Supreme Court of Canada weighs in on Henson trusts

4 February 2019

A Henson trust, named after an Ontario court decision from the 1980s, is an estate planning tool by which property can be held in trust for a disabled beneficiary such that it is not an asset of the beneficiary, thereby preserving and maximizing the beneficiary’s entitlement to government means-tested social programs. It is frequently employed by parents of disabled children.

In S.A. v. Metro Vancouver Housing Corp, released 25 January 2019, the Supreme Court of Canada gave full consideration to Henson trusts.  It confirmed the Henson trust as an important estate planning tool in Canada.

The appellant S.A. lived in subsidized housing operated by the respondent Metro Vancouver Housing Corporation, a non-profit corporation. The terms of her residential tenancy required her to demonstrate on an annual basis that she met the eligibility criteria, by completing and submitting an assistance application to MVHC.  When S.A.’s father died she became the beneficiary of a Henson trust established by his will. MVHC requested that she disclose the balance of the trust, and some other details.  She refused on the ground the trust was not an asset that could affect her eligibility for rental assistance. MVHC concluded it was unable to approve her application for assistance.

At trial and on appeal the British Columbia courts held (for different reasons) her trust was an asset, and she had to disclose the information requested. The SCC allowed S.A.’s appeal on the ground she had no entitlement to the trust property.  (Two judges dissented in part but agreed with the majority’s analysis with respect to Henson trusts.)  The word “asset” in the appellant’s assistance application was not broad enough to encompass S.A.’s interest in the trust.  The value of the trust in question was not pertinent to the determination of her eligibility for assistance.  Therefore MVHAC was not entitled to require the information as to value, or to refuse to consider her application when the information was not provided.

This SCC decision confirms the validity of the Henson trust as an estate planning tool, but makes clear validity depends on the following: (1) the trust must be purely discretionary so that the beneficiary only has a “mere hope” not an enforceable right to any distribution of income or capital from the trust; (2) the beneficiary must not have the right to unilaterally collapse the trust and call for the property; and (3) the trust  must not contravene the contractual  terms of the particular social program in question.

(1) Purely discretionary

The beneficiary must have no fixed entitlements to the trust property.  Even if the terms of the trust require the trustees to consider whether to make payments to the beneficiary, the trustees must have ultimate and absolute discretion whether or not to make a payment. It is irrelevant whether the beneficiary is also a co-trustee of the trust provided the trust terms prevent the beneficiary as co-trustee from unilaterally ordering trust payments, and give her no more access to its assets than a beneficiary who is not also a trustee. A beneficiary of a Henson trust can therefore have input into decision-making for the trust, but cannot have control.

(2) No right to terminate

Regarding the right to unilaterally terminate the trust, the rule in Saunders v. Vautier which permits beneficiaries with absolute entitlement to all beneficial rights to terminate a trust and demand legal title over the trust property, must not be applicable.  The rule will not apply where there is a “gift over”: in such cases the beneficiary’s interest in the trust is not absolute so the rule in Saunders v. Vautier does not apply. In S.A. v. Metro Vancouver Housing Corp the trust terms required any remainder of the trust funds to pass to a third party on S.A.’s death and prohibited her from appointing herself or her creditors as remainder beneficiaries.

(3) Subject to contractual terms

The beneficiary of the Henson trust must however comply with the specific terms of the target social benefits program in question, and all contractual terms as interpreted under the usual principles of contractual interpretation. This required interpretation of the word “assets” in the context of MVHC’s Rental Assistance Program. In that context the word means property or interest in property that a person can actually use to discharge debts and liabilities. As S.A. was unable to compel the trustees to make any distributions for her benefit, and could not collapse the trust for her benefit, her interest in the trust was not a asset within the meaning of that contract.

The Latest Word from the Supreme Court of Canada on Unjust Enrichment

27 November 2018

This is an important decision for everyone who comes across equitable relief in their practice.

In March 2017 a divided panel of the Ontario Court of Appeal in Moore v. Sweet overturned a finding of unjust enrichment on the ground there was a “juristic reason” for the enrichment. The decision was appealed. On 23 November 2018 the Supreme Court of Canada, splitting 7-2, applying precisely the same legal test, found there was there was no “juristic reason” for the enrichment, and restored the unjust enrichment remedy awarded at first instance.

The facts of the case are simple.

During their marriage Michelle Moore and her husband Lawrence bought a life insurance policy on his life which designated Ms Moore as revocable beneficiary. They later separated. They agreed orally that Ms Moore would pay the policy premiums and in exchange Mr Moore would maintain Ms Moore as beneficiary. Despite this agreement shortly after their separation, unbeknownst to Ms Moore, Mr Moore changed the beneficiary designation in favour of Risa Sweet, his common law spouse with whom he lived until his death 13 years later. Mr Moore validly designated Ms Sweet as irrevocable beneficiary of the policy pursuant to the provisions of Ontario’s Insurance Act R.S.O 1990 c. I.8. Unaware of this, Ms Moore continued to pay the premiums totalling about $7,000 under the policy for the next 13 years. At the time of death Mr Moore lacked assets making any claim against his estate pointless. The judge at first instance held Ms Sweet had been unjustly enriched at Ms Moore’s expense and imposed a trust in favour of Ms Moore over the $250,000 policy proceeds which had been paid into Court.

At all three levels the courts agreed on the elements to be established for a successful unjust enrichment claim – enrichment, corresponding deprivation, and absence of juristic reason. But that’s where agreement ended.

Juristic Reason
The majority of the ONCA went no further than finding the irrevocable designation provisions of the Act provided a juristic reason justifying the receipt by Ms Sweet of the insurance proceeds. Applying the analysis in the Supreme Court of Canada’s 2004 decision Garland v. Consumers’ Gas Co., the ONCA held those provisions of the Act impose a regime over the insurance policy and its proceeds that gives rights and protection to the insurer and the beneficiary.
Also relying on Garland the majority of the SCC came to precisely the opposite conclusion. It held the irrevocable designation provisions of the Act do not oust the common law or equitable rights persons other than designated beneficiaries may have in insurance policies. The Act does not preclude claims for unjust enrichment against designated beneficiaries, or the imposition of a constructive trust over proceeds. It is presumed the legislature does not depart from prevailing law if it does not clearly express its intention to do so.
On this issue the SCC minority, siding with the ONCA, stressed the purpose of the comprehensive scheme of irrevocable beneficiary designation in the Act is to insulate the designated beneficiary from the claims of all of the deceased’s creditors. It does not carve out a special class of creditor. The legislative scheme is deliberately indifferent to the source of the premium payments. It constituted a juristic reason for Ms Sweet to receive the proceeds.

‘Residual’ reason
The second stage of the Garland test affords the defendant an opportunity to establish some other, residual reason why the enrichment should be retained. These may include the parties’ reasonable expectations, and moral or policy-based arguments. The SCC divided starkly on this issue as well.
The majority held residual reasons favoured Ms Moore because it was her payment of the premiums that made Ms Sweet’s entitlement to receive the proceeds possible. The minority concluded policy considerations weighed against Ms Moore’s claim. Irrevocable beneficiary designations were created to ensure that life insurance proceeds could be disbursed free from claims against an estate, giving certainty to insured, insurer and beneficiary alike so litigation does not tie up funds that the deceased intended to support loved ones for a significant period of time.

Corresponding enrichment and deprivation
The SCC even divided on whether Ms Sweet’s enrichment corresponded to Ms Moore’s deprivation.
The majority found Ms Sweet was enriched by virtue of her right to receive the insurance proceeds and her enrichment was at the expense of Ms Moore, because the proceeds otherwise would have accrued to Ms Moore. The dissent accepted that absent the payments of premiums by Ms Moore the policy would have lapsed, and that but for Mr Moore’s breach of contract Ms Moore would have been the beneficiary, but, it reasoned, this was not sufficient to establish that the deprivation and enrichment were corresponding. Ms Sweet’s benefit – a statutory entitlement to proceeds – is different from Ms Moore’s deprivation – the inability to enforce contractual rights. They must be “zero-sum”. Had Mr Moore’s estate been solvent and able to pay damages to Ms Moore for breach of contract, Ms Sweet would have retained the insurance proceeds. Ms Sweet’s enrichment therefore could not be said to be dependant on Ms Moore’s deprivation.

Ontario Court of Appeal clarifies requirements for releasing unknown claims

24 May 2017

The Ontario Court of Appeal has clarified that “exceptionally comprehensive” language may not be required to release claims that were unknown at the time the release was signed.

A release of a category of claims arising prior to a certain date, does not need to say unknown claims in that category are being released.  There is no need to further specify the types of claims. All claims are included – even unanticipated claims – unless specifically excluded.

So says the Court of Appeal in its reasons for decision in Biancaniello v. DMCT LLP, handed down 15 May 2017, reversing the rulings of the motions judge and the Divisional Court below.

The release being considered was given in 2008 to settle a claim by a firm of accountants for payment of its fees. The fees claimed were roughly $66,000 for services rendered in applying for tax credits, negotiating the departure of an employee, and structuring a tax saving butterfly transaction.  The clients objected to the accountants’ bill on grounds including that they gave little value.

The accountants agreed to accept $35,000 in settlement, and the parties signed a mutual release which provided in part that they were releasing claims against each other which they, “now have, or hereafter may, can or shall have for or by reason of any cause, manner or thing whatsoever existing to the present time” with respect to the services provided by the accountants up to 31 December 2007.

In late 2011 the clients discovered problems with the butterfly transaction which resulted in a potential income tax liability of $1.24 million.

The clients sued for negligence.  The accountants moved for summary judgment arguing the action was barred by the release.

The accountants’ motion was dismissed at first instance.  The motions judge held the wording of the release referred to claims “existing to the present time” i.e. 2008.  The accountant’s negligence came to light only in 2011 so there was no basis for the clients to assert a claim until after 2008.  The Divisional Court agreed. It interpreted the language of the release to include only known causes.

Applying principles from UK House of Lords decisions, the Court of Appeal reasoned that because the release was given as part of a settlement of a fees action, its purpose for both parties was to wipe the slate clean in respect of that dispute. To the extent a release contains general language, the court must determine what was within the contemplation of the parties. The context of the settlement of an action limits the intended scope of a release. But in this case the release expressly includes all claims arising from “any and all” services provided by the accountants up to 31 December 2007.  There was no need to search for what was contemplated by the parties.   The clients now sought to assert a claim that arises out of the services provided by the accountants before 31 December 2007.

The clients asserted the release did not bar these claims because (1) the claim was unknown at the time of the release, and (2) the claim did not exist at the time.

The court of Appeal rejected both arguments.  Although the release does not specifically say it includes unknown claims, it includes all claims arising from the accountants’ services before the date stated. Writing for the court Feldman J.A. observed, “Had the client wished to exclude claims it might later discover arising from that work, it could have bargained for that result.”

As for the argument the claim did not exist, the Court of Appeal held this finding by the Divisional Court was an error of law.  The fact that the claim was not discovered, did not mean it did not exist.

UK Supreme Court re-visits testamentary freedom

20 March 2017

In a decision released on 15 March 2017 , overturning the Court  of Appeal, the UKSC reminds courts that when considering claims for financial support from the estate of a deceased, the test is not whether the deceased behaved unreasonably in leaving the will they did.

The right question for the court is: did the will/intestacy make reasonable financial provision?, not whether the deceased acted unreasonably.

Unreasonable testamentary behaviour of the deceased may be considered, but English law, the court confirmed, recognizes the freedom of individuals to dispose of their assets by will in whatever manner they wish, subject to the statutory requirement to make reasonable financial provision for a limited class of persons.

The court has no carte blanche to make the deceased’s disposition accord with what it might have thought sensible, if it had been in the deceased’s position.

The deceased left her estate of 486,000 pounds to three charities, with which she had no particular connection during her life, and cut out her only child Heather Illott, who had eloped and married as a young woman.  A 26 year estrangement between mother and daughter followed.

At the time of the mother’s death, Illott, her husband and four children lived in modest circumstances, renting accommodation subsidized by the public purse.

At first instance the judge found the deceased’s will did not make reasonable provision for her daughter.  He awarded her 50,000 pounds.  The court of appeal saw its task as to, “balance the claims on the estate fairly”.  It increased the award giving Illott sufficient capital to purchase her rental accommodation (roughly 150,000 pounds) plus 20,000 pounds. The UKSC restored the trial judge’s award.

KPMG v. Minister of National Revenue – Limits on accountants’ duty of confidentiality

2 March 2017

On 18 February 2013 the Minister of national Revenue moved ex parte for an order under section 231.2(3) of the Income Tax Act, authorizing him to impose on KPMG LLP a requirement to provide information relating to certain of its unnamed clients, including their identities, and documentation relating to their participation in an offshore company tax structure.

KPMG moved for an order quashing the ex parte order.  It sought a declaration that the sections of the Income Tax Act which authorized the order were of no force or effect because they unjustifiably infringe the protections of life, liberty and security of the person and protections against unreasonable search or seizure contained in the Charter. KPMG also relied on the accountants’ professional duty of confidentiality, including under their code of professional conduct.

After extensive without prejudice settlement discussions, KPMG’s motion was dealt with in writing, and dismissed late last year by the Federal Court of Canada.

The decision confirmed that KPMG’s duty of confidentiality does not prevent the Minister from obtaining the information sought. The Court also declined to exercise its discretion to quash the order on the ground that the section of the Income Tax Act under which the order was made,  has since been amended to eliminate the court’s ability to grant such orders on an ex parte  basis.

Tweaking mediation

21 February 2017

Civil justice resources should be deployed so that there is a gravity-assisted, downhill run to the courtroom where disputes will promptly be determined by a judge, if mediation fails. Unless the parties decide otherwise, failed mediation and the judicial determination step should be linked.

There can be no doubt that promotion of the settlement of civil disputes through mediation, is a wise policy.  But it must not effectively be the final step in the civil justice process.

If parties are at the point of emotional and financial exhaustion by the time they reach mediation, it will not be practical for them to continue on to a hearing when no settlement is reached.

In that situation, effectively, they must settle.

Such a situation opens the door to exploitation, unfairness and injustice.

What if the price of peace is too high?  What if one party is both unreasonable and wealthier than the other?

Caught in that dilemma the reasonable party’s option is either to accept a settlement that does not fairly reflect the chances of success at a judicial determination, or trudge on uphill through mud and obstacles rolled in the way of getting a matter before a judge for determination.  These obstacles often include: mandatory wait times before setting down for hearing; judicial mediations; pre-trials; second pre-trials; and even “mid-trial pre-trials”.

Such obstacles increase the cost to the reasonable party, and therefore increase the pressure to accept an unfair settlement. They work in favour of an unreasonable party.

Not only would linking failed mediation to prompt judicial determination focus the minds of the parties at mediation, it would tend to improve mediation by curbing unreasonable positions, and creating real, more affordable options for parties faced with unreasonable adversaries.

“Mediation? The most expensive sandwiches I’ve ever eaten”

17 October 2016

This was the eye-catching title of an evening symposium held at a London UK barristers’ chambers earlier this year.

Anyone facing litigation – whether in business, or private life – is confronted with an awful trilogy: unpredicatable expense, with an uncertain outcome, lasting a period of time that cannot be determined.

Mediation arose because of the increasing failure of the usual channel of resolving civil disputes – the civil justice system.

It was taking too long to get a dispute to the point where it could be resolved by a judge.  The “one size fits all” procedure was unwieldy and expensive.  The interests of the lawyers and their clients were misaligned – the longer a case took, the more it would cost.

Mediation promised a faster, less confrontational, therefore less expensive approach, based on resolution through agreement of the parties.

The major difference in the mediation model is the absence of a neutral person who decides on the parties’ rights.  But at what price do we abandon the conventional focus on rights, as a method of resolving disputes?

Where the parties to a dispute are sophisticated and  motivated to reach agreement, mediation can work well.

But if one party seeks to postpone the day they will be required to pay a judgment, or is belligerent, or where there is pronounced inequality of strength between the parties, mediation, by creating an extra step in the process, in which there is no referee, can hurt the party who may have the stronger case.

Mediation is not appropriate for all disputes, any more than blood-thinners are the best treatment for all ailments. Indeed, in certain cases it is precisely the wrong approach.

The causal link between a healthy economy and a robust judicial system in which disputes can be determined predictably, efficiently and affordably,  is self-evident.   The role of authoritative, neutral person, who decides a dispute on principles of fairness, is the baby that must not be thrown out with the bathwater.