June 3, 2015

A common estate planning technique to avoid probate tax is for a parent to transfer his or her house into joint tenancy with one of his or her children. That way, when the parent dies, the property passes by way of survivorship from the parent to the child without the need to go through probate (and pay the consequent probate taxes). Often, the plan is for the child who ultimately receives the house by way of survivorship to sell the house and split the proceeds with his or her siblings. What happens if, after the parent dies, the child who inherits the house claims that the house belongs to him alone and is not willing to share the proceeds with siblings, or to otherwise fulfill the deceased’s intentions?

The law presumes that when a parent transfers a property to an adult child, and the transfer is “gratuitous” in the sense that the child paid nothing for the property, the property is held on “resulting trust” for the parent or her estate. In other words, the law presumes that the parent did not intend to gift the property to the child named on title, but to impose trust obligations on the child who inherited it by way of survivorship on the parent’s death. If the recipient child claims that the house is his alone, he must “rebut the presumption of resulting trust”. In other words, he must show evidence that the parent truly intended to gift the house to him alone.

A recent decision of Ontario’s Court of Appeal, Mroz v. Mroz, considered the doctrine of resulting trust. The case involved an elderly woman, Kay, whose only substantive asset was her house. She went to her lawyer and did two things on the same day. First, she transferred the house to herself and her daughter Helen as joint tenants (there was evidence that she was frugal and knew that this would save probate taxes). Second, she wrote a will in which she gifted the house to Helen, but on the condition that Helen pay $70,000 to her niece, $70,000 to her nephew, $50,000 to the children of Richard, who had been raised as Helen’s brother, plus another $5,000 gift.

This raised what Helen’s lawyer called a “conundrum”. Having transferred the house into joint tenancy with Helen, the house would no longer form part of Kay’s estate (because it passed by way of survivorship to Helen). Apart from the house, Kay had only about $3,200– not nearly sufficient funds to pay the approximately $195,000 in testamentary gifts set out in her will.

The doctrine of resulting trust is an equitable principle which steps in to correct what would otherwise be an injustice. Here, Kay clearly wished for Helen to sell the house within a year of Kay’s death in order to fund the gifts set out in Kay’s will. Helen took the position that she was not required to pay the gifts in the will (although she first offered to pay $140,000 for her niece and nephew into court and then seemingly rescinded this offer). At trial, Helen argued that she owned the house and had no legal obligation to share the proceeds of the house with those named in Kay’s will.

The trial judge criticized Helen and found that she had committed a breach of trust. The trial judge ordered Helen to pay $70,000 each to her niece and nephew (the issue of the gifts to Richard’s children had been settled).

Helen appealed. The Court of Appeal upheld the result, but for different reasons than the trial judge. What the trial judge got wrong, the Court of Appeal found, was her finding that Helen had rebutted the presumption of resulting trust. The presumption of resulting trust had NOT been rebutted on these facts, the Court of Appeal held, with the result that the house continued to be beneficially owned by Kay and then by Kay’s estate. Once Kay died, Helen may have become the legal title holder of the house, but she was not the beneficial or true owner of the house. Rather, Helen held the house in trust for those named in Kay’s will on the terms set out in Kay’s will.