Restrictions on Distribution of Estate
After the death of a spouse, no distributions can be made out of the estate during the six month period immediately following the deceased spouse’s death without:
1) Written consent of the surviving spouse; or
2) Authorization of the court, the Family Law Act (“FLA“), section 6(1).
If the personal representative receives notice that an application, for extension, has been made under Part I of the FLA, no distributions can be made out of the estate without:
1) Written consent of the applicant; or
2) Authorization of the court, FLA, section 6(15).
If the court extends the time for a spouse’s application based on section 5(2), any property distributed by the personal representative before the date of the order and without notice of the application is not brought into the calculation of the deceased spouse’s Net Family Property (“NFP”), FLA, section 6(16).
The precise meaning of “not bringing such property into the calculation of the deceased spouse’s NFP” is not quite clear. It also raises a host of issues, such as: a) Creation of an additional category of excluded property; b) Its impact on the order of distribution of assets out of the estate after the six-month prohibition expires; and c) It puts an onus on the personal representative to make distributions as soon as possible after the expiry of the moratorium. In fact, this provision has shortened the executor’s year to only six months. If the surviving spouse fails to elect and bring an application under s. 7 within the six month period, any distributions (out of non excluded property) will decrease the amount of the equalization claim, to the advantage of the beneficiaries under the will, if any, or the rightful heirs on an intestacy. Fulfilling all other legal obligations, the personal representative would be hurrying to make a speedy distribution as soon as possible after the expiry of the six-month prohibition period so as to reduce the value of the equalization claim by the surviving spouse.
No constructive notice is served on the personal representative when the surviving spouse files an election to make an equalization claim. The personal representative is under no obligation to inform himself or herself of the election. Therefore, a surviving spouse has to block distributions by the personal representative and bring an application under s. 7 on or before the expiry of the statutory six-month period or apply for a court order to suspend administration of the estate, FLA, section 6(20). If the surviving spouse requires more time to decide whether to make an equalization claim, the latter step would be appropriate.
Liability of Personal Representative
Disregarding the FLA rules, if a personal representative makes distributions out of the estate he/she will be liable up to the amount distributed in breach, for the amount of any shortfall in the estate assets available to satisfy the equalization claim, FLA, s. 6(19).
There could be two situations when the personal representative is tempted to ignore the six-month moratorium on distributions out of the estate:
1) The will leaves the deceased spouse’s entire estate to the surviving spouse; or
2) The benefits to the surviving spouse under the will are stated to be in addition to his or her rights under s. 5 of the FLA.
There could be two caveats to help the personal representative with respect to the matters above:
1) The domestic contract, if any, could be set aside under one or more criteria set out in the FLA, ss. 55(1) and 56(4); and
2) The will could be found to be invalid, say, on the basis of mental incapacity of the testator, undue influence, or the failure to observe the formalities of execution.
Exchange of Financial Information
Both the parties, on an application under s. 7 of the FLA, are required to serve on the other and file with the court a statement, verified by oath or statutory declaration, disclosing particulars of debts and liabilities as of, 1) The date of marriage; 2) The valuation date (as discussed earlier in prior articles); and 3) The date of the statement. Furthermore, any exclusions or deductions claimed in calculating NFP is to be stated in detail. Lastly, information regarding dispositions of property during the two years preceding the making of the statement or during marriage, whichever period is shorter, is required, FLA, s. 8.
In regards to dispositions of property, there are no claw back provisions in the FLA. If the property has been disposed of prior to the valuation date, there is nothing in the FLA that permits tracing of the property into the hands of third parties. This does not mean that the court is incapable of finding that the apparent disposition is a mere sham and a third party is simply holding the property as a bare trustee for the disposing spouse. If the transactions are not legally effective in transferring beneficial ownership to a third party, the court, as a remedy, can order for an unequal division of NFPs. Moreover, it seems that the court does not have authority to order payment in excess of 100% of the difference between the spouses’ respective NFPs.
Before you jump to acting as an Estate Trustee or as an Executor/ix of an Estate, contact the lawyers at Levy Zavet PC (Levy Zavet) to get proper instructions all the way through.