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Estate Administration and Automatic Vesting

by Robin Spurr, Published: October 03, 2014

Automatic vesting is often an illusory concept and almost always comes as a surprise to the lay estate trustee. The rule as set out in the Estates Administration Act (EAA) is that real property vests in the beneficiaries three years after the death of the testator. Vesting means taking ownership of something.  Sometimes a gift is vested only in interest before someone actually takes possession of it. When an interest vests, that is the moment someone has a legal claim of ownership.  Once a property vests in the beneficiary, the beneficiary becomes the owner of the property even if it is still technically registered in the name of the deceased person or the estate trustee. After the property becomes vested in the beneficiary, the estate trustee is limited in what he or she can do with the property.

In the recent Ontario Court of Appeal decision of Di Michele v. Di Michele 2014 ONCA 261, the court clarified the circumstances in which automatic vesting will occur. This was a case of an estate trustee (who was also a beneficiary) who mortgaged the estate property to secure his personal debts more than three years after the death of the testator. The estate trustee’s creditor applied to enforce the mortgage and sell the estate property. The other estate beneficiaries tried to block the sale of the estate’s real property by the creditor in the enforcement proceedings on the grounds that the estate trustee had no right to give the mortgage to his creditor in the first place, arguing that the property had vested in them.

At trial, the Court agreed with the beneficiaries that the property had vested in the them pursuant to the EAA and therefore the mortgage was only enforceable against the estate trustee’s 1/3 interest in the property, and not the other 2/3 which had vested in the other two beneficiaries. However, on appeal, the Court overturned this finding. The Court of Appeal held that the mortgage applied to the entire property.

The Court of Appeal concluded that when a will includes a clause allowing the estate trustee to postpone the sale of property or to deal with property as the estate trustee sees fit, as many standard wills do (and this will in fact did), the automatic vesting provisions of the EAA do not apply.  If they did, it would limit the power given to the estate trustee in the will to use his discretion to deal with the property, and court is not inclined to do that. The rationale being that section 10 of the EAA states that nothing in the legislation should interfere with the powers given to the estate trustee in the will.

Secondly, the Court decided that only a beneficiary who is specifically gifted property by a testator in his will benefits from automatic vesting. The Court of Appeal held that a residuary interest (even in an estate that has real property in the residue) is not enough of an interest in the property for automatic vesting to apply.  The beneficiary can only claim a property interest if the will gives the particular property to the beneficiary as a specific gift.

What we can take away from this case is that automatic vesting is not as widely applicable as we once thought.  A will can be drafted to prevent the automatic vesting from occurring and prevent the unsuspecting estate trustee from being caught by the rule during a difficult or lengthy administration.