Andrew asked his friend Mary to be the executor of his Will. Andrew’s financial affairs were in order and his family life uncomplicated. Mary knew that if Andrew passed away the task would not be onerous. The duties of probating the Will, paying all debts and distributing the estate would take approximately a year or two at the very most. Based on her understanding of the responsibility Mary agreed to be the executor.

Shortly after making his Will, Andrew passed away. Andrew had been the executor of the Will of his late brother, Steven. To her dismay Mary discovered that if she becomes the executor of Andrew’s Will she will assume all of the executor’s responsibilities under Steven’s Will. She does not want to take on these responsibilities. The parties in Steven’s estate are in litigation and the beneficiaries are infants, resulting in responsibilities which will last for decades.

This unfortunate situation arises because of Section 64 of the Estate Administration Act which reads:

What can Mary do, now finding herself in this awkward position?

The only option available to Mary is to renounce the executorship of Andrew’s Will, which must be done before she commences her executorship duties. She did not bargain to take on the responsibility of Steven’s estate and thus has, on moral grounds, the right to renounce. This option is, of course, unsatisfactory to all and will leave Andrew’s estate in the difficult and costly predicament of having to appoint an alternate legal representative.

What could Andrew and Mary have done to avoid the problem created by Section 64 of the Estate Administration Act?

Firstly, before Andrew agreed to take on the executorship of Steven’s Will he should have ensured that Steven’s Will contained provisions so that an alternate executor is appointed if Andrew passes away before the administration of his estate is completed.

Secondly, because Steven’s Will failed to make provision for an alternate executor, Andrew could have rectified this by appointing Mary as his primary executor and selecting another person as an executor, whose role would be limited to all of the duties and responsibilities of Steven’s estate. In short, Mary would be appointed executor, take on all the duties and responsibilities of Andrew’s estate and the other person would also be appointed as an executor of Andrew’s Will but with his or her duties and responsibilities limited to administering Steven’s estate.

In summary, Section 64 of the Estate Administration Act has caused some testators grief. Before you take on an executorship you will be well advised to make the necessary enquiries with the testator to ensure that Section 64 will not come into play or if it is to come in to play then to make necessary provisions to meet everyone’s expectations.

Individuals with disabilities and their families face exceptional challenges that make sound estate and financial planning vitally important. Soon they will have a new tool available to them in the form of the Registered Disability Savings Plan (RDSP), a tax-free savings plan announced in the 2007 Federal Budget. Draft legislation relating to RDSPs was released on October 2, 2007, and the government of Canada indicates on its website that RDSPs will be available “as soon as possible in 2008”.

Establishing and Contributing to a RDSP

Once the RDSP legislation is passed into law, any individual who is resident in Canada and qualifies for the disability tax credit will be able to establish an RDSP for his or her own benefit. If the person with the disability is a minor or is not competent, the plan may be established by a parent or legal guardian.

As with other registered plans, the RDSP will have to be established with an issuer that is a regulated trust company. Investments in the plan will be subject to the same parameters that apply to investments in RRSPs and other registered plans.

After the RDSP is established, contributions to the plan may be made by any person. There is a $200,000 lifetime contribution limit but no annual limit. The RDSP is similar to a Registered Education Savings Plan (RESP) in that contributions are not deductible, but income earned in the plan on private and government contributions is exempt from tax.

Government Contribution Programs

RDSPs will be eligible for matching government contributions in the form of the Canada Disability Savings Grants (CDSGs) and may also be eligible for Canada Disability Savings Bonds (CDSBs), depending on family income.

CDSGs will be paid to the plan based on the amount contributed to the plan annually. If the net income of the beneficiary’s family is below the lower threshold for the third federal marginal tax bracket ($75,769 in 2008), the annual grant will be 300% of the first $500 contributed and 200% of the next $1,000, for a maximum of $3,500. For families over the income threshold, the annual grant will be 100% of the first $1,000 contributed only. CDSGs are subject to a lifetime limit of $70,000 per beneficiary.

CDSBs will be paid to an RDSP based on the net income of the beneficiary’s family regardless of contributions to the plan. If the net family income is less than the threshold established for the purposes of the National Child Benefit Supplement ($21,287 in 2008), the RDSP will be entitled to the maximum contribution of $1,000 per year. Where income is above that threshold, CDSB eligibility is reduced by formula that reaches nil at the top of the lowest tax bracket ($37,885 in 2008). The lifetime maximum for CDSBs is $20,000.

Where the disabled beneficiary is under 18, family income for the purposes of determining CDSG and CDSB eligibility is determined by the combined income of the parent on which the beneficiary is dependant, and that parent’s spouse. Where the beneficiary is an adult, the tests are based on the combined income of the beneficiary and his or her spouse.

Government contributions in the form of CDSGs and CDSBs are subject to a clawback provision that essentially requires government contributions to mature in the plan for 10 years. If funds are withdrawn from the plan (other than normal payments described below) within 10 years of a particular government contribution, the beneficiary must repay the contribution and associated income. Repayment will also be required if the beneficiary dies or loses eligibility for the disability tax credit during the 10 year period.

Payments and Withdrawals

Normal payments from the plan, referred to as “lifetime disability assistance payments”, may begin at any time and must begin before the beneficiary turns 60. The quantum for normal payments is calculated based on the assets in the plan divided by 3 plus the number of years remaining in the plan beneficiary’s expected lifespan. Life expectancy is based on statistical norms unless a medical certificate is obtained indicating a lower life expectancy.

Withdrawals in excess of normal lifetime disability assistance payments may be made at any time. However, such withdrawals will trigger the clawback rule requiring the repayment of CDSGs and CDSBs received in the prior 10 years and associated income. In addition, withdrawals in excess of normal payments will not be permitted if in the prior year government contributions to the plan exceeded taxpayer contributions.

Payments from an RDSP will be received tax-free to the extent that they represent taxpayer contributions to the plan. The portion of a payment that represents CDSGs, CDSBs, and income earned in the plan will be included in the beneficiary’s income in the year received.

Normal payments from an RDSP will not reduce eligibility for federal programs such as GST rebates, Child Tax Benefits, Old Age Security or Employment Insurance benefits. British Columbia has announced that RDSP assets and RDSP income will be exempt for the purposes of determining eligibility for disability benefits, and other provinces are expected to enact similar legislation in due course.

Summary

RDSPs will provide another potential estate planning tool for persons with disabilities and their families. RDSPs will be of the greatest benefit to lower income families who will be able to multiply savings significantly by contributing modest amounts to the plan over the course of a number of years. Families in a position to provide large gifts or bequests to benefit their disabled children will find the RDSP rules limiting and will be better advised to realize the benefits of a properly structured disability trust.

For more information on any article contained in this issue of Clark Wilson LLP's Your Estate Matters or on any Tax & Estate Planning matter, please contact any member of our Tax & Estate Planning Practice Group.

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