Disclaimers and Assignments – When Beneficiaries Don’t Want Their Gift

Today’s blog discusses what happens when a beneficiary doesn’t want their gifts. Ian Hull and Jordan Atin discussed this topic on a recent eState Planner Academy’s advanced webinar.

Disclaimer

Under common law, a beneficiary cannot be forced to accept a gift. A beneficiary can voluntarily disclaim a gift only after a testator’s death.  Court’s have found attempts to disclaim future interests (pre-death) to be invalid.  A gift cannot be disclaimed if a beneficiary is bankrupt.  However, in some cases, where the beneficiary is not an undischarged bankrupt, gifts are disclaimed to avoid creditors.  A beneficiary cannot accept than disclaim, the gift must be disclaimed before unequivocally accepting it and before obtaining any benefit from it.  In certain cases, Courts have divided a gift between income and capital to allow for a disclaimer of part of the gift.

Disclaiming a gift can have tax consequences, get proper tax advice before disclaiming a gift.

Use of Disclaimers in litigation

In the course of a settlement of litigation, a beneficiary may agree to disclaim a gift, but where there is a future gift, it may not have vested yet in the beneficiary at the time, so it is important to be alert to these scenarios.  The webinar discussion was limited to voluntary disclosure, where there is consideration received in exchange for the disclaimer, this would not be voluntary.

No formality for a disclaimer, can be done orally, by conduct, or in writing.  Mostly it is done in writing. Although disclaiming a gift is often permanent, there are some certain circumstances in which they can be retracted.

Effects of a Disclaimer

There are certain general effects of a disclaimer being made. The gift is void ab initio as if the gift had never been made. There is no transfer of property interest to the disclaiming beneficiary, so nothing to convey. There is no active conveyance. The failure of the gift relates back to the death of the testator.  This is important for the vesting rules and creditor claims. The disclaiming beneficiary does not get to decide who receives the disclaimed gift instead of them.  Disclaimed legacies or bequests fall into the residue (SLRA s.23).  If the beneficiary is given a percentage of the residue, there could be a partial intestacy.  If a beneficiary is an intestate heir and disclaims, the heir would be deemed to have predeceased, likely increasing the shares of other intestate heirs. 

Disclaimers, by a life tenant, in a trust situation are different.  One common situation might occur where a spousal trust is set up and the spouse wants to get the capital to the kids before the spouse’s death.  Two issues arise here: 

  1. Do the issue receive the residue immediately upon disclaiming (ie. is their intest accelerated)  or on death of the spouse?  
  2. When do you determine the  members of the class?

Doctrine of Acceleration

Whether the doctrine of acceleration will apply is a question of interpretation.  It is unclear how the Court will interpret the intention of the testator. Courts will look at the presumption of acceleration and  consider whether acceleration would defeat the testator’s intention of giving the beneficiary the capital only if living at a specified date?

Consider who this affects, typically the unborn.  If any of the children predecease the life tenant, their kids typically inherit, but if the interest is accelerated, the parent inherits because they are then alive.  The Office of the Children’s Lawyer represents unborn and unascertained beneficiaries and typically argues against acceleration since they want to wait until the spouse dies and figure out who is then alive. 

Case law

In  Re Jacques, the Court held that the presumption of acceleration should not apply because the testator’s intention was that beneficiaries would not get the inheritance until the life tenant’s death. This decision is viewed as an older approach by Courts to the doctrine of acceleration.

A newer approach by the Courts is seen in Brannon v. British Columbia (Public Trustee) where the Court held that acceleration is not excluded by words defining the time of distribution by reference to the natural ending of the particular estate, for instance, a direction for distribution upon the death of the life tenant or by a direction that distribution is to be made among persons then living.  This case has been followed many times and is a helpful case if seeking acceleration.

Some of the factors that have been considered by the Court in determining whether to allow acceleration are:

  1. Did the testator have more remote issue when the will was made? If not the testator was likely concerned primarily with her children and not with more  remote issue; 
  2. Was the estate small? If so it was unlikely that the testator had dynastic concerns; 
  3. If more remote issue were born during the testator’s lifetime but after the Will, did the testator change the Will to prevent acceleration; 
  4. Was there any other voluntary trigger for the end of the life interest such as remarriage. If so, the unilateral ability to end the life interest suggests that acceleration was considered; and
  5. Was the power to encroach limited for the life tenant. If not, it suggests that maintaining the capital for future generations was not a priority.

Why Disclaim?

  1. Wanting to accelerate gifts to others,
  2. Moral reasons,
  3. Disclaim when the beneficiary has creditors. This can’t be done when the beneficiary is bankrupt.  Subject to fraudulent conveyance rules, if the beneficiary has creditors and is not bankrupt, the caselaw seems to suggest they can disclaim in certain circumstances. 

A Drafting Tip

It is important to get the testator to specify their intentions in their will in regards to a disclaimer and acceleration.  eState Planner already has a default provision that includes the following provision: ‘A beneficiary who disclaims a benefit under this Will (the “disclaimed benefit”) shall be deemed to have died before me for the purpose of interpreting the provisions of this will which govern the disclaimed benefit.

eState Planner Academy hosts advanced topic webinars every Thursday at 12:30 (ET). You can view the recording here.

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