks of his death. She applied under WVA, claiming that Reg had failed to properly provide for her in his Will. She also claimed that the Alter Ego Trust was not a valid trust, so that the assets transferred to it would fall back into Reg’s estate and her WVA claim would include them. Just in case that failed, she also claimed that the transfer of Reg’s assets to the Trust was a fraudulent conveyance, meant to hinder her position as a creditor of Reg’s estate under both family law and unjust enrichment for the work she had done for Reg’s businesses.

So what happened? The Supreme Court judge found that the Trust was valid (it is open to attorneys to settle a trust for the person who gave them the power, so long as the terms of the trust are for the benefit of that person.

Since the trust was valid, was the transfer of the assets to it a fraudulent conveyance? Again the judge said no, because Kay was not a creditor as defined by the law.

Bottom line? Provided it is done properly, (ie, the proper matters are considered when the trust is created and the assets are transferred to it), the creation of an Alter Ego Trust is a good planning strategy.

An analysis of how the judge came to her conclusions will follow in my next post. And of course I’ll be watching for the Court of Appeal’s decision to see if the Supreme Court’s decision stands. I hope it does because it is a good, well-reasoned and very helpful judgment.

If you think your estate plan might benefit from a discussion about an Alter Ego Trust, please contact me.