As a general rule, in Ontario, we have “testamentary freedom” or the autonomy to distribute our assets as we wish. I say, as a general rule, because our testamentary freedom is subject to certain statutory obligations, primarily those owed to our “spouse” and our “dependents.” In this blog post, I will focus on the rights of married spouses.
When a person dies, his or her legally married spouse has the right to take what he or she receives under the deceased spouse’s will (or on an intestacy, if there is no will ) or to bring an election under the Family Law Act for equalization of net family property. In simple terms, equalization is a payment from one spouse (the spouse with the higher net family property) to the other spouse (the spouse with the lower net family property) equal to one-half the difference between their respective net family properties. The reasoning behind the equalization is that upon marriage breakdown (which definition includes the death of a married spouse) everything accumulated during the marriage should be shared by the spouses equally.
Put simply, if a married spouse doesn’t do as well on death as he or she could have done on separation, he or she can bring an election under the Family Law Act for equalization of net family property instead of taking what he or she is otherwise entitled to under the will or, on an intestacy, under the provisions of the Succession Law Reform Act (the law that governs the distribution of a person’s estate when he or she dies without a will). I say “married” spouses because the right to elect only applies to legally married spouses and not common law partners.
Some important considerations:
There is No Double Dipping. A surviving spouse who elects to take under the deceased spouse’s will (or on an intestacy) is entitled to receive all property that passes to him or her outside of the estate in addition to any gifts made to him or her under the deceased spouse’s will. Assets which pass outside of the estate include property that the spouses owned jointly with right of survivorship, such as real estate held by them as joint tenants and joint bank accounts, and the proceeds of registered accounts, such as an RRSP, RRIF and TFSA, or a life insurance policy, that passes to him or her by way of beneficiary designation. Conversely, if the surviving spouse elects for equalization, the value of property passing to the surviving spouse outside of the estate, will be deducted from the spouse’s equalization entitlement. Thus, it is important to consider the value of all assets passing to the surviving spouse, both through the will and outside of the estate.
There is a Deadline. A surviving spouse must file his or her election with the office of the Estate Registrar within 6 months after the date of death of the deceased spouse. If no election is made within that time period, the surviving spouse is deemed to have elected to take under the deceased spouse’s will. The court has the discretion to extend the time period for bringing an election where, for example, the nature of the deceased’s assets (eg. a business which requires a valuation, a discretionary interest in a family trust) is such that it would take a longer period of time for the surviving spouse to determine the value of the deceased spouse’s estate and thus, whether it makes sense for him or her to take under the will or to elect for equalization.
Outright Gift Versus Trust. Sometimes there are non-monetary reasons why a surviving spouse may decide to elect for equalization. Generally, there are two ways to provide for a beneficiary through a will, an outright gift or a trust. When a surviving spouse receives an outright gift, he or she can do with the money as he or she wishes. When a surviving spouse’s share of the estate is left to him or her in trust, the trustee often has complete discretion to determine when and how much the spouse will receive from his or her share of the estate. A surviving spouse may decide to elect for equalization, even where he or she would receive more under the will than upon separation, so that he or she can receive a lump sum cash payment rather the uncertainty of a his or her trust interest.
Calculating Net Family Property. The calculation of a spouse’s net family property is not always as simple as determining the spouse’s assets (less liabilities) at the date of marriage breakdown (i.e. separation or death). With some exceptions, the value of a spouse’s assets (less liabilities) at the date of marriage is deducted from that spouse’s net family property. Other categories of assets, such as gifts or inheritances received by a spouse during the marriage, are often excluded assets and are not included in the calculation of that spouse’s net family property. Further, the matrimonial home is treated uniquely in the equalization process. If a spouse came into the marriage owning a home which subsequently became the spouses’ matrimonial home, the pre-marriage value of the home cannot be deducted from the owner spouse’s net family property (unless otherwise provided in a marriage contract between the parties).
In Ontario, married spouses have certain rights at law which limit our ability to dispose of our assets as we see fit. If your spouse feels that his or her entitlement under your will is insufficient, he or she can elect to treat your death as a marriage breakdown and instead receive what he or she would have been entitled to had you separated. This issue often arises in second (or subsequent) marriages where the spouses have decided to keep their assets separate and apart, especially where there are children from a prior relationship. Do you have a spouse? Contact me today to discuss how your spouse’s right to elect for equalization can affect your estate plan.
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