Introduction to Intestacy + Estate Administration

Where the deceased prepared a legally valid will, the named executor in the will immediately has the legal authority to manage the estate pursuant to the terms of the will. The process differs, however, when a person dies “intestate” – namely without a legally valid will. Under intestacy laws, rights and duties to take control of an estate will be committed to a court-appointed administrator only after the issuance of a grant of administration. Another key difference where the deceased dies without a legally valid will is that the distribution of an intestate estate is governed by provincial legislation without any reference to the deceased’s wishes or intentions. This article focuses on Alberta where the Wills and Succession Act (the “Act”) governs. Generally, intestate estates will be distributed in a fixed proportion to a spouse or adult interdependent partner and/or surviving children or grandchildren pursuant to the Act. If there are no heirs beyond four degrees of familial relationship, the intestate estate will vest in the Crown. Farmers and ranchers can be apprehensive about approaching lawyers and, accordingly, if they choose to get a will done up at all, they may feel inclined to draft their own or use a wills kit. Doing things the right way and retaining a lawyer for professional guidance and to ensure that the will is legally valid can help formalize a plan that protects your interests, supports comfortable family relationships, reflects your wishes, optimizes tax advantages, and avoids problems that commonly give rise to litigation.

Intestacy Perpetuates a Major Problem in Agricultural Communities

Only 14% of farms in Alberta have a formal succession plan and Canada’s farming population has decreased by 83% since 1931. If a farm or ranch owner does not have a legally valid will, it may be unclear how their property and assets are to be distributed on their death. Indeed, a lack of clear direction can lead to contentious litigation between family members after the owner dies, and the combination of grief and acrimony is nothing short of disastrous. The hope is that administering an estate would be done in a way that gives effect to the deceased’s wishes while providing for the surviving family members. However, absent a legally valid will, the farm will be distributed as strictly directed in provincial legislation. In some situations, that may be an acceptable outcome; however, in most circumstances legislation does not dispose of the property (including the farmland) in precisely the way the deceased farmer would have wanted or in a way that is perfectly in the family’s best interests. Furthermore, planning for the intergenerational transfer of family farm or ranch property involves three types of transfers: transfer of ownership, transfer of management responsibilities, and transfer of labour. Even if ownership of the property is transferred in a manner that is generally acceptable to the deceased’s loved ones, without a formal plan, the remaining transfer types remain unsettled. Intestacy thus leaves many variables unexamined and may very well be the reason a family loses the farm or cannot keep producing.

Transfer of Management

The transfer of management is indispensable in agricultural succession planning, yet it can be overlooked. Farms and ranches are businesses that require leadership to continue after an owner’s death. As noted at the outset, in an intestacy, the court will appoint an administrator who may not be the person the deceased would have wanted to administer their estate. Because this decision is highly consequential, it is vital that a will is drafted and signed pursuant to strict legal requirements, and that the successor selection makes sense in the overall scheme of operational dynamics. If the goal is to preserve the farming legacy, this will entail making sure the successor(s) are prepared and committed to implementing effective management practices. To achieve that, the appointed executor or administrator must exercise prudence in arranging the farm’s management structure through the transition. Moreover, determining how the operation ought to be run is critical because there is ownership, management, and use criteria for determining whether the lifetime capital gains exemption and other tax advantages are available for qualified farm property. These considerations inform the approach to planning and dictate what should be reflected in a will. Intestacy could result in the family being left in a position where use of the property is limited and no one truly has decision-making authority with respect to the operation as a whole. This, in turn, directly impacts such things as financing and access to credit, leasing and improvements, investing in or divesting of farm assets, and other aspects of farm management that are part and parcel of remaining productive and sustainable.

Tax Implications of Intestacy

Another issue is the tax burden that the family may be left with if the farm or ranch owner dies without a legally valid will. When a taxpayer dies, they are deemed to have disposed of their assets – including, for example, shares of a farm corporation – at fair market value immediately prior to their death. Because capital gains may be realized, thus triggering capital gains tax, there may be a burdensome tax liability on the estate and surviving family members. This is particularly true if the farm assets are not transferred in a way that utilizes the lifetime capital gains exemption, treats capital gains or losses appropriately, or exploits the provisions of the Income Tax Act allowing property to be rolled over to family members without immediate tax consequences. The potential tax liability is made especially onerous when the estate or family does not have sufficient funds to pay all outstanding debts or taxes. There may, of course, still be difficult tax consequences where the deceased dies with a legally valid will, but the risk can often be minimized by the producer obtaining professional advice and guidance and formalizing those instructions. Intestacy can thus complicate matters, and potentially result in hefty tax liabilities that otherwise could have potentially been reduced or minimized. With proper planning, however, farm property can be transferred in a way that distributes the assets in consonance with the owner’s wishes and defers or reduces the tax liability with which the estate would otherwise be saddled.

Inherent Fairness Issues of Intestate Estate Administration

Dying without a legally valid will also raises fundamental issues of fairness. The intestacy provisions under the Act may not distribute the farm property in a way that is equitable given the family’s circumstances. In Broen Estate, Re, 2002 ABQB 806, a woman left her off-farm career to devote full time and attention to helping her husband run and work the family farm. The husband was regularly incapacitated by illness, so the wife eventually took de facto control of the farm, performing all management duties and significant daily labour. The husband died intestate and the estate was distributed in accordance with the Intestate Succession Act (which is now repealed but contained intestate distribution provisions similar to those that exist today in the Act). Provincial legislation directed that the deceased’s daughters received a significant portion of his estate even though they made no contribution to the farm and had little contact with their father. Ultimately, the widow was granted the entire estate, though only at the conclusion of lengthy court proceedings. Time and money could have been saved – and continuity of the farming operation ensured – if the deceased discussed his intentions and the family goals with a legal professional and formalized them in a legally-enforceable will.

Costly + Contentious Litigation

It is not uncommon for agriculture families to fight over farm assets and property distribution on the death of an owner. Common reasons why estate matters end up in litigation include: lack of understanding of the need for a will; inadequate planning advice; nonexistent or outdated estate planning; breach of administrator duty; and acrimonious or intransigent family members. One way to reach agreement or mitigate the risk of a family dispute is to hold a family conference pre-mortem in which the family convenes to constructively discuss the important issues and logistics of succession. This is a great opportunity for the owner(s) to make their wishes known and see how the family reacts to ascertain interests and make adjustments. This meeting additionally allows family members to share their thoughts on the proposed distribution and clarify their own wishes for the operation and their involvement. For example, the father owner may express his desire to distribute the farmland in equal shares among his children since they all worked on the outfit and seemed interested in staying on to see its continued success. However, the daughter may express during the meeting that she wants to pursue other endeavours, or that she only wants a home place and no part in the labour or management. By coming together to plan for intergenerational succession, the family can employ a meaningful forum to discuss what happens to their operation, clarify wishes and intentions, and ensure that everyone understands the intended transition.

Conclusion + Takeaways

The vast majority of Canadian producers do not have a formal succession plan, including a legally valid will and incapacity planning documents. In the face of an aging farm population, elevated interest rates, ballooning farm debt, declining farm income, severe and unpredictable weather, and carbon tax and capital gains tax regimes, producers grapple with tremendous uncertainty on a daily basis. Uncertainty about whether they will stay afloat, whether they will be able to retire, and how or if the next generation can continue producing quality food for local and global communities. Intestacy adds further complications and challenges to the mix. Legally enforceable wills give producers the ability and freedom to distribute their assets in a way they intend and desire while also avoiding onerous tax implications. The best way to protect your life’s work is to retain a lawyer to create a carefully considered and tailored estate plan that achieves your goals for your operation and your family. It is also important to have personal directives and enduring powers of attorney in place to authorize someone to make health and financial decisions on your behalf in the event of incapacity. Contact Aidan Nicholson of our Calgary office for assistance with agricultural estate and succession planning.