In BC, a will is revocable at any point before a person dies. For that reason, an agreement not to revoke a will—known as a “mutual will” or mutual will agreement—must be made on clear and certain terms. Even where the clear intention to form a binding mutual wills agreement exists, complications can arise. In today’s post, we will look at the problem created by transfers of property intended to defeat a mutual will agreement.
Overview: The law of mutual wills in BC
People who make mutual wills agree to dispose of property in a certain way and not to revoke or change their wills without the other’s consent or notice to the other. The emphasis is on notice of revocation during the parties’ joint lives, as the consequence of death of one of the parties is that notice is no longer able to be given. If the first to die dies without revoking or changing his or her will, the agreement becomes “locked-in.” (For more information, see here for our BC estate litigators’ post on mutual wills FAQs.)
Constructive trust is the remedy for breach of mutual will obligations
When the first party to the mutual will dies, the agreement not to revoke the wills becomes binding and can no longer be resiled from. If the surviving party later changes their will or executes another will that does not follow the terms of the mutual will, the intended beneficiaries of the revoked will can bring a claim for a declaration of a constructive trust in relation to the property of the estate. The constructive trust that arises in mutual wills cases has been described as a “floating” trust or obligation that crystallizes on the property remaining at death of the first party. The person holding the property has the right to enjoy and use that property during their lifetime, subject to the obligation under the mutual wills agreement with respect to the ultimate disposition of the property on their death.
Problem: What if there is no property left on the death of the surviving party?
What if the surviving party doesn’t make a new will that breaks the mutual will agreement, but instead transfers property or gives assets away during their lifetime? This gives rise to much uncertainty and the outcome for the intended beneficiaries will depend on a number of factors, including the specific terms of the mutual wills agreement. The usual rule is that a person who inherits property absolutely is entitled to do what they want with it, whereas a person who inherits property subject to a life estate is not. The trust implications of a mutual will agreement reduces the surviving party to something less than an absolute owner but something more than a life tenant.
Getting at the purpose behind the transaction
The law is clear that the surviving party cannot make a disposition of property intended to defeat the mutual will agreement. The difficulty is proving the intent behind the transaction. For example, in the Brynelsen Estate case, which our estate litigators recently discussed, valuable securities were in dispute. The intended beneficiaries argued that the shares should go to them after the death of their stepmother, the surviving party to what they alleged was a mutual will between their father and stepmother. The beneficiaries were not able to establish that a mutual will existed. However, even if they were, the terms of their father’s will made it clear that the stepmother could have encroached on the capital during her lifetime. The stepmother inherited the securities when her husband died on the understanding that her husband’s daughters should inherit them after she died—but only if she did not need to sell the securities during her lifetime to live on.
Was the transaction intended to defeat the mutual will agreement?
Consider a blended family where spouses each have one child from a previous relationship. Their home is their most valuable asset. Each spouse agrees to be bound by a mutual will that leaves all to the other, with the residue to be split equally among both children. The wife dies first. Imagine these scenarios:
- The husband sells the house at arm’s length or market price and uses the proceeds to fund his place in a nursing home.
- The husband transfers the house into joint tenancy with his child from his first marriage, removing that property from his estate by operation of the right of survivorship.
The beneficiaries would likely have no complaint in the first scenario. The second scenario is more complicated and the reason for the transfer of property would need to be examined. The effect of the transfer is that the husband’s child would receive the property on his death, to the exclusion of the wife’s child. Whether the court finds this to be a breach of the mutual will and imposes a constructive trust on that piece of property in favour of the wife’s child depends on whether the transfer was done with the intent to defeat the trust.
Take home point on property transfers, constructive trusts, and mutual wills
Gifts, settlements, and inter vivos transfers made by the surviving party to a mutual wills agreement can be challenged by the beneficiaries who allege that the property is rightfully theirs. Success of the legal claim depends on whether the transaction in question or disposal of assets was done with the intention of defeating the mutual wills agreement.