Trustee Might Pay Personally For The Failure to Meet Estate Obligations

I have written before that being named an estate trustee might be more headache than honour. See: https://www.linkedin.com/pulse/honour-headache-considerations-named-estate-trustee-adrian?trk=mp-reader-card . A recent Ontario case demonstrates a further aspect of the headache. The trustee, who was also the beneficiary of a life insurance policy was ordered to pay proceeds of that policy to a dependent claimant of the estate. This is not typical as normally the proceeds of life insurance pass outside the estate. However, in certain circumstances, those proceeds can be deemed to be part of the estate to pay estate obligations.

The facts are fairly straightforward. The deceased and claimant were married for 38 years and had two daughters. During the marriage, the claimant wife raised the daughters and worked as a bookkeeper in the husband's business. Upon marital breakdown, the husband was ordered to pay spousal support. At the time of the divorce, the husband warranted to the wife that she was the beneficiary of a group life insurance policy. That warranty never became part of the divorce degree.

Spousal support was paid for a number of years but terminated approximately a year before the deceased's death. There was no legal basis for the termination; no court had decree for variance or termination had been made.

Following the death, the claimant discovered that she was no longer the beneficiary of the life insurance policy as the policy her husband had promised had been terminated by an employer. Rather, a new policy named one of the two daughters as beneficiary. That daughter was also named as estate trustee.

In deciding whether to grant the relief sought, the court looked first at whether one or both of the ex-wife and daughters met the criteria for being a dependent of the deceased. The ex-wife's financial circumstances were dire. She was unable to work and was living on a limited disability payment. The spousal support payments had been crucial to meeting her monthly obligations. The daughter, in contrast, was married to a spouse with a modest income. Although the deceased had given gifts to the daughter, he had not provided financial support to the point where the daughter was dependent on that support. As such, the dependency of the ex-wife created an obligation on the estate whereas a payment to the daughter did not.

Pursuant to s. 72 of the Succession Law Reform Act, proceeds that pass outside the estate, such as life insurance proceeds, can be deemed to be part of the estate. The facts that the judge considered in deciding to deem the funds part of the estate included the fact that the ex-wife had been married to the deceased for 38 years and worked in his business. She made a significant contribution to the deceased's welfare, business and career. The ex-wife was also unable to meet her monthly living expenses without the support of the deceased. Additionally, the deceased did not have an obligation to support his daughter.

The daughter had already spent some of the insurance proceeds on personal expenses such as debt payment. Despite this, the court ordered her to pay $40,000 as a lump-sum plus the spousal support arrears to the ex-wife.

The Lesson: If you are an estate trustee make sure that all potential dependent's claims are resolved before distributing estate assets. In rare instances, you could be personally liable for the estate's failure to meet its obligations to the deceased's dependents.

Bormans v Estate of Bormans, 2017 ONSC 428 https://www.canlii.org/en/on/onsc/doc/2016/2016onsc428/2016onsc428.pdf

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