ESTATES & NFP: How your estate will be impacted by your spouse’s statutory rights
The Impact of the Family Law Act on Estate Administration
The administration of estates became very complicated with the enactment of Ontario’s Family Law Act (“FLA”) in 1986. Before that, the lawyer was to advise an estate trustee that the only statutory claim to interfere with the testate or intestate distribution of the deceased’s assets was one brought by a “dependant” under Part V of the Succession Law Reform Act (SLRA), on the grounds that the deceased had not made “adequate provision” for the claimant (usually a dependant). With the FLA in operation, the estate trustee is now also to be prepared for a potential property claim by a surviving married spouse.
Net Family Property (NFP)
A solid grasp of the rules in Part I of the FLA is essential to understand the nature of the surviving spouse’s claim and how it affects the estate trustee’s responsibilities and authority. “Net Family Property” (“NFP”) is the key concept underlying those rules, which is defined in subsection 4(1) of the FLA. In a nutshell, the NFP of a spouse is intended to be a measure of his or her increase in net worth during the marital relationship. Both the spouses calculate his or her net worth as at the “valuation date” (such as the date of separation etc…) and also as at the date of marriage. The difference between the two values, which obviously cannot be less than zero, is that spouse’s NFP.
For a number of reasons, this description is simplistic:
1) It happens that certain property owned by a spouse on the valuation date is not in the calculation. Such property is referred to as “excluded property”, a misleading term because it suggests that the property itself is somehow immune from any court order.
2) In calculating NFP, the matrimonial home is given a special place. Though the value of all other property owned by a spouse at the date of marriage constitutes a credit on the spouse’s opening balance, the full value of a matrimonial home owned by that spouse at the date of marriage has to be included in calculating his or her NFP, provided it is still a matrimonial home at the date of separation.
3) Owing to an expanded definition of “property” in subsection 4(1) of the statute, certain categories of property that would not otherwise be thought of as being owned by a spouse are treated, for purposes of Part I of the FLA, as if they are in fact owned by the spouse. For instance, if a spouse is a trustee, either alone or with another person, of a trust authorizing the trustee(s) to distribute trust capital to that spouse, the value of the trust property is treated as if he or she owned it.
Exclusions from NFP
Due to its nature or its source, it is not uncommon for certain property, despite being owned by a spouse on the valuation date, to not be included in calculating the spouse’s NFP, the categories of so-called “excluded property” are described in subsection 4(2) of the FLA. Whoever claims an exclusion, the burden of proving entitlement rests with the person doing so. In view of this, it is essential to maintain accurate and thorough records of the source of property and, where applicable, the transformation(s) it has undergone between the time of its original receipt and the valuation date. It could be quite a problem for the personal representative of the deceased spouse, but, then the information gathering exercise is aided by the statutory requirement that each party to an application under subsection 7 of the FLA provide the other with the financial information necessary to calculate NFP.
It is defined in subsection 4(1) as the earliest of the following dates:
1) The date the spouses separate, with no reasonable prospect that they will resume cohabitation;
2) The date a divorce is granted;
3) The date the marriage is declared a nullity;
4) The date one of the spouses commences an application based on subsection 5(3) (improvident depletion) which is subsequently granted; and
5) The date before the date on which one of the spouses dies, leaving the other spouse surviving.
Observations on the points above are:
- Interestingly, the valuation date in the case of the death of one spouse is not necessarily the day before that spouse’s death. If, for instance, the spouses have separated prior to the spouse’s death, the valuation date will be the date of separation. For reference purposes, it is assumed that the valuation date is the day before the deceased spouse’s death, provided the matter of the discussion is something else.
- When the spouses are dead simultaneously, neither spouse’s estate will have a claim against the estate of the other because there is no surviving spouse. If both spouses die under circumstances making it uncertain who survived the other, none of the spouses’ respective personal representatives is in a position to establish entitlement to an equalization claim
- There is one reason why the day before the date of death was chosen instead of the actual date. It was held that if the date of death were specified, the value of a deceased spouse’s interest in property owned in joint tenancy with a third party would, due to the third party’s right of survivorship, be excluded from the deceased spouse’s NFP.
- Since the valuation date is deemed to be the day before the deceased spouse’s death, proceeds of any insurance policy on his or her life will not yet be payable. So, even though any cash surrender value attributable to the policies on the day before the insured spouse’s death will be included in the owner spouse’s NFP, the policy proceeds would not appear to be included in the NFP calculation of either spouse.
For all your Family Law matters and how best to resolve your estate issues or that with a spouse contact the lawyers at Levy Zavet PC (Levy Zavet).