When is a house not a house?
When it’s a divisible asset!
That’s not a very good joke. But it is an interesting question. For many, owning a home is the ultimate financial dream. At the same time, home ownership means more than just financial stability. It’s where we raise our families and where we celebrate special occasions, it’s an oasis, a familiar place in our busy lives. With so much wrapped up in this “asset” it makes sense that we may want to gift a house to a child for practical or sentimental reasons when the time comes for us to shuffle off this mortal coil. The problem is, as much as a house is an extension of it’s owner, it’s also a financial asset. This can strain the relationship between an individual’s intention, and equity provisions under the Wills Variation Act.
A recent case, Kelly v Bell, sheds some light on these conflicting tensions. Olive Bell died in 2008 leaving her estate to her two children, the plaintiff Valerie, and defendant Irving. The house and its contents went to Irving, and the rest of the estate went to Valerie and Irving equally. If the will was executed as per its terms Irving would receive about $2.4 million in assets, while Valerie would receive less than $350,000. Valerie commenced a claim for variation under the S.2 of the Wills Variation Act, in order to obtain a greater share.
The court determined the issue was not the reasons for unequal distribution, but the effect of the increase in value of the assets left to the defendant. Previously, when Mrs. Bell obtained legal advice concerning her will in 2006, the house was worth $1 million and the rest of the estate consisted of about $860,000. If Mrs. Bell had died at that time the defendant would have received assets worth $1.43 million and the plaintiff, $430,000. On a pro rata basis that would be about 77% to 23%. At the time of Ms Bell’s death, the ratio was closer to 88% to 12%. The court found that this was not within the range of an acceptable gift in the circumstances. The issue was resolved by varying the will to reflect the 73% to 23% share of the entire estate, including the house.
It is unclear how the gift was ultimately fulfilled. After costs, it’s likely there were not enough assets outside of the house to cover the deficiency. The house might have been sold. What if Ms. Bell did not intend for Irving to have A house, she intended for him to have THE house? That intention would not have been satisfied. Applying Kelly, suppose you left one child the house to live in, valued at $100,000, and left another child $100,000 in cash. Over time the house appreciates and comes to be worth $500,000. The value of the cash has not changed as signficantly. The second child would probably be entitled to some, if not half, of the appreciated value. The house would have to be sold and the intention of the gift would not be fulfilled.
Alternatively, would the same principle apply if the house depreciated in value? Could the first child reclaim value from the second, enjoying the intrinsic value of the home and additional assets?
The point arising out of this case is that Individuals and their lawyers need to be aware that assets that fluctuate in value can greatly affect their ultimate intentions when trying to split property between children.