I enjoyed presenting today on estate disputes and how to avoid them on the BC Almanac show on CBC Radio One, hosted by Mark Forsythe.

A link to the podcast is here or here.

One of the main reasons that intended parents choose anonymous sperm donors instead of donors they know is that the current law does not provide a mechanism for a sperm donor to formally relinquish legal parenthood, unless the intended mother has a partner who can adopt the child and the donor consents at the time of the adoption. Anonymity is currently the most simple and practical way to have some certainty that only the intended parent(s) will be recognized as the legal parent(s) of the child. I believe that any law reform relating to disclosure of donor information and identities in B.C. should include the creation of a mechanism for a sperm donor* to relinquish legal parenthood at the time of donation and prior to the conception of any child and for intended parent(s) to formally accept full parental responsibility.

At law, a donor is the natural parent of any child conceived using his sperm. A donor potentially has all the responsibilities and rights of a parent, including the right to apply to a court for custody or access and the responsibility to pay child support if the intended parent applies for support. The intended parent(s)* and a known donor may make an agreement that only the intended parents will have the responsibilities and rights of parenthood, and that the donor will consent to adoption if the intended mother has a partner, but such an agreement is not legally enforceable.

This is completely different than the reality in the adoption context. Under the B.C. Adoption Act, legal parenthood shifts from the biological parents to the adoptive parent(s). The law provides a legal  mechanism for the biological parents to relinquish their legal parenthood – by  consenting to the adoption – where the adoptive parent(s) agree to take on that responsibility. Once an adoption is complete, the adoptive parent(s) are the legal parents of the child, and the biological parents cease to be legal parents. This legal parenthood is reflected in all aspects of the law.

Although legally speaking there may be no difference between known and anonymous donors, in practice anonymity is a primary way that intended parents reach the same on-the-ground result as adoption. If a donor is anonymous, a single mother of a child born in British Columbia can declare that the father is unknown and no information about the father will appear on the birth registration. If the mother is in a relationship, the mother can include a co-parent on the registration (see http://www.vs.gov.bc.ca/births/breg.html ). The intended mother, and her co-parent if she has one, will effectively be recognized as the child’s legal parent(s).

A recent B.C. Supreme Court case would require the B.C. legislature to extend to donor offspring the same rights to information about their biological offspring as adoptees, thereby stripping some of the anonymity from sperm and egg donation (see my blog post “BC Court declares an end to anonymous sperm donation” about Pratten v. British Columbia (A.G.)). The case highlights the mechanisms that allow adoptees to obtain information about their biological origins, particularly as adults.

What is not discussed in the case – because it was not the question before the courts – is that the information sharing mechanisms of adoption only work because they exist along with the shift in legal parenthood which is the heart of adoption. Once an adoption is complete, adoptive parents have some certainty about their status as the only legal parents of the child. This is recognized as being in the best interests of the children. No (or only very rare) adoptive parents would adopt children in B.C. if their parental status was not certain.

I would argue that creating a legal mechanism for a donor to relinquish legal parenthood at the time of donation, prior to conception, in favour of the intended parent(s) is an essential part of any law reform dealing with gamete donation. This could include a mechanism for the intended parent(s) using donated sperm to formally accept full parental responsibility. This would create certainty about legal parenthood and reflect the intention of donor(s) who choose to assist others to have children but never planned to parent those children. It would provide some comfort to donors about the implications of any law reform providing for more open information disclosure. It would encourage more people to consider using known donors or being known donors. For the children conceived by sperm donation, predictability and stability of the intended family unit in childhood and the increased ability to obtain information about their biological origins, including identity disclosure in adulthood, are in their best interests.

* This post deals with sperm donation, but the mechanism could also apply to egg donors.

There is a lack of a common definition of a family business but it is generally considered to be a business with two or more family members who have financial control of the company and there is some intent to transfer the business to the next generation. Over 90% of family businesses in Canada are family businesses.

Family businesses employ approximately six million Canadians and an average family business employs approximately 18 employees.  The total annual sales of Canadian family businesses are estimated to be $1.3 trillion.

Family businesses are often reflected as a system of three intersecting circles: the business circle, the family circle and the ownership circle.

The most successful family businesses have a balance and clear boundaries between the three circles with professional business management, responsible ownership and a harmonious family culture.  Assisting families to successfully manage the three spheres presents difficult dilemmas.

How do you balance individual desires and differences with the interests of the family and the development of a shared vision?  Are the interests of the business or the family more important?  How do you celebrate tradition and successes of the past while focussing on the future and a rapidly evolving business climate?

What does it mean to be a successful business owner and how does that differ if you do or do not have a role in the family or business management circles?

How does the business successfully transition from the founding entrepreneur, to the sibling partnership to the cousin consortium stage?

Succession is the greatest long term challenge that most family businesses face.  Less than one third of family businesses make it to the second  generation and only approximately 13% make it to the  third generation.   The failure to plan and manage succession well is the greatest threat to the survival of a family business.  This not only has significant impacts on the hopes, dreams and wealth of individual family members but also on the greater economy as a whole given the pivotal role family businesses play.

The most successful succession plans involve careful planning over many years, and it is the CEO’s responsibility to initiate and manage the process in a timely manner.  The CEO must develop a strategic business plan, create a process to identify and choose successors and train potential successors.  The CEO must ensure that an adequate estate plan is put in place.  The CEO must prepare the family for succession, often through the development of a family mission statement that elucidates the family’s relationship with the business.  The CEO must ensure that the next generation of owners is educated on how to be effective owners and to function well as a co-ownership team.  The CEO also needs to focus on preparing for a financially secure and enjoyable retirement or second career.

Given how high the stakes are and its pivotal role in the future of the individuals involved and the business itself, the succession process can be filled with tension and conflict between individual and collective family, business and owner stakeholders.

One way to manage the complexities of the family business succession process is through professionally mediated family meetings.  A professional mediator can assist by convening the meeting including determining who will participate and obtaining buy in for the process from all the parties; assigning roles and responsibilities including setting the agenda and ground rules; facilitating group problem solving including involving appropriate experts; reaching and recording agreement; and holding parties to their commitments including monitoring changing circumstances and arranging to reconvene as necessary.

Whatever the purpose of convening a family meeting, the process of gathering as a family to communicate in a structured way can encourage members to act on important and shared values, with valuable results for both the business and the family alike.  Family meetings also often spark a desire to codify a family constitution or mission statement articulating the family’s values and the mechanism by which they are expressed in the business, the family and the community as a whole.

Succession may be the most difficult life cycle of a business, but it also has the highest rewards.  Why not start today.

As an adoptee who has reconnected with her birth family, the mother of a donor child, and a lawyer with a particular interest in assisted reproduction, I was very curious to read the B.C. Supreme Court’s new and landmark decision on the rights of donor offspring: Pratten v. British Columbia (Attorney General), 2011 BCSC 656.

Prior to this decision, children conceived in B.C. using donated sperm or eggs had no right to any information about anonymous donors, especially the donor’s identity.

Olivia Pratten, a journalist who was conceived in B.C. using the sperm of an anonymous donor, successfully argued that the sections of the B.C. Adoption Act and regulations which provide a mechanism for adoptees to obtain information about their biological origins are discriminatory because they are underinclusive and don’t provide equivalent rights to people who were conceived using the sperm (primarily) or eggs of a donor (“donor offspring”).

The court found unconstitutional provisions of the Adoption Act* that:

• require the medical and social history of the child’s biological family be collected during the adoption process and then preserved
• require that prospective adoptive parents receive a copy of that information
• allow for openness agreements between adoptive parents and relatives of the child
• allow disclosure of identifying information if necessary for the child’s safety, health or well-being
• (for adoptions prior to 1996) allow an adoptee who is 19 years or older to obtain a copy of their original birth registration (which usually contains at least the birth mother’s name) and adoption order unless the birth parent registers a veto preventing disclosure
• (for adoptions after 1996) allow an adoptee who is 19 years or older to obtain a copy of their original birth registration and adoption order, except the adoptee must sign an undertaking not to contact the birth parent if the parent registers a no-contact declaration
• provide for similar identity disclosure to birth parents of adoptees over 19
• provide a registry for adult adoptees and other relatives to exchange identifying information (e.g., siblings who did not grow up together)
• set up government services to assist searches and reunions

The court accepted evidence that donor offspring experience the same sense of loss and incompleteness as adoptees, that their lack of knowledge  causes psychological harm, that their health may be compromised by a lack of family medical history, and that they risk unwittingly being romantically involved with a half-sibling. The court also found that the private sector (which increasingly provides detailed medical and social history of donors for intended parents) is no substitute for government regulation, and regulation must come from the provincial government.

The court found that the Adoption Act violates the equality provisions of s. 15 of the Canadian Charter of Rights and Freedoms because it distinguishes between children who are disassociated from a biological parent based on the manner of their conception, and this distinction disadvantages donor offspring who have the same need for information about their biological origins and suffer the same harm from lack of information as adoptees. The court found that donor offspring are the victims of stereotypical thinking that they don’t have the same needs as adoptees or that it is acceptable to ignore their needs. The violation was not a justifiable limit on rights under s. 1 of the Charter.

However, the court did not find that the lack of regulation requiring medical practitioners to obtain and preserve medical and social history was a violation of the right to life, liberty and security of the person under s. 7 of the Charter because s. 7 does not create positive rights, such as the right to know one’s origins. That is, s. 7 can be used to attack legislation that deprives a person of a right but not to require that legislation be created to advance a right.

The court suspended its declaration of invalidity of the Adoption Act provisions for 15 months to allow the Province to enact legislation that remedies the discrimination. If the decision stands, anonymous gamete donation will no longer exist in B.C. It remains to be seen what new law the Province will enact for donor offspring.

I have long thought that the reformed adoption law strikes the best balance possible between the  various needs and concerns of children, birth parents and adoptive parents by generally preserving privacy during childhood if desired by the parents and then allowing information disclosure in adulthood, subject to a veto for birth parents who gave up children on the understanding that their identities would remain secret (although the result of this can be very painful for the adult children whose birth parents do choose to register a veto).

I know from personal experience that obtaining information about one’s biological origins and the possibility of knowing one’s biological parents goes a long way to completing one’s sense of identity and place in the world. No matter how close one is to the family they grew up with, there can be great satisfaction in seeing one’s physical characteristics physically reflected in others (something most people talk a lot about and take for granted) and seeing which character traits are biologically innate and which develop through family culture and influence.

This balance seems to me to apply well to donor offspring. When I chose to become the mother of a donor child, I deliberately chose an ‘identity disclosure’ donor. During childhood, we have fairly detailed non-identifying information about the anonymous donor (several pages worth, including medical history and two photographs). When my child turns 18, we should be able to obtain some form of identifying information, which is something the donor specifically agreed to.

This seems to me a fair default system, and one which hopefully will not discourage too many potential donors. The one missing piece that would remain, which I will discuss in my next blog post, is a mechanism – a cornerstone of adoption – for donors to relinquish legal parenthood in favour of the intended parent(s).

*This is not intended to be a complete list or summary, which is found at Schedule A of the decision

Terminal City Club
837 West Hastings Street
Vancouver, BC V7L 0B1

We invite you to join Monique Shebbeare and Angelique Poutissou of Heritage Law for lunch and a review of the current law of incapacity in BC.

Monique will discuss the essentials of incapacity planning, including upcoming changes to the law commencing on September 1, 2011 with respect to advance directives, enduring powers of attorney and representation agreements. Angelique will discuss what happens if someone becomes mentally incapable and they haven’t planned for it or there is a dispute, including the process of applying to the Supreme Court under the Patients Property Act to appoint a committee.

Click here to register

Entertainment media websites are reporting that Jackie Cooper, a Hollywood child star and a star of the Superman movies, had a “poison pill” clause in his will which apparently states that if anyone challenges his will, he/she will receive only five dollars.  Whether or not Mr. Cooper’s will contained the clause, or whether it is valid, is yet to be determined, but begs the question of what would happen if the will was subject to the law of British Columbia?

In British Columbia, the use of such a “poison pill” clause was found to be against public policy by the British Columbia Supreme Court in the 2003 case of  Bellinger v. Nuytten Estate, 2003 BCSC 563.  In that case, the deceased, Dorothy Nyutten, had expected one of her children to challenge her will.  Her will included the following clause:

“7. IT IS MY FURTHER DESIRE, because of an expressed intention of one of the legatees to contest the terms of this my Will, that should any person do so then he or she shall forfeit any legacy he or she may be otherwise entitled to.”

Two of Ms. Nuytten’s sons made various challenges, including the transfers  of assets during her lifetime, and one son claimed that Ms. Nuytten had not made adequate provision for him under the Wills Variation Act.

The Court found that because the forfeiture clause  did not include a gift-over, it was a mere threat (“in terrorem”) and was void.    The Court further stated that it was against public policy to prevent the spouse and children of the deceased, who are specifically able to challenge a will under the Wills Variation Act, from challenging the provision made for them in a will.

The greatest hurdle to handing down a cottage successfully is poor estate planning.

There are two central issues to be aware of:

1. Capital Gains Taxes

Taxation issues lie at the root of many cottage bequest problems.  The biggest issue that that capital gains taxes must be paid when the cottage is sold or gifted, either during the parents lifetime or after their death.

Estimate the capital tax payable

a. What is the fair market value today?

Start by figuring out the present fair market value (FMV) of the cottage. Check recent sales in the area, ask a realtor for an opinion of value, or pay for an appraisal.
What is the cost base?

b. Find the cost base of the cottage. If you acquired the cottage after 1971, the value as of the date of acquisition is the cost base. If you acquired it before 1971, then the value as of December 31, 1971, is the relevant amount. If you cannot get this value by yourself, appraisers can research comparable sales.

c. How many capital improvements?

Next, add up the capital improvements made to the cottage or the property since you acquired it. This would include new docks or additions, replacing the roof or windows, installing a new well or pump. You can’t include simple repairs, maintenance or the value of your own hard work in improving the cottage, only the amount actually paid to others.

d. What is the adjusted cost base?

Now add the cost base and the capital improvements. This will produce the adjusted cost base (ACB). (If you made use of the capital gains tax exemption before it was taken away in 1994, then you can get the ACB from the tax return in 1994. The process above still applies, but from 1994 instead of from the date of acquisition.)

e. What is the total capital gain?

Subtract the Adjusted Cost Base from the Fair Market Value. This gives you the total capital gain.

f. What is the tax payable?

Divide the capital gain figure by half to get the taxable capital gain, then again by half to approximate the tax actually payable.

Take steps to reduce the capital gains tax payable

• Transfer it to children  in stages rather than all at once (i.e. 20% a year for five years) to reduce capital gains taxes payable  (and also prevent a possible clawback in OAS)

• Transferring it via your will may result a higher total amount of capital gains payable, but there may be more sources of payment available

• Use the principal residence exemption (you can choose to designate your cottage instead of your house as a principal residence for a specified period). You and your spouse are able to claim only one principal residence per tax year.  You don’t need to identify a principal residence until the residence is sold or ownership is otherwise transferred.  This means the designation can be applied in hindsight, by reviewing the history of the changes in the value of the principal residence and cottage and moving it between them for particular years to minimize the capital gains impact.  This can be done as part of settling an estate or when selling a property.

Determine how to fund the capital gains tax liability

• Savings and investments
• Life insurance (adult children can pay premiums)
• Have the beneficiary children pay the capital gains taxes triggered on inter vivos transfers
• Use the cottage itself to fund the capital gains tax (subdivide and sell a lot; register a mortgage that the children can pay off over time)

Ongoing Management: the Use, Operation and Expenses of the Cottage

How will the children use, operate and fund the expenses of the cottage?

Among the questions to be answered are:

• Can any child use the cottage any time, or will there be periods of exclusive use?
• Who will open and close the cottage?
• Who makes sure the bills are paid?
• Who is responsible to pay the bills, whether it’s replacing the septic system, paying the municipal taxes or repairing the roof.  How do you deal with differing financial resources of the children?
• Who decides if improvements or additions are to be made?
• If a child dies, does his or share of the cottage pass to the spouse and children, or does ownership continue with the surviving siblings only?
• What happens if a child divorces or goes bankrupt?
• What happens if one or more of the children wants to sell?
• What happens if the children stop getting along and/or reach an impass?

A Co-Ownership Agreement, negotiated while the parents are alive and able to assist, can be invaluable in retaining family harmony and enabling successful second- and third-generation ownership.

A Co-Ownership Agreement is essentially a business partnership agreement. Some issues addressed are identical, like decision-making procedures and disposition of interests by the partners. Other matters are unique to cottages and your own family’s needs and desires.

Vehicles to Transfer the Cottage to the Next Generation:

Retain Sole/Joint Ownership by Parents & Transfer Via Will

• Best for simple succession situations
• Pros: wills are simple and inexpensive to create; parents retain ownership and control during their lifetime
• Probate fees (approximately 1.4%) will be payable on the assessed or market value of the cottage
• Capital gains taxes will be payable on death
• How to deal differences in children’s incomes and financial resources: leave a certain sum of capital in trust in your wills to be used exclusively for cottage purposes ( referred to as a testamentary trust).   It enables all or a significant portion of the cottage operating costs to be paid from the trust, rather than from the childrens’ own pockets. Furthermore, if there is a need for a substantial expenditure, then the trust capital can be encroached upon for that purpose, avoiding a financial emergency. The use of a testamentary trust compensates for the differences in economic positions between the children, to the benefit of all.

Inter Vivos Gift or Sale to Children

• Best if parents are ready to give up ownership and control of their cottage now
• Pros: no probate fees are payable; children can assume ownership costs and responsibilities; additional capital gains deferred to recipients
• Gifting is simply transferring an interest in the cottage without requiring payment.
• You cannot save on capital gains taxes by gifting. For tax purposes, the property is deemed to pass at fair market value. You must report the gift transfer on your next income tax return as a taxable disposition using the fair market value (FMV), even though you actually received no money. This is one of the impediments to cottage succession – even though the parent may choose to give the cottage away, the tax costs are the same as a real sale, and the parent does not have sale proceeds to pay the tax.
• Property Transfer Tax may be payable (1% on the first $200,000 and 2% on the remainder) of the assessed value, whether gifted or sold

When a related individual transfers a recreational residence , you may be exempt from paying PTT.
The following people are considered to be a related individual:

• your spouse, child, grandchild, great-grandchild, parent, grandparent or great-grandparent,
• the spouse of your child, grandchild or great-grandchild, and
• the child, parent, grandparent or great-grandparent of your spouse.

Your spouse is:

• a person who you are married to, or
• a person who you are living and cohabitating with in a marriage-like relationship, provided that you have been living and cohabitating in that relationship for a continuous period of at least two years. This includes a marriage-like relationship between people of the same gender.

The following are examples of people who are not considered to be a related individual: your sister, brother, uncle, aunt, niece or nephew.

A property is considered to be a recreational residence if the following four criteria are met.
1. Before the transfer, the person transferring the property to you (the transferor) usually resided on the property on a seasonal basis for recreational purposes. Please note: When a trustee is involved in a transfer, the trustee becomes the transferor and this requirement applies instead to the settlor or the deceased.
2. The property is classified as residential by BC Assessment. The property includes the land and any improvements on the land (e.g. buildings).
3. The land is 5 hectares (12.36 acres) or smaller.
4. The property has a fair market value of $275,000 or less.

• Consider retaining a life interest in the cottage, whether gifted or sold (can be registered on title to the cottage in the Land Title Office)
• A  life interest provides several advantages to the parents. One is that it entitles them to use the cottage for their lifetime as of right, not rely upon the continued goodwill of the child who now owns the cottage. Another is for the parents to retain a measure of control. With a life interest, the child cannot “cash in” on the cottage by selling it or mortgaging it, without the involvement and consent of the parents. This would defeat the intention of keeping the cottage for family purposes. If and when the parents are no longer interested in using the cottage, or are no longer concerned that a child may cash in on it, then the life interest can be released.

Transfer to a Trust

• Best if parents wish to leave the cottage to children without the costs of probate for their estate, but do not want to relinquish control
• A possible solution to leaving a vacation property to more than one family member is to transfer it to a trust.  In addition, a trust affords benefits such as creditor protection, the ability to defer capital gains taxes on capital assets and centralized asset management.

Multiple Beneficiaries, Centralized Management and Creditor Protection

• The trust can be structured to govern who is entitled to benefit from the property, how it is managed and what to do if the trustees can’t agree.
• The trustees of the trust could be one or more individuals who would have the power to make certain decisions, and the beneficiaries could include not only children, but potentially grandchildren or other relatives.  An advantage to a discretionary trust is that none of the beneficiaries have any vested right to the property – they will only be entitled to use the property as the trustees allow and/or when the trustees decide to distribute the property to them.  In the meantime, if a beneficiary dies, there will be no tax liability resulting from their interest in the trust.  If a beneficiary suffers a marriage breakdown or experiences creditor issues, they will have a strong argument that they have no interest in the vacation property, and that it therefore should not be subject to asset division or seizure.

Tax Considerations

• When an asset is transferred into a trust, the transfer will trigger a deemed disposition of any unrealized capital gains (except in the case of a spousal, alter ego or joint partner trust).  Once the property is transferred into a trust, it can grow in value in the trust and the death of a beneficiary will not trigger any tax liability.
• There will be a “deemed disposition” of the property held in the trust every 21 years thereafter.  This means that any unrealized capital gain in the value of the recreational property will be triggered on the 21st anniversary of the trust and the tax will have to be paid (unless the trust property is distributed to a successor trust or Canadian resident beneficiaries prior to the 21st anniversary).
• The property in the trust will not be subject to probate fees, currently approximately 1.4% of the gross value of the estate.

Primary Residence Capital Gains Exemption Issue

The Income Tax Act allows a home owned by a “personal trust” to qualify as a principal residence if the recreational property was ordinarily inhabited in the calendar year ending in the relevant fiscal year of the trust by an individual beneficiary of the trust or a child, spouse or former spouse of such a beneficiary. A beneficiary who satisfies this test is referred to as a “specified beneficiary”.

A personal trust is defined by subsection 248(1). Generally, a personal trust is either a testamentary trust or an inter vivos trust where all of the beneficiaries received their interests as gifts. In order to limit the types of taxpayers who can benefit from the principal residence exemption in respect of a home held through a trust, a number of limitations are placed on the ability of a personal trust to claim the benefit of the exemption.
Pursuant to paragraph (c.1) of the definition of “principal residence” in section 54, a taxpayer that is a personal trust may designate a property as a principal residence if:

• the designation is made in the prescribed form and manner;
• each individual who in the calendar year ending in the taxation year, is beneficially interested in the trust and ordinarily inhabits the housing unit, or has a spouse, former spouse or child that ordinarily inhabits it, is listed in the designation;
• no corporation other than a registered charity or partnership is beneficially interested in the trust at any time in the year;
• no other property has been designated for the year as a principal residence by a specified beneficiary of the trust, by the beneficiary’s spouse (other than a spouse who was throughout the year living apart from and was separated pursuant to a judicial separation or written separation agreement from, the beneficiary), by a person who was the beneficiary’s child (other than a child who was during the year a married person or 18 years of age or over) or where the beneficiary was not during the year a married person or a person 18 years of age or over, by a person who was his or her mother or father, or his or her brother or sister who was not during the year a married person or a person 18 years of age or over.

The designation which must be filed by the trust must specify each individual who was a specified beneficiary of the trust in the calendar year ending in a relevant fiscal year of the trust. A designation by the trust is not valid if any of the following persons have designated any other property as their principal residence:

• a specified beneficiary of the trust;
• a spouse of a specified beneficiary unless the spouse is living apart from the specified beneficiary pursuant to a judicial separation or a written separation agreement;
• a child of the specified beneficiary unless the child is at least 18 years old or married;
• a parent of the specified beneficiary unless the specified beneficiary is either married or at least 18 years old; or
• a sibling of the specified beneficiary unless either the sibling or the specified beneficiary is either married or at least 18 years old.

**Note: A property which is validly designated as the principal residence of a trust is deemed to have been designated by every beneficiary of the trust as that person’s principal residence for the calendar year ending in the relevant fiscal year of the trust. This rule prevents the trust beneficiaries from designating any other property as their principal residence for the year.

Transfer to a Family held Non-Profit Organization

• Best for those with a large cottage property suitable to being shared by an extended family
• Enables successive generations of family to use the cottage without incurring capital gains tax or probate fees
• Initial transfer will likely trigger a capital gain which in the case of a large property could be massive
• Demographics can force the sale of such compounds: too many members and too little space
• Expense of ongoing accounting and legal fees

Often marketed as a solution to allow a homeowner over age 60 to remain in their home while borrowing the money needed for improvements or living expenses, reverse mortgages can present a nasty surprise for the borrower’s estate. A relatively small amount of money borrowed can become a surprisingly large debt. Because the debt is not paid until the house is sold or the borrower dies, the borrower may not suspect during their lifetime just how much they owe. This can significantly reduce the inheritance that is left to loved ones, and even in some cases bankrupt or near bankrupt an estate (even if there is enough equity in the home to cover the reverse mortgage itself). If the borrower has to sell during their lifetime to move into long term care, they may be shocked by how little money is left from the home proceeds to fund that care.

I have seen $40,000 borrowed become almost a $200,000 debt of the estate – 5 times the original amount borrowed and almost the entire value of the borrower’s condominium which was the primary asset of the estate. By the time the reverse mortgage, funeral expenses, probate fees, and basic estate administration costs were covered, there was just enough money left to cover a relatively small Visa debt and no inheritance left for the beneficiaries named in the Will.

The reason is compound interest. The nasty surprise above would come about with an interest rate of 11% compounded over 15 years. To take another example closer to today’s relatively lower interest rates, and assuming compounding only once annually:

Year 1 – $50,000 x 5% (a relatively low interest rate on a reverse mortgage) = $2,500

Year 2 – $52,500 x 5% = $2,625

Year 3 – $55,125 x 5% = $2,756.25

Year 4 – $57,881.25 x 5% = $2,894.06

By Year 5, the total interest is $13,814 (28% of the original amount borrowed), and total amount owing is $63,814.

By Year 10, the total interest is $31,445 (63% of the original amount borrowed), and total amount owing is $81,445.

By Year 15 the total interest is $53,946 (108% of the original amount borrowed), and total amount owing is $103,946. All of this assuming that the interest rate does not rise during that 15 year period.

A potential borrower can avoid nasty surprises by doing their research, considering all the options, considering all the scenarios that might occur, getting objective advice from a financial expert and doing some calculations to get a realistic idea of the cost of borrowing.

The named executor of a person who has died will want to know if there is a reverse mortgage and, if so, immediately get a full statement for the mortgage. If it looks like there might be any possibility of a bankrupt estate, the named executor will want to get full information and legal advice about the options before taking on the role of executor.

Next installment: What happens if an estate is bankrupt?

Join Karen Redmond and Nicole Garton-Jones of Heritage Law for lunch and a review of important upcoming changes to family law, wills and estates and incapacity legislation in BC.

Karen Redmond will review proposed significant changes to British Columbia’s family law legislation as set out in the Ministry of Attorney General White Paper on Family Relations Act Reform.

Nicole Garton-Jones will review the Wills, Estates and Succession Act (WESA), expected to come into effect in middle to late 2011. It repeals and brings together the current Estate Administration Act, Probate Recognition Act, Wills Act, and Wills Variation Act and also amends dozens of other provincial statutes.  Nicole will also outline changes to incapacity law as set out in the Adult Guardianship and Planning Statutes Amendment Act, 2007 (Bill 29), which will come into force on September 1, 2011.

Pinnacle Hotel at the Pier

139 Victory Ship Way

North Vancouver, BC

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