(From the July 2022 Edition of eFORUM)

By Kevin Wark

With increasing frequency, the death of a parent has resulted in acrimony and legal proceedings involving the surviving adult children. Many of these disputes are the result of the parent transferring property to one child while alive, without the knowledge of the other children. More recently, such disputes have also resulted from a parent designating one adult child as the beneficiary under a registered plan or life insurance policy, to the exclusion of other family members. The children disputing the gift or beneficiary designation typically rely on the presumption of resulting trust as a legal sword to claw back the gift into the estate, for distribution to all beneficiaries under the deceased’s will.  

The recent Ontario case of Strauss v. Wright represents a bit of a twist, as it involves the parent, Mr. Wright, disputing the validity of an inter vivos gift to a family trust for the benefit of his adult daughters. Mr. Wright attempted to use the presumption of resulting trust to invalidate this gift.

Let’s briefly review the legal basis for the presumption of resulting trust and discuss why Mr. Wright was unsuccessful in his court action.

The Presumption of Resulting Trust  

In common-law provinces there is a legal presumption that the gratuitous transfer of property to a spouse or minor child is intended as a gift. This is referred to as the “presumption of advancement.” If another party brings a legal action challenging the gift, they bear the burden of proving that a gift was not intended.

However, a gratuitous transfer of property to an arm’s length person, such as a family friend, is governed by the presumption of resulting trust. Where there is a challenge relating to the validity of the gift, the transferee bears the burden of proving a gift was intended. If a court determines that the presumption was not successfully rebutted by the transferee, the property will fall back to the transferor (if alive) or the transferor’s estate. The 2007 decision of the Supreme Court of Canada in Pecore v. Pecore extended the presumption of resulting trust to gifts to adult children. This has resulted in the proliferation of court actions between adult children, which are typically instituted after the death of the parent. This leaves the Court to determine the deceased’s intentions based on any relevant documents as well as evidence provided by the children, family friends, and professional advisors.

The Facts in Strauss v. Wright

The facts of this case are quite involved as they span events taking place over a number of years. It started in 2005, with Mr. Wright and his then-wife making mirror wills that provided that a $4-million mortgage on a farm held by them would be transferred to a testamentary trust created for the benefit of the surviving spouse. Subsequently, Mr. Wright worked with his lawyer to create a family trust as part of his succession plans, under which he would be the trustee and a beneficiary.

However, the terms of the draft trust agreement were subsequently modified such that his two daughters became the main beneficiaries of the family trust — with Mr. Wright no longer being a trustee or a beneficiary. Mr. and Mrs. Wright then made a number of gifts to the family trust.

Mrs. Wright passed away in 2008, and in 2013 Mr. Wright conveyed his interest in the farm mortgage to the family trust. The farm mortgage was discharged in 2014 and at that time Mr. Wright expressed an interest in using these proceeds to make another investment. He was then advised that he did not have access to these funds, as the mortgage proceeds were now held in the family trust.

This resulted in Mr. Wright taking the position that the transfer of the mortgage was invalid, as it was based on his mistaken belief that he continued to be a beneficiary under the trust. He also alleged that his daughters unduly influenced him into making this transfer. The daughters brought this action on their own behalf and as trustees of the family trust to have the Court declare the transfer of the farm mortgage to the trust was valid and binding on Mr. Wright.

The Court Decision

The Court acknowledged that Mr. Wright’s gift of the farm mortgage to the family trust was subject to the presumption of resulting trust. However, after reviewing all the facts, the Court concluded that Mr. Wright was or should have been aware that he was not a beneficiary of the family trust. The Court also noted there was significant evidence that this transfer was part of Mr. Wright’s overall succession plan, where he intended to transition family assets to subsequent generations through an estate freeze.

This view was further supported by notes taken by Mr. Wright’s lawyers concerning his estate plan and his instructions to give effect to the plan. In the Court’s view, there was no doubt that Mr. Wright understood the effect of the gift of the farm mortgage to the family trust and the presumption of resulting trust had been rebutted.

The Court also disagreed with Mr. Wright’s assertions that he had been subject to undue influence by his two daughters. Further, even if the presumption of undue influence could apply, the Court found that no actual influence had been applied as he had been properly informed by his legal advisors and acted freely. As a result, the gift of the mortgage to the family trust was found to be valid.

Thus, while the presumption of resulting trust will apply to a gratuitous transfer of property to adult children, that is not the end of the matter. In any resulting legal dispute, the Court will review the underlying facts to determine the intentions of the parent in making the gift. In the Strauss case, the evidence from Mr. Wright’s legal advisors indicated he was both aware of the terms of the family trust and intended to make a gift of the farm mortgage in furtherance of his estate and succession plans. The Court also noted that the succession plan could only be effective from a tax perspective provided Mr. Wright had no control of the property held by the trust.

This case serves as an important warning to business owners, in particular, who are engaging in succession and tax planning. The transfer of business assets to adult children, either directly or via a family trust, will often result in the loss of control of those assets unless appropriate legal checks and controls are put in place.

Kevin Wark is managing partner of Integrated Estate Solutions and a tax advisor to CALU. He is the author of several tax/estate planning books entitled The Essential Canadian Guides that are available through Amazon.ca and Kindle.