Don’t count on ‘zombie deeds’ in estate planning: Part two
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Published Friday, November 06, 2020| The Lawyer's Daily
As we stated in part one of this series, the court in Thompson v. Elliott Estate 2020 ONSC 1822 chastised the actions of the lawyer who registered the transfer of the deed of Alitha Elizabeth Elliott on April 18, 2017. Elliott died three days earlier on April 15. In making required statements in the transfer on behalf of Elliott on her age and spousal status, the court stated that the lawyer “knew or ought to have known that this was clearly not the case” and that if Elliott’s death had been known by the Land Registry Office, “severance of the joint tenancy would have been properly rejected.”
The comments by the court may have been spurred in part by the fact that the lawyers had received instructions to register the transfer, but had failed to do so and quickly attempted to correct this mistake once they were notified of Elliott’s death.
Elliott’s circumstances were different than those in Winarski v. Sproul 2015 ONSC 812. Elliott owned the property as joint tenants with her husband, Byron Thompson. Elliott intended to end her relationship with Thompson and to ultimately divorce him. In order to ensure that her estate would go to her children, she had instructed her lawyers to register transfer to herself to effect a severance of her joint tenancy interest in the property. It is this severance of joint tenancy which was registered as a zombie deed.
In reviewing the evidence in Thompson v. Elliott Estate, the court found that the effectiveness of a severance of the transfer relied upon legal delivery of the document having been made. Delivery required conduct or words which acknowledged the grantor’s intention to be immediately and unconditionally bound by the terms in the transfer. Notwithstanding that the actual registration was deficient, the court held that the signing of the Acknowledgement and Direction by Elliott and her instructions for its registration were sufficient to affect its legal delivery. As a result, the severance of joint tenancy was legally effective even if proper registration had not occurred.
Unfortunately, in Thompson v. Elliott Estate the court did not consider whether an Acknowledgement and Direction was in fact a power of attorney and so we do not know whether the Director of Title’s arguments hold water. The court’s conclusion that legal delivery had occurred and that the severance was legally effective do not mean that the Acknowledgement and Direction remained valid — the court also concluded that it was improper for the lawyer to act on the Acknowledgement and Direction to register the severance. Instead, proper procedure required an application to be made to court and a court order to be registered on title to affect the severance.
In reviewing these two cases, a number of lessons can be learned on zombie deeds:
Given the foregoing, it is surprising that any lawyer can recommend or still attempt to use zombie deeds today. One commentator in particular has expressed his view that zombie deeds are “an effective estate planning tool which allows Ontarians to avoid the punitive 1.5 per cent estate tax and the court delay of eight-plus months to obtain probate.” I cannot disagree more strongly. Zombie deeds are questionable and come with significant risks that can be avoided with proper estate planning. Skilled real estate and estate planning practitioners will already be able to implement strategies to avoid the delays and costs of probate for the transfer of real estate without resorting to the use of zombie deeds.
This is the second of a two-part series. Read the first article:
As we stated in part one of this series, the court in Thompson v. Elliott Estate 2020 ONSC 1822 chastised the actions of the lawyer who registered the transfer of the deed of Alitha Elizabeth Elliott on April 18, 2017. Elliott died three days earlier on April 15. In making required statements in the transfer on behalf of Elliott on her age and spousal status, the court stated that the lawyer “knew or ought to have known that this was clearly not the case” and that if Elliott’s death had been known by the Land Registry Office, “severance of the joint tenancy would have been properly rejected.”
The comments by the court may have been spurred in part by the fact that the lawyers had received instructions to register the transfer, but had failed to do so and quickly attempted to correct this mistake once they were notified of Elliott’s death.
Elliott’s circumstances were different than those in Winarski v. Sproul 2015 ONSC 812. Elliott owned the property as joint tenants with her husband, Byron Thompson. Elliott intended to end her relationship with Thompson and to ultimately divorce him. In order to ensure that her estate would go to her children, she had instructed her lawyers to register transfer to herself to effect a severance of her joint tenancy interest in the property. It is this severance of joint tenancy which was registered as a zombie deed.
In reviewing the evidence in Thompson v. Elliott Estate, the court found that the effectiveness of a severance of the transfer relied upon legal delivery of the document having been made. Delivery required conduct or words which acknowledged the grantor’s intention to be immediately and unconditionally bound by the terms in the transfer. Notwithstanding that the actual registration was deficient, the court held that the signing of the Acknowledgement and Direction by Elliott and her instructions for its registration were sufficient to affect its legal delivery. As a result, the severance of joint tenancy was legally effective even if proper registration had not occurred.
Unfortunately, in Thompson v. Elliott Estate the court did not consider whether an Acknowledgement and Direction was in fact a power of attorney and so we do not know whether the Director of Title’s arguments hold water. The court’s conclusion that legal delivery had occurred and that the severance was legally effective do not mean that the Acknowledgement and Direction remained valid — the court also concluded that it was improper for the lawyer to act on the Acknowledgement and Direction to register the severance. Instead, proper procedure required an application to be made to court and a court order to be registered on title to affect the severance.
In reviewing these two cases, a number of lessons can be learned on zombie deeds:
- Under the Land Titles System, using an unregistered deed or Acknowledgement and Direction signed prior to the grantor’s death is inappropriate, has ethical dilemmas for the lawyer involved, and may be rejected by the Land Registry Office if discovered;
- It is possible that a signed but unregistered deed or Acknowledgement and Direction may be recognized as effective by a court, but the court must be persuaded that the document was legally delivered, which will require that the Acknowledgement and Direction be given unconditionally for immediate registration. Estate planning by way of zombie deeds will be ineffective as it would require the premeditated intention to register the deed after a person has died and thereby not meet the test for legal delivery;
- A transferee takes a risk when relying on a signed but unregistered deed or Acknowledgement and Direction as, until such transfer is registered, a third party without notice may take title without being subject to the unregistered deed or Acknowledgement and Direction. For instance, estate planning using an unregistered deed may be thwarted if a mortgage or other transfer is registered in the interim;
- The procedure to recognize a zombie deed will be expensive and time consuming as it will require obtaining a vesting order from court. In Winarski the zombie deed was no longer capable of registration as the property had been converted to land titles, and as such only resort to court action was possible. In Thompson, the registration of the zombie deed ultimately resulted in costly litigation which could have been avoided if the lawyers had not delayed the registration. Further, the court in Thompson held that a zombie deed should not be registered — instead the parties should obtain a court order and register the court order.
Given the foregoing, it is surprising that any lawyer can recommend or still attempt to use zombie deeds today. One commentator in particular has expressed his view that zombie deeds are “an effective estate planning tool which allows Ontarians to avoid the punitive 1.5 per cent estate tax and the court delay of eight-plus months to obtain probate.” I cannot disagree more strongly. Zombie deeds are questionable and come with significant risks that can be avoided with proper estate planning. Skilled real estate and estate planning practitioners will already be able to implement strategies to avoid the delays and costs of probate for the transfer of real estate without resorting to the use of zombie deeds.
This is the second of a two-part series. Read the first article:
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