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The amount of careful analysis and due diligence that good individualized estate planning requires cannot be overstated. Importantly, this process involves determining all the assets a testator has an interest in, how such interest is held, and finally how they would like to dispose of or pass on such interest(s) in their estate planning documents.
Understanding the nature of ownership is key, as it affects the legal tools and strategies available. For example, if a bare trustee nominee corporation is suggested to hold legal title of a testator's primary residence where beneficial ownership remains with the testator, what does this actually mean?
The Backstory: The Bundle of Rights or "Bundle of Sticks"
In virtually all common law jurisdictions property rights are often described with the metaphor of a "bundle of rights" or "bundle of sticks". This illustrates that property ownership is a set of legal relationships among people and is not merely ownership of "things" or the relationships between owners and things ("Reflections on the Bundle of Rights," Denise R. Johnson, 2012).
The bundle of rights also demonstrates the many ways in which ownership can be divided. In this sense, the concept works to illustrate both tangible and intangible property, for example, 100 acres of land or 100 shares in a corporation.
Ownership is not a monolithic right but much like a bundle of sticks, it is a collection of rights, which can be separated, transferred, shared, or limited. Although this metaphor may seem trite, this was a marked departure from the historic understanding of property ownership that preceded the 20th century.
Each "stick" in the bundle represents a different aspect of ownership; a tenant may have possessory rights, but a landlord retains ownership; a spouse may be given a life interest to possess or use a home on the death of the spouse legally on title allowing for a benefit during the surviving spouse's lifetime with an eventual gift-over to others (e.g., children of a prior marriage) who retain an interest.
Murdoch v Murdoch
The metaphor is also evident in the evolution of trust law subsequent to the watershed 1975 Supreme Court of Canada decision Murdoch v Murdoch, where the Appellant sought, as part of her divorce settlement, a beneficial right to part of the cattle ranch that she ran with her husband for 25 years, but which was solely registered in his name.
The Appellant was unsuccessful as the Court declined to recognize non-financial contributions to property to allow for equitable sticks in the property bundle.
Public outcry to the decision spurred reform to matrimonial legislation across Canada and subsequent case law also softened, allowing for a constructive trust based on equitable principles.
How Legal and Beneficial Ownership Applies to Estate Planning
Understanding the difference between legal and beneficial ownership allows you to make better-informed decisions when planning your estate.
In the bare trustee example provided at the outset, you retain full beneficial ownership of the property, and the corporation only holds the legal title for you. Even though the corporation is listed as the owner on title it does not beneficially own or benefit from the property. The corporation has no control over the property, it only acts on your instructions, and a declaration of trust is executed to confirm this arrangement.
For tax purposes, transfer to a bare trustee is not considered a taxable disposition as there is no change of beneficial ownership, so no capital gains are triggered when the title is transferred. All income, gains, and losses still belong to you (or your estate when you pass away).
The various "sticks" in the ownership bundle are evident in this arrangement which allows for privacy (as the beneficial owner's name is not on title) and ease of transfer/administration on the death of the beneficial owner when part of a dual will strategy, allowing for the sale/transfer by the corporate trustees without being subject to Estate Administration Tax on the value of the property or delays often incurred in obtaining probate of a will.
The implementation of any trust (e.g., spousal trusts, family trusts, alter ego trusts etc.) in your estate plan also relies on parsing out types of ownership; trustees have "legal" ownership while beneficiaries have "beneficial" ownership.
This distinction also underlies the legal principle of a presumption of a resulting trust; the presumption that an asset that is put into joint names by a parent with an adult child for no consideration (e.g., a house or bank account) is not a gift to the child (i.e., beneficial ownership) but rather the child is holding the property in trust (i.e., legal ownership) for the estate of the parent.
This presumption can be rebutted or affirmed with the right legal documentation which explicitly states the intention of the parties which will impact whether the transfer is considered a taxable disposition as well as whether the asset is subject to Estate Administration Tax.
To add another layer of complexity, a person who is a trustee may also be a beneficiary. They are distinct roles with differing legal capacities; to provide another metaphor the person is wearing "different hats" at the relevant times and must act in accordance with the distinct legal duties attached to each role.
Lessons Learned
Clear estate planning depends on a solid understanding of how ownership works both legally and beneficially. The concept of the "bundle of rights" helps us see that ownership is not all-or-nothing, and that various rights can be separated, assigned, or held in trust, depending on your needs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
