Updating your estate plan on separation and divorce in a timely manner is critical in order to avoid unintended results, possible later disputes, and even litigation. The following highlights some of the most common concerns, as well as precautions to take.
Wills
Generally, in Ontario the Succession Law Reform Act (SLRA) automatically revokes gifts to former spouses by will upon a subsequent divorce. As well, former spouses are deemed to have predeceased the person making the will. These laws shouldn’t be relied on as a substitute to updating your estate plan, especially since they only apply to married couples who divorce. In addition, unintended outcomes could result if substitute beneficiaries have not been named or if those named are no longer appropriate.
In contrast, gifts to married separated spouses or to former common law spouses by will remain valid after separation and generally can only be revoked by executing a new will or codicil removing the gift.
The case of Makarchuk v. Makarchuk illustrates what may happen where married spouses do not execute new wills after a separation. In that case, the spouses entered into a separation agreement under which they released all rights they may acquire in each other’s estates. The deceased spouse died with a will naming his separated spouse as the sole beneficiary. The court held that the separation agreement was not broad enough to remove entitlements received under each other’s wills. As a result, the entire estate of the deceased passed to his separated spouse. This result could have been avoided if the deceased had prepared a new will or if the separation agreement was drafted to expressly exclude entitlements under will.
If a former married spouse dies without a will but was never legally divorced, a significant share of his or her estate will pass to his or her spouse. To avoid this result, a new will should be prepared soon after separation.
Beneficiary Designations
Former spouses often neglect to update life insurance, RRSP/RRIF, and TFSA beneficiary designations on separation and divorce. In contrast to the laws relating to wills, divorce (and separation) has no impact on beneficiary designations. A former divorced spouse may be entitled to all or a portion of such policies and plans if the named beneficiary is not changed, which was the result in Richardson Estate v. Mew. In that case, the deceased had remarried but had failed to change his beneficiary designation for his life insurance policy. The court held that the deceased’s former wife was entitled to the life insurance proceeds as she was the designated beneficiary, despite the fact that she had provided a general release under their separation agreement.
The above outcome is often exacerbated by the fact that the deceased’s estate may also be liable for any taxes payable in respect of those plans designated to the former spouse.
Prior to updating beneficiary designations, it is important to review the terms of any separation agreement to determine whether a change of beneficiary is permitted. In some cases there may be express obligations providing for how insurance, for example, is to be maintained and designated, including for child support purposes.
Powers of Attorney
In contrast to appointments of former spouses as executors or trustees, generally under Ontario law, divorce (and separation) does not revoke prior appointments of former spouses as attorneys for property or personal care. This is extremely problematic because one would generally not want a former spouse to make property and personal care decisions on his or her behalf. As well, in such cases, the former spouse may also be entitled (and more willing) to take compensation for acting as an attorney for property and personal care.
Difficulties could also arise if a former spouse was named but unwilling to act and the alternate attorney, if any, was also unwilling to act. If the grantor is incapable and can’t execute new powers of attorney due to a lack of capacity, it may then be necessary for a person to apply to court to become the court-appointed guardian, which will have the effect of revoking the power of attorney, but is a costly and time-consuming process.
Jointly-Owned Property
Property owned jointly with a right of survivorship passes to the surviving former spouse even if the spouses separate or divorce. This issue is often dealt with in a separation agreement. Joint bank accounts can also pose their own unique problems as there may be a concern that funds could be depleted by one of the former spouses. In such circumstances, stopping direct deposits (such as paycheques) may be appropriate and matrimonial advice is often necessary.
Family Trusts
On separation or divorce, any family trust’s terms should also be examined, including considering changes to the trustees where both spouses are appointed as trustees.
It is important to review and update your estate plan, including wills, powers of attorney, and beneficiary designations, on separation and divorce on a timely basis. This is a necessary and critical step in the separation and divorce process and should always be given high priority. Otherwise, your estate may pass in a manner that is no longer in accordance with your wishes.
Please watch for our next blog post on dispute resolution in estate and trust matters.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.