A recent decision from the British Columbia Supreme Court, Kramer v Kramer,[1]considered whether assets transferred to an alter ego trust should be returned to the deceased’s estate as a fraudulent conveyance to satisfy a wills variation claim.
British Columbia is unique in Canada for the wills variation provision in the Wills, Estates and Succession Act (WESA). Section 60 of the WESA allows a court to vary a testator’s Will upon application and order provisions that it considers “adequate, just and equitable in the circumstances” for the support of the testator’s spouse or children.[2] If there are insufficient assets in the estate, applicants can apply to declare conveyances made during the testator’s lifetime fraudulent under the Fraudulent Conveyances Act (FCA)to return the assets to the estate.[3]
In this case, Justice Young rejected a beneficiary’s attempt to obtain a larger share of her mother’s estate and declared that the transfer of assets to an alter ego trust during the deceased’s lifetime was not fraudulent.
The Facts
This case revolves around the estate of Clara Kramer. Clara died on July 14, 2017. Clara executed a Will on May 4, 2009, and a Codicil on March 31, 2010, which named her only children, Karen and Leanne, as the executors and sole beneficiaries of her estate. Leanne also had power of attorney over Clara’s affairs during her lifetime.
On May 31, 2015, Leanne used her authority under the power of attorney to transfer most of Clara’s assets into the Kramer Alter Ego Trust (the “Trust”), appointing herself and two solicitors as trustees. An “alter ego trust” is an estate planning tool that allows you to transfer your assets to a trust with yourself as both the trustee and beneficiary. This allows you to hold and manage the property for your own benefit. You can also provide for who gets the assets after your death, making these trusts a common form of will substitutes. In this case, the distribution of assets in the Trust mirrored the terms of the Will and Codicil. Karen was not aware of the Trust until after Clara’s death.
On March 18, 2019, Karen brought an action to vary Clara’s Will under section 60 of the WESA and for an order under section 1 of the FCA that the transfer of property to the Trust was fraudulent and void. If the order was granted, then the assets would form part of Clara’s estate. The defendants applied for summary judgment to dismiss Karen’s claim.
Issues
The Court considered two main issues:
- Did the plaintiff have standing under the FCA as a creditor?
- Were estate assets transferred to the Trust with fraudulent intent?
Karen maintained that the conveyance of the estate assets to the Trust was fraudulent and that the Trust was created with the intention to prevent her from collecting her debt.
The defendants denied this allegation. Firstly, they maintained that Karen was never a creditor of Clara. Even if she was, she had been paid what was owed to her before the property was transferred to the Trust. Moreover, the purpose of the Trust was not to place Clara’s assets out of the reach of creditors and did not constitute a fraudulent conveyance.
Does the Plaintiff Have Standing Under the FCA as a Creditor?
Section 1 of the FCA states that a conveyance made to delay, hinder, or defraud creditors via a disposition of property is void.[4] However, for this provision to apply, Karen must prove that she was a creditor of Clara’s and had standing to bring the claim under the FCA.
Justice Young found that making a claim under section 60 of the WESA does not make the applicant a creditor under the FCA.[5] As such, Karen’s claim as a creditor was based on a series of loans totalling $164,000 that she gave to Clara in September and November 1998. In 1998, Clara had contacted Karen asking for a loan from the proceeds of the sale of Karen’s condo. Karen agreed and transferred the funds to another account of hers that Clara had access to. Clara withdrew the funds and deposited them into one of her corporate accounts. Due to Karen’s evidence that she thought that she was personally loaning her mother the money and Clara’s tendency to treat corporate accounts like personal accounts, the Court determined that the loan was a personal loan.[6]
However, the loan had already been repaid. On June 20, 2012, Clara contacted her attorneys and insisted that she owed Karen $300,000, though she could not recall the particulars of the loan, including whether it was made to her or to one of her companies, the principal amount, or the interest rate.[7] Clara’s attorney suggested that they transfer $200,000 from a sale of one of Clara’s properties to Karen as either an advance on her inheritance or as a repayment of the loan. If Karen established that Clara owed her more than $200,000, then Clara would agree to pay the outstanding balance.[8] On June 25, 2012, the agreement was executed, and the money was wired to Karen’s account. Karen never provided any further evidence of the loan.
The Court determined that, as Karen had only established the principal loan amount of $164,000 and did not establish that there was any agreement for interest, her loan was more than repaid and she was not a creditor at the time of the transfer of the assets to the trust.[9] As she was not a creditor at the time of the conveyance, she did not have standing to assert a claim under the FCA.
Were the Assets Transferred to the Trust with Fraudulent Intent?
Justice Young explained that the test for a “fraudulent conveyance” under the FCA was whether the transfer of assets was done with the intent of putting assets out of the reach of creditors.[10] A trust created with the effect of putting assets out of reach of creditors, but not the intent, is insufficient.[11]
Justice Young found no indication of fraudulent intent in this case. Instead, the Trust was created for estate planning purposes on the advice of Clara’s counsel. Justice Young concluded that the Trust was created:
… for legitimate estate planning purposes to maximize the value of Clara Kramer’s estate by avoiding substantial probate fees that would have been payable on the gross value of the North Property and the South Property, and to ensure Clara Kramer’s estate could be administrated in an efficient, cost-effective, non-confrontational manner after her death. There is no evidence on which to draw an inference of fraudulent intent.[12]
Justice Young also considered the fact that there were provisions in the Trust to pay out estate liabilities, consisting of over $13 million in capital gains, deferred property tax, legal costs, personal loans, and other expenses.[13]
Conclusions
While this case was decided in British Columbia under their provincial legislation, it has clear implications for testators in Ontario, given the similar legislation governing fraudulent conveyances in each province.[14]
For testators, Kramer affirms that creating an alter ego trust to avoid probate fees and ensure effective estate administration of your estate is a valid method of estate planning, so long as there is no intent to delay or hinder creditors which could trigger fraudulent conveyances legislation. Moreover, though not required, it is good practice to have trust provisions which provide for paying out the liabilities of the estate to disprove any fraudulent intent.
Contact Derfel Estate Law for Estate Administration and Trustee Disputes
At Derfel Estate Law, our estate litigation lawyers work with clients in all aspects of estate disputes, including trustee and executor issues and passing of accounts. We provide personalized assistance to beneficiaries, guardians, executors, trustees, and any other party involved in estate matters. If you are wondering how we can help you, please don’t hesitate to reach out online or call 416-847-3580 to speak with an estate lawyer who will work tirelessly to resolve your dispute.
This blog was co-authored by David Derfel and law student, Leslie Haddock.
[1] 2023 BCSC 116 [Kramer].
[2] Wills, Estates and Succession Act, SBC 2009, ch 13, s 60 [WESA].
[3] Fraudulent Conveyances Act, RSBC 1996, c 163, s 1(a) [FCA].
[4] Ibid.
[5] Kramer, supra note 1at para 41.
[6] Ibid at para 70.
[7] Ibid at para 85.
[8] Ibid at para 88.
[9] Ibid at para 90.
[10] Ibid at para 93.
[11] Ibid at para 94.
[12] Ibid at para 113.
[13] Ibid at para 9.
[14] In Ontario’s Fraudulent Conveyances Act , RRO 1990, ch F.29, s 2 states that any conveyances made with the intention to defeat, hinder, delay or defraud creditors is void, similar to s 1(a) of British Columbia’s FCA.