Sawdon Estate v. Sawdon – The Beneficial Ownership of Funds in a Joint Account

Introduction

In Sawdon Estate v. Sawdon, 2014 ONCA 101 (“Sawdon“), the Court of Appeal for Ontario was tasked with determining, inter alia, to whom the funds held in several joint accounts belonged—the children of Arthur Sawdon (“Mr. Sawdon”), the deceased, or the Watch Tower Bible Tract Society of Canada (the “Charity”), the residuary beneficiary of Mr. Sawdon’s estate.  The matter was first heard by Justice Leonard Ricchetti of the Ontario Superior Court of Justice.   In a decision dated July 23, 2012, Ricchetti J. considered and applied the Supreme Court of Canada’s 2007 decision in Pecore v. Pecore, 2007 SCC 17 (“Pecore“) and ultimately held in favour of Mr. Sawdon’s children.  On appeal, the Court of Appeal for Ontario this year upheld Ricchetti J.’s decision.

Background Facts

Mr. Sawdon died in March 2007.  His wife had predeceased him and he was survived by five children.  Beginning in 2004, Mr. Sawdon transferred bank accounts into joint names with two of his sons, Wayne and Stephen.  In June 2004, Mr. Sawdon specifically expressed to one of his bank representatives, Gladys Fisher (“Ms. Fisher”), that he wanted certain accounts to be held jointly among him, Wayne and Stephen and that Wayne and Stephen “knew what to do with the money” upon his passing (i.e. share it equally among all their siblings).  Due in particular to past experiences dealing with bank accounts following his wife’s passing, Mr. Sawdon explained to Ms. Fisher that he wanted his children to have the funds in the joint bank accounts without having to go through probate of the actual Will.  Mr. Sawdon continued to transfer his bank accounts into joint names in this manner until July 2006.  At the time of his death, the funds in the joint accounts totalled just over $1 million.

In 2006, Mr. Sawdon met with his lawyer to revise his then existing Will (which had been executed in 2004).  As a result of the change to his Will, the Charity was named as the beneficiary of the residue of Mr. Sawdon’s estate as well as the beneficiary of Mr. Sawdon’s shares in a corporation known as “Sawdon Holdings.”  Mr. Sawdon’s lawyer, Daniel Pole (“Mr. Pole”), was not aware of Mr. Sawdon’s joint accounts at the time he revised Mr. Sawdon’s Wills.  However, Mr. Pole had at that time (and in and around the same time period) advised Mr. Sawdon that he recommended that Wayne and Stephen execute a declaration of trust if Mr. Sawdon did not intend for the money in the joint accounts to pass directly to the surviving account holders upon his death.  At no time was such a declaration of trust prepared or executed.  Moreover, Mr. Pole did not inform Mr. Sawdon that he was associated with the Charity and had acted from time to time as its counsel.

Following Mr. Sawdon’s passing, his children argued that the funds held in the joint accounts had been gifted to them and that these funds accordingly passed to them outside of Mr. Sawdon’s estate.  The Charity, on the other hand, argued that the change in registration of the joint accounts had never constituted a gift of the beneficial interest in the joint bank accounts, and that the accounts accordingly formed part of the residue of Mr. Sawdon’s estate.

Superior Court Decision

Ricchetti J. considered and applied Pecore, which established that there is a rebuttable presumption of a resulting trust in favour a deceased parent’s estate in cases involving gratuitous transfers between a parent and an adult child.  In this case, there had been a gratuitous transfer of an interest in the bank accounts from Mr. Sawdon to his sons, Wayne and Stephen.  The question was whether, based on the facts of the present case, the presumption in favour of a resulting trust had been adequately rebutted.  Ricchetti J. determined that it had.  He based his conclusion on three key facts:

1. Mr. Sawdon’s experience dealing with joint accounts and accounts that were not jointly held following his wife’s death;
2. Mr. Sawdon told Mr. Pole that he was considering transferring his bank accounts into joint name with Wayne and Stephen and was then advised that he should/would have a declaration of trust prepared and signed in order to avoid the funds in the accounts going directly to Wayne and Stephen following his passing.  In spite of Mr. Pole’s advice, Mr. Sawdon proceeded to transfer the bank accounts into joint names; and
3. Ms. Fisher’s evidence clearly established that she had discussed the nature of a joint account with a right of survivorship with Mr. Sawdon and presented him with the option of a joint account without a right of survivorship.  Mr. Sawdon understood the distinction between the two types of accounts, but nonetheless chose to proceed to transfer his bank accounts into joint names with Wayne and Stephen, with a right of survivorship.

Ricchetti J. held that the funds in the joint bank accounts belonged equally to Mr. Sawdon’s children based on one of either two lines of reasoning.  Either Mr. Sawdon made a gift of the beneficial interest in the bank accounts to his children, with Wayne and Stephen being used to facilitate this transfer, or Mr. Sawdon made a gift of the legal and beneficial interest to Wayne and Stephen, but they were to hold whatever money they ultimately received from the bank accounts in trust for their siblings.  In either case, the result was the same, in that the funds in the joint accounts did not form part of Mr. Sawdon’s estate and the Charity could accordingly not establish any claim to them.

Court of Appeal Decision

Gillese J.A. wrote the Court of Appeal’s decision in Sawdon.  She agreed with the Ricchetti J. that Mr. Sawdon’s children were beneficially entitled to the funds in the joint bank accounts, but arrived at her conclusion based on a differing legal analysis.  In Gillese J.A.’s view, Mr. Sawdon established a trust when he transferred the bank accounts into joint names with Wayne and Stephen.  The trust was established based on the understanding that Wayne and Stephen would, as trustees, distribute the funds then remaining in the accounts evenly among them and their siblings.  In other words, Mr. Sawdon “made an immediate inter vivos gift of the beneficial right of survivorship to [his children].”  As such, from the time that the joint accounts were opened, the legal title holders (being Mr. Sawdon, Wayne and Stephen) held the beneficial right of survivorship in trust for Mr. Sawdon’s children, in equal shares.

Gillese J.A. distinguished her reasoning from Ricchetti J.’s in two important respects:

1. Mr. Sawdon’s children did not have a beneficial interest in the funds held in the joint bank accounts at the time the joint accounts were created, but rather, of the beneficial right of survivorship to the joint accounts; and
2. It is not possible to find that a gift of the beneficial right of survivorship had been made and to also find that the recipient of the gift held it in trust for others.  The proper analysis in such circumstances is based on the law of trusts, such that legal title to the accounts passed to Wayne and Stephen, as trustees for their remaining siblings.  This negates a gifting arrangement or analysis.

Key Take-Aways from Sawdon

In Sawdon, the courts were forced to engage in an ex-post-facto examination of Mr. Sawdon’s intentions at the time he transferred his bank accounts into joint names with Wayne and Stephen.  Although the credibility and reliability of Mr. Pole’s evidence was brought into question by Ricchetti J., in reading the trial and appellate decisions it is difficult to not think that the matter would likely not have been litigated at all had Mr. Sawdon, Wayne and Stephen followed Mr. Pole’s initial advice and executed a straightforward declaration of trust with respect to the beneficial ownership of the funds held in the joint accounts.  Such a trust declaration would have made it clear that the accounts did not form part of Mr. Sawdon’s estate (meaning the Charity would have had no claim to them).  The trust declaration would have also established that the facts of the case were generally in line with Gillese J.A.’s ultimate determination.  Of course, if the bank accounts had been a brokerage account there would have been a disposition for tax purposes.

Sawdon accordingly serves as an important reminder to lawyers in the area of estate planning to advise clients about the potential consequences of transferring funds into accounts jointly held with one or more of their children or family members.  Should a client, like Mr. Sawdon, wish to transfer funds into a joint account for the purposes of avoiding probate, in keeping with the decision in Sawdon, it appears that a trust of the right of survivorship may now be a possibility to consider with him or with her.  In any event, any such trust should be properly documented, leaving little doubt as to the intention of the transferor.  Nonetheless, the question of what rights and obligations the joint account holders would have with respect to the funds held in the joint accounts during the transferor’s lifetime remains an open question.

In circumstances involving cross-border estate planning, it appears to also be an open question as to how the United States would regard and treat the transfer of funds held by a U.S. citizen in a Canadian account into joint names.  If, as Ricchetti J. had reasoned in his decision, the transfer would, in any way, be considered to constitute a gift, then U.S. tax advice should be obtained as to whether U.S. gift tax disclosure would be required.  U.S. tax and legal advice should also be obtained if a trust of the right of survivorship is contemplated, in order to determine whether federal gift tax would apply to a U.S. citizen transferor and what, if any, ongoing reporting obligations a U.S. citizen transferee may face.