Month: June 2001

Summer 2001 issue of the Expert Witness newsletter (volume 6, issue 2)

Posted on By economica

Contents:

  • The Deduction of Accelerated Inheritance
    • by Christopher Bruce
    • In this article Chris Bruce discusses a requirement established by the Court of Appeal in its October 17, 2000 ruling in Brooks v. Stefura. This was that “accelerated inheritances” should be deducted from each plaintiff’s dependency award.

      The Court did not, however, state clearly what it meant by “accelerated inheritances,” nor did it specify how those inheritances were to be calculated. In this article, Chris offers some observations that may cast some light on these issues.

  • The Deduction (?) of “Accelerated Inheritance” (Scott Beesley’s view)
    • by Scott Beesley
    • In this article Scott Beesley discusses a requirement established by the Court of Appeal in its October 17, 2000 ruling in Brooks v. Stefura. This was that “accelerated inheritances” should be deducted from each plaintiff’s dependency award.

      The Court did not, however, state clearly what it meant by “accelerated inheritances,” nor did it specify how those inheritances were to be calculated. In this article, Scott offers some observations that may cast some light on these issues.

  • Avoiding Overlap Between Fatal Accident Act and Survival of Actions Act Claims
    • by Scott Beesley
    • This article points out that while the method set out by the Court of Appeal in Brooks v. Stefura does prevent double-recovery, it does not prevent double-payment, that is, the payment of the same dollar to one plaintiff under the FAA and to another under the SAA. The text of the judgment makes it clear that the Court does not wish this to occur. The article suggests a refinement of the Court’s method which would prevent such double-payments. Four detailed examples are provided.
  • Case Comment: Boston v. Boston
    • by Scott Beesley
    • The Supreme Court of Canada recently ruled in the case of Boston v. Boston. This was a case involving the variation of spousal support at the time of the husband’s retirement. He retired in 1997 and began to receive his pension. He applied to have the original support payment reduced, on the grounds that he was now paying support from his pension, which had already been considered in the original division of assets. It was argued that the wife had traded off her right to half the pension, and in return had received the bulk of the physical and other assets. He succeeded in having the monthly payment lowered from $3,200 to $950, but the Ontario Court of Appeal increased the figure back to $2,000. The husband was appealing that last OCA decision in the Supreme Court.

      The SCC’s decision allowed the husband’s appeal and restored the motions judge’s decision to reduce support to $950 per month. This was in my view correct, as it would appear to be unjust that the wife should receive half of an asset at separation, and then be allowed to claim part of the husband’s half of that asset later.

Case Comment: Boston v. Boston

Posted on By economica

by Scott Beesley

A much briefer version of this article appeared in the Summer 2001 issue of the Expert Witness. The brief version appears as the overview at right. The full article is below.

The Supreme Court of Canada recently ruled in the case of Boston v. Boston. This case concerned a divorced couple who had reached a consent agreement in 1994 which divided their assets roughly equally. In estimating the value of their assets at the time of separation, the original court had included the present value of the husband’s large pension, using its present value (PV) at that time. That present value in fact constituted the bulk of the assets he received at separation ($333,329/$385,000, or 86.6 percent of his total). The wife received almost all of the family’s physical and other financial assets, amounting to $370,000. In addition she was to receive support payments of $3,200 per month, fully indexed to inflation.

The husband retired in 1997 and began to receive his pension. He applied to have the support payment reduced, on the grounds that he was now paying support from his pension, which had already been considered in the original division of assets. It was argued that the wife had traded off her right to ½ the pension, and in return had received the bulk of the physical assets. He succeeded in having the monthly payment lowered to $950, unindexed, but the Ontario Court of Appeal increased the figure back to $2,000 and restored the indexing. The husband was appealing that last OCA decision in the Supreme Court.

The SCC’s decision allowed the husband’s appeal and restored the motions judge’s decision to reduce support to $950 per month, without indexing. This was in my view correct, as it would appear to be unjust that the wife should receive half of an asset at separation, and then be allowed to claim part of the husband’s half of that asset later. There are two primary issues, in my view. The first is that when a support order is made, that order should specify that the support in question should continue only until a particular assumed retirement age. That retirement age should of course be the same one assumed in calculating the present value of the pension being divided. I understand that support orders are generally indefinite, which creates the potential for double-dipping that arises in this and other cases.

Once it is recognized that no labour income is earned in retirement, the appropriate division procedure is quite clear. A correct division accounts for all of the assets held at the time of the breakup, including the present value of pension entitlement, based on agreed retirement ages. Once that (usually 50/50) division is made, then to allow another claim on the assets that were divided is by definition double-dipping and seems to me unjust. The second part of the process is the awarding of support as a share of income the payor will earn after the time of separation. In the case in question, as noted above, the wife received spousal support in addition to the 50 percent share of assets. She is perfectly entitled to a share of that future income, based on the standard arguments regarding her own career sacrifice, the raising of children, etc. The problem is that that future income ceases to be earned at retirement, but (I gather in this and most cases) the support payments do not.

There is a logical inconsistency if support in such cases carries on after the agreed retirement age, because the only source of such payments is the savings accumulated before and after separation. The wealth accumulated before separation was already divided in the original agreement; the income earned after the separation was already divided (presumably fairly) when the monthly support was set. Unless the courts set up spousal support such that payments end (or are reduced) at the paying spouse’s retirement, there will always be the potential for double-payment of the same money.

It is not complicated to prevent such double-dipping while ensuring that the spouse who is supported receives a fair settlement, inclusive of continuing monthly payments. The steps are as follows:

  1. At the time of separation the parties should divide assets owned already, including the present value of pensions earned to that time, using whatever formula the court sees fit to apply. This may not be equal, most often because one party brought in assets exceeding the other at the time of the marriage. For the purpose of creating an example I will, however, assume an equal division.
  2. The court then can assess what share of the higher-income spouse’s future income should be paid out in the form of continuing support. In the case in question, the original award of $3,200/month or $38,400 per year represented 33.25 percent of the husband’s before-tax income, or 48 percent of his after-tax future income.
  3. Finally, the court should assess what fraction of the payor’s incremental pension income should be awarded to the payee. This seems to be a point of contention. By incremental we simply mean that part of the pension that is accumulated after the separation. In the Boston case this amount was reported as $2,300 out of a total teacher’s pension of $7,600 per month (it appears that there was no corresponding amount earned before marriage, so I presume they were already married when he began his pensionable service). The decision by the motions judge granted $950 per month, which appears to be consistent with the rough 50/50 split that had been applied all along, in that it is on the order of half of the after-tax value of the $2,300.
  4. At the time of the separation it is possible to estimate the value of current assets, including the PV of pensions, and the present value of future income, including additional pension entitlement which will accumulate between the time of settlement and the agreed retirement age. Such pension growth is merely part of the payor’s future income, and if the lower-income spouse is entitled to a share of such income then the pension is properly part of the calculation of that income. The court can then award a percentage of existing assets to each party, as well as a percentage of the future income stream to the recipient spouse. The key point is that once all current assets and future income are considered, and shares awarded, then no other payment is required. If the future income is not paid as a lump, but is to be paid as continuing monthly support, then the amount should decline at the agreed retirement age. Assume the spouse’s share remains at 50 percent for the future support calculation. Monthly support should then be 50 percent of after-tax income until retirement only, declining then to 50 percent of the monthly value of the (also after-tax) incremental pension amount. In Boston, the motions judge apparently understood all of this reasoning and made the correct award, in my view.

The problem of double-dipping occurred in this case because the original separation agreement awarded $3,200 per month indefinitely, which would only be correct if the payor would never retire! While such an award may be conventional, it is clearly incorrect, when such payments can only be made after retirement using assets that were already fairly divided. If the above procedure is followed then all of the payor’s income, including future pension increases, would be considered in reaching a settlement. The problem of double-dipping would not occur, nor, conversely, would the award to the lower-income spouse wrongfully ignore future pension gains that they have a legitimate claim upon. Also, note that once a retirement age is agreed to at the time of separation, the present values of future income and future pension increments are based on retirement at that age. Ten or twenty years later, the paying spouse is still free to retire before or after that date, but there should be no change in the support payment stream (it should decline as scheduled, not before, so there is no incentive to retire earlier and therefore pay less to the former spouse).

It may be helpful in thinking of these issues to imagine a divorce that occurs at retirement. In that event there is no future income stream, and no future pension increment. The court will simply divide the assets already owned, and divide the pension using the standard formula. Say the spouse’s asset share is 50 percent while the pension share is also 50 percent. Assume in the first case that the 50 percent asset division has been made. The court can then award continuing support in the amount of 50 percent of the monthly pension payments. The recipient has no further claims – all the family’s assets have been divided.

In the alternative (second) case, the court can combine the lump-sum calculations. For example, assume $400,000 in current assets and a pension PV of $200,000. The spouse is entitled to a total of $300,000 (i.e. half of the $400,000 plus half of the pension amount of $200,000). If the goal is to have a “clean break” at the time of the settlement, then this is one way to get it. The recipient spouse receives $300,000 of the current total of $400,000, and then has no further claims. The pension-holder keeps the remaining $100,000 in assets and all of the pension ($200,000), for a total of $300,000. It should be obvious that the spouse who receives the greater share of assets will eventually have to convert some of those assets into income, and conversely the pension-holder may be renting indefinitely, no longer having (typically) the use of the family residence. While the spouse may feel entitled to both sole owner ship of the family home, RRSP’s, etc. and half of any pension, one can see that that is unrealistic under a typical 50/50 division. Finally, note that in the Boston case, the division was roughly 50/50, following the motions judge’s decision. The support awarded in the original settlement would have paid Mrs. Boston significantly more than 50 percent of the overall total, which the motions judge presumably would have thought unjust.

The critical point in such cases is that an agreed share of future income (base income plus pension gains) can either be awarded as a lump-sum or as a share of monthly or annual income. If the same dollar is paid out twice then double-dipping is the result, while if (for example) future pension increments are not counted in future income, the support provided will be too low.

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Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

Avoiding Overlap Between Fatal Accident Act and Survival of Actions Act Claims

Posted on By economica

by Scott Beesley

This article first appeared in the summer 2001 issue of the Expert Witness.

In its October 17, 2000 rulings in the Duncan v. Baddeley and Brooks v. Stefura cases, the Court of Appeal was concerned about overlapping claims between the Fatal Accidents Act (FAA) and the Survival of Actions Act (SAA).

Although the Court set out explicit instructions for avoiding double recovery under these Acts – that is, awarding one plaintiff the “same” dollar of the deceased’s income twice – it also expressed concern about the possibility of double payment – that is, paying the “same” dollar to two different claimants.

The purpose of this article is to describe the Court’s method for avoiding double recovery, to discuss some of the circumstances in which claimants might obtain double payment, and to suggest a methodology for avoiding double payment.

Avoiding Double Recovery

At paragraph [14] of Brooks, the Court set out the following methodology for avoiding double recovery:

  1. Calculate the dependency (FAA) award to each person. For example, a widow would receive a dependency claim for the length of her, or her husband’s, life expectancy and a dependent child would receive such a claim until he or she would have ceased to be dependent.
  2. Calculate the lost years (SAA) award. For example, a widow and the deceased’s children (not just those who were dependent) would share in the deceased’s expected lifetime income, after deduction of taxes and the “personal consumption deduction.”
  3. Allocate the lost years award using the will or the Intestate Succession Act (ISA). Under the ISA, the widow or widower would receive the first $40,000 of the lost year award and the remainder would be divided equally among the eligible family members.
  4. Compare the dependency and lost years awards for each claimant and reduce the dependency awards by the amount of the lost years award (if the former exceeds the latter). For example, if the widow was eligible for $150,000 under the FAA and $80,000 under the SAA, this step would calculate a differential of $70,000. Whereas if the child’s dependency (FAA) claim was $30,000 and lost years (SAA) claim was $50,000, no differential would be calculated
  5. If the lost years award is greater than the dependency claim for any plaintiff, that plaintiff receives only the lost years award. In the example developed here, the child would receive only his or her lost years award, $50,000.
  6. If the dependency award is greater than the lost years award, the plaintiff receives the full lost years award plus the difference between the two as the dependency award. In the example developed here, the widow would receive her lost years award, of $80,000 plus the differential calculated in step 4, $70,000. That is, she would receive her full dependency award of $150,000.

Neither party has received the “same” dollar twice. The widow’s award has come strictly from the dependency claim and the child’s award has come strictly from the lost year’s claim.

Avoiding Double Payment

Note that in the example developed above, the maximum FAA claim (alone) would have been $180,000 (the widow’s $150,000 plus the child’s $30,000) and the maximum SAA claim would have been $130,000 (the widow’s $80,000 plus the child’s $50,000). Yet, applying the Court’s method, the claimants would receive $200,000 (the widow’s $150,000 FAA claim plus the child’s $50,000 SAA claim). That is, they would receive more than would have been allowed under either of the Acts alone.

This is one form of what the Court of Appeal called “double payment.” Most of the dollars in the $130,000 lost years claim come from the same source as the $180,000 dependency claim – that is, from the deceased’s income after-taxes and after-personal consumption. In that sense, the child’s lost years claim represents a second claim on the “same” dollars as the dependency claim.

It is even possible to imagine situations in which the sum of the plaintiffs’ awards would exceed the deceased’s total (after-tax) income. For example, assume that the present value of the deceased’s lifetime (after-tax) income was $500,000 and that the widow’s dependency on that amount was 70 percent, or $350,000.

Assume also that the deceased’s personal consumption deduction was 40 percent, leaving 60 percent, or $300,000, for the lost years claims. If the will divided the estate equally among the widow and her two (non-dependent) children, each of them would be entitled to $100,000. In this case, the Court of Appeal’s method would allocate $350,000 (the FAA claim) to the widow and $200,000 (the two SAA claims) to the children. The total, $550,000, would exceed the deceased’s entire income.

The Court, in its paragraph [19] appears to have recognised this problem; for there it notes that:

If the dependants and the heirs are not the same people, the lost years’ award would be paid to the beneficiaries of the deceased’s estate, rather than to the dependants…. [A] defendant could potentially pay double damages by having to pay full dependency and lost years’ awards, with no accounting.

The Court, however, offers no method for dealing with this problem. I suggest the use of a method that is based on a concept that I call the overall limit. The value of this limit is calculated in the following way. First, determine the total dependency claim of all dependent members of the family. In the first example developed above, for example, this value was $180,000 ($150,000 for the widow and $30,000 for the dependent child). Second, determine the total lost years claim of all beneficiaries of the deceased’s estate ($130,000 in the example developed above – $80,000 for the widow and $50,000 for the child). The overall limit is the larger of these two numbers – here, $180,000.

I assume that the total award granted under both the FAA and the SAA cannot exceed the largest award that would be granted by one Act – that is, it cannot be larger than the “overall limit.” Therefore, I propose that the following method be used to determine the parties’ awards. First, estimate the total FAA and SAA awards and define the overall limit as the greater of the two total awards. Second, award the surviving spouse his or her FAA or SAA entitlement, whichever is greater. Finally, award any children their FAA amount, plus their share of any greater SAA, up to the limit imposed by the overall limit. For one child this is simple, as I show in the examples below. For two or more I assume the extra SAA dollars would be allocated equally, in proportion to each child’s FAA award, or using some other formula.

Numerical Examples

In this section, I provide four examples of the application of my suggested method. For the purpose of these examples I will assume a personal consumption deduction of 35 percent. This was endorsed by the Court of Appeal in Duncan, and the approach used in Duncan was endorsed in Brooks, though a particular percentage was not specified. [I note with all due respect that, following these decisions, there remains a conflict between the idea that the estate’s award should not depend on the victim’s future spending decisions (Brooks at paragraph [29]) and the statement that the deduction does depend on the number of children in the victim’s hypothetical future family (Brooks at paragraph [28]). This conflict has been present since the original Court of Appeal decision in Duncan, and we have covered the issue in earlier newsletters.]

I also assume in my examples that the FAA awards are calculated using a 78 percent dependency rate for a surviving parent and two children, a 74 percent rate for a parent and one child and 70 percent for the parent only. The problem of double payment will be present at any conventionally used rates. Finally, note that the FAA award is calculated using joint mortality while the estate calculation uses only the mortality contingency of the deceased.

Example #1 – Without Divorce and Remarriage

The first example assumes that a man has died, leaving his wife and one child. For simplicity I consider only future losses, though the analysis is the same in the pre-trial period. The deceased would have been 50 years old at the date of settlement, the surviving spouse will be the same age, and the child will be 15. The child is assumed to be dependent until the age of 22, which is the parents’ age 57. The deceased would have earned a before-tax income of $40,000 and an after-tax income of $30,000, with no changes until retirement at 62. Contingencies are balanced and are therefore ignored, and I apply Economica’s usual 4.00 percent discount rate and 1 percent rate of productivity increase. Following the steps listed in Brooks, we would calculate the figures provided below:

  1. The dependency awards are $171,897 to the parent and $33,818 to the child, for a total of $205,715. The present value of all after-tax income is $283,433, so the total FAA loss to the family is 72.58 percent of the deceased’s after-tax income.
  2. The estate award is valued at $188,613, which is 66.55 percent of the joint mortality value of after-tax income.
  3. Using the ISA, $114,306.50 is allocated to the surviving spouse and $74,306.50 is allocated to the child. (The parent receives $40,000 more than the child.)
  4. For the parent, the dependency award is reduced to $57,590.50 (= $171,897 less $114,306.50). In the child’s case the SAA award is larger and no reduced FAA is calculated.
  5. The child receives their lost years award of $74,306.50.
  6. The parent receives $114,306.50 under the SAA and $57,590.50 under the FAA, implying a total equal to the original FAA award of $171,897.

Notice that the overall award to the family would be $246,203.50, which is 86.86 percent of the present value of joint mortality after-tax income. I would set an overall limit of $205,715 (since the combined FAA award is larger than the combined SAA award of $188,613). The difference between the given total and the overall limit is $40,488.50, and that is the amount of the double-payment in this example. That amount is deducted from the $74,306.50 awarded to the child at step 5, such that the child’s final joint award is simply their original dependency award of $33,818.

Example #2 – As in Example #1 but With Divorce and Remarriage

I now alter the above example to apply standard divorce and remarriage contingencies to the spouse’s FAA claim. All other assumptions remain unchanged. The revised figures are provided below:

  1. The dependency awards are now $151,775 to the parent and $33,818 to the child, for a total of $185,593. Note that the total FAA loss to the family has been reduced to 65.48 percent of the deceased’s after-tax income.
  2. The estate award is still valued at $188,613 (66.55% of after-tax income).
  3. Using the ISA, $114,306.50 is allocated to the surviving spouse and $74,306.50 is allocated to the child.
  4. For the parent, the dependency award is reduced to $37,468.50 (= $151,775 less $114,306.50). In the child’s case the SAA award is larger and no reduced FAA is calculated.
  5. The child receives their lost years award of $74,306.50.
  6. The parent receives $114,306.50 under the SAA and $37,468.50 under the FAA, implying a total equal to the “divorce and remarriage” FAA award of $151,775.

Notice that the overall award to the family would be $226,081.50, which is 79.75 percent of the present value of joint mortality after-tax income. I would set an overall limit of $188,613 (since the combined SAA award is now larger than the combined FAA award of $185,593). The difference between the given total and the overall limit is $37,468.50, and that is the amount of the double-payment in this example. It is not a coincidence that that is the amount of the spouse’s FAA award – by definition a double payment is that part of a combined award to one party in excess of the amount they would receive under the Act which sets the overall limit. (To go back to the no-divorce version, note that the double payment of $40,488.50 can also be calculated as the child’s FAA award of $74,306.50 less their SAA award of $33,818.) Of course, the double payment can be eliminated on either side – if the spouse’s FAA award is deemed to take precedence then the double payment is deducted from the child’s combined award, while the reverse should be done if the courts decide that the SAA amount takes precedence.

Example #3 – Without Divorce and Remarriage

The third example assumes that the deceased would have been 30 years old at the date of settlement, the surviving spouse will be the same age, and the child will be 5. The child is assumed to be dependent until the age of 22, which is the parents’ age 47. The deceased would again have earned a before-tax income of $40,000 and an after-tax income of $30,000, with no changes until retirement at 62. The resulting calculation is:

  1. The dependency awards are $355,957 to the parent and $72,682 to the child, for a total of $428,639. The present value of all after-tax income is $589,892, so the total FAA loss to the family is 72.66 percent of the deceased’s after-tax income.
  2. The estate award is valued at $390,215, which is 66.15 percent of the joint mortality (FAA) value of after-tax income.
  3. Using the ISA, $215,107.50 is allocated to the surviving spouse and $175,107.50 is allocated to the child.
  4. For the parent, the dependency award is reduced to $140,849.50 (= $355,957 less $215,107.50). In the child’s case the SAA award is larger and no reduced FAA is calculated.
  5. The child receives their lost years award of $175,107.50.
  6. The parent receives $215,107.50 under the SAA and $140,849.50 under the FAA, implying a total equal to the original FAA award of $355,957.

Notice that the overall award to the family would be $531,064.50, which is 90.03 percent of the present value of joint mortality after-tax income. I would set an overall limit of $428,639 (since the combined FAA award is larger than the combined SAA award of $390,215). The difference between the given total and the overall limit is $102,425.50, and that is the amount of the double-payment in this example.

Note that as in the first example, when one Act (here, the FAA) determines the limit then the double payment is the difference between what one person (the child, in this case) receives using the Brooks formula ($175,107.50 under the SAA) and what they would receive under just the Act which sets the limit ($72,682).

Example #4 – With Divorce and Remarriage

The fourth example assumes that the deceased would have been 40 years old at the date of settlement, the surviving spouse will be the same age, and that there are two children aged 8 and 12. The children are each assumed to be dependent until their age 18, which is the parents’ ages 46 and 50. The deceased would have earned a before-tax income of $60,000 and an after-tax income of $44,000, with no changes until retirement at 62. Divorce and remarriage apply. The resulting Brooks-Stefura calculation is:

  1. The dependency awards are $274,407 to the wife, $37,217 to the older child and $62,027 to the younger child, for a total of $373,651.
  2. The estate award is valued at $444,776.
  3. Using the ISA, $174,926 is allocated to the surviving spouse and $134,925 is allocated to each child.
  4. For the parent, the dependency award is reduced to $99,481 (= $274,407 less $174,926). In the children’s cases the SAA awards are much larger and no reduced FAA is calculated.
  5. The children each receive their lost years award of $134,925.
  6. The parent receives $174,926 under the SAA and $99,481 under the FAA, implying a total equal to the original FAA award of $274,407.

Notice that the overall award to the family would be $544,257. I would set an overall limit of $444,776 (since the combined SAA award is larger than the combined FAA award of $373,651). The difference between the given total and the overall limit is $99,481, and that is the amount of the double-payment.

Note that again, when one Act (here, the SAA) determines the limit then the double payment is the difference between what one person (the spouse, in this case) receives using the Brooks formula ($274,407 under the FAA) and what they would receive under just the Act which sets the limit ($174,926 under the SAA).

The correction for the given double-payment can again be made in either of two ways. If the SAA award is deemed to take primacy, then the spouse is simply awarded $174,926 while the children receive their estate amount. If the FAA is primary then the spouse receives the full $274,407 and the children’s SAA total of $269,850 (= $134,925 x 2) must be reduced by the overpayment amount. The children’s combined award would therefore be $170,369 (= $269,850 – $99,481). This could be divided between them equally or in proportion to the shares they would receive under the FAA (which I would argue is sensible, since the FAA is being deemed primary in this case). In that event the younger child would receive $106,481 and the 12-year-old would receive $63,888.

In considering the four examples presented, it is apparent that for younger surviving spouses, the amount available under the Survival of Actions Act will often be significantly larger than a “divorce and remarriage adjusted” Fatal Accidents Act claim. If we assume (as I would expect) that the courts will consider the FAA awards paramount, then in example #1 and the first part of example #2 the double payment will be deducted from the child’s SAA amount. For the children of a younger couple, the award available to them under the SAA can become very significant when their estate claim “recaptures” dollars lost to divorce and remarriage contingencies under the FAA.

The examples above suggest that when joint FAA/SAA claims are made, one way to proceed is as follows: First, estimate each person’s FAA and SAA award and define the overall limit as the greater of the two total awards. Second, award the surviving spouse their FAA or SAA entitlement, whichever is greater. Finally, award any children their FAA amount, plus their share of any greater SAA, up to the limit imposed by the overall limit.

Of course, when all of the family members involved receive higher awards under one act or the other, then there is no need for any further calculation. For example, when there are no children, and absent divorce and remarriage, the spouse’s 70 percent dependency under the FAA will generally be greater than their 65 percent entitlement under the SAA (though they are closer than the rates would seem to indicate because the SAA uses sole mortality while the FAA adds the survivor’s mortality as well).

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Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

The Deduction (?) of “Accelerated Inheritance” (Scott Beesley’s view)

Posted on By economica

by Scott Beesley

This article was originally published in the Summer 2001 issue of the Expert Witness.

The Court of Appeal has stated that other “accelerated inheritances” should be deducted from each person’s dependency award (at paragraph [15] in Brooks). I have two comments to make on this topic.

First, as a relatively minor point I would mention that the deduction used must be the present value gain involved, not the amount inherited at the time. The “gain” now is reduced somewhat by the loss of the same amount in the future, at the deceased’s without-accident expected age of death. Of course for a young spouse this latter present value is small, but it is not zero. The Court was probably aware of this issue but as the paragraph was written one would simply deduct what was received shortly after the premature death.

Second, and far more importantly, I would argue that to deduct any accelerated inheritances would be an enormous and unjustified change to existing practice – note that for a middle-aged couple with significant assets, the deduction from a normal dependency award could be very large. For example, if they have assets of $400,000, the supposed gain to one spouse from early receipt of the partner’s half of those assets would be a large fraction of the $200,000 (about ¾ of it, or over $150,000, for a couple aged 40). Assuming a gross dependency award of perhaps $450,000 (= $30,000 times a multiplier of 15), the loss would be reduced by more than a third. I suggest with all due respect that this would be incorrect and unjust.

In a fatal accident case we have always been concerned with assessing the spouse’s (and children’s) loss of labour income. We are not supposed to consider the assets (or lack thereof) of the family, except to the extent they are relevant in estimating lost labour income. In particular it would seem quite unfair that two families who had suffered identical losses of labour income would receive very different dependency awards, should the Court’s suggestion be adopted. (It is perhaps even more bothersome to consider that between those two families, the one that had failed to save much of their income would be granted the larger award!) Similarly, a child who might normally be entitled to a dependency award in the tens of thousands could receive nothing, if his or her share of the estate’s assets was significant.

I have in fact seen at least one attempt to apply such a deduction, disguised within a cross-dependency methodology. The expert in question simply counted interest income along with each person’s labour income in estimating the family total, and of course this led to the survivor “gaining” something that partially offset the loss of dependency on labour income. I do not recall the exact figure but it was of the same order of magnitude as the following example: Assume interest income of $10,000 per year ($5,000 for each spouse). Using cross-dependency with 30 percent consumed by each person and 40 percent going to indivisibles, the survivor formerly benefited from $7,000 of that income. To be formal about it, the survivor received $4,000 (40 percent of their own $5,000 and the same amount from the deceased) for indivisibles and $3,000 (30 percent of each side’s funds) for exclusive personal consumption. After the death, the cross-dependency methodology presumes that she gains $3,000, consisting of the deceased’s supposedly saved personal consumption (30 percent x $5,000 x 2). All of these are annual figures only and the present values over decades would be much larger. The deduction of almost half the family’s assets (as opposed to just the interest on those assets) would be even worse. As discussed previously in this newsletter, we strongly disagree with the cross-dependency method – even when it is applied only to labour income it can imply that the survivor is better off without their spouse. The courts are free to use this method if and when they see fit, but I would ask that at the very least they refrain from allowing the deduction of accelerated inheritances, since that falsely reduces a future loss of labour income using assets the family already owns. In a great many cases this method would eliminate any dependency losses (consider a couple within ten or fifteen years of retirement – their assets are already substantial and there are relatively few years of labour left). One would like to think that survivors will not be asked to pay the defense the amount by which they have been made “better off,” but we have already seen cases where this has occurred across different years (i.e. a cross-dependency “gain” in some years is left in a multiyear calculation in order to offset losses occurring in others).

I hope that the Court will in the future clarify which, if any, accelerated inheritances they would like to see deducted from dependency awards. In addition, it would be preferable to have the sole vs. cross dependency debate settled definitively – it hardly seems fair when two otherwise identical families in similar fatal accident cases can receive very different awards, depending on the method favoured by each of the judges involved. The same discrepancy could be made even more pronounced if some judges deduct accelerated inheritance while others do not. Ideally, I would prefer to have the legislature consider each of these issues and impose some uniformity.

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In a companion article, Christopher Bruce considers these same issues, and offers a different perspective.

Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

The Deduction of Accelerated Inheritance

Posted on By economica

by Christopher Bruce

This article was originally published in the Summer 2001 issue of the Expert Witness.

In Brooks v. Stefura, the Court of Appeal stated that “accelerated inheritances” should be deducted from each plaintiff’s dependency award. The Court did not, however, state clearly what it meant by “accelerated inheritances.” In this article, I offer a number of observations that may cast some light on this issue.

First, note that the “gain” in the present is to be reduced by the loss of the same amount in the future, at the deceased’s without-accident expected age of death. When the asset inherited “today” is physical in nature – for example, a house or piece of land – one must be careful to take into account the probability that the value of that asset would have increased significantly before the deceased’s natural death. The greater would this rate of increase have been, the lesser will the “gain” be from having inherited “early.”

For example, assume that a child inherits a house with a value of $100,000 (after payment of outstanding debts) today instead of at his mother’s natural date of death 20 years from now. If the rate of inflation of house prices is 3 percent per year, the house would have been worth $180,000 at the mother’s date of death. Assuming a rate of interest of 6 percent, it would be necessary to invest $56,300 today to generate $180,000 20 years from now. Thus, receiving $100,000 today instead of $180,000 20 years from now yields a gain of $43,700.

If, however, the rate of inflation of house prices is 4 percent, the house would have been worth $219,000 20 years from now. At a rate of interest of 6 percent, that amount could be replaced by investing $68,300 today. In that case, the receipt of $100,000 today, instead of $219,000 20 years from now, provides a benefit to the survivor of only $31,700.

More importantly, when the asset that is inherited today is financial in nature – for example, stocks or bonds – there is no gain at all from early inheritance. For example, assume that the asset is a secure bond that pays 8 percent per year for the next 10 years. Assume also that the deceased had a 10-year life expectancy. It is unlikely that the heirs could sell the bond and invest it in a secure financial instrument that pays more than 8 percent. Hence, they have gained nothing by receiving ownership of the bond today rather than 10 years hence.

Second, the deduction of “accelerated inheritances” results in the dependants of spendthrifts receiving larger awards than will the dependants of frugal individuals, everything else being equal. For example, assume that two individuals both earn $50,000 per year after taxes and both own houses valued at $200,000 that they purchased 10 years ago. Individual A has been devoting $20,000 per year to the payment of his mortgage, whereas individual B has been devoting only $10,000. As a result, at the time of his death A has paid off $140,000 of his mortgage while B has paid off only $60,000. The decision of the Court of Appeal would result in a much larger deduction from A’s estate than from B’s.

Third, in most cases, the most important inheritance will be the equity in the family home, left to the surviving spouse. It is not clear, however, that receipt of this equity “accelerates” the benefits enjoyed by the survivor. Assume, for example, that the home in question is worth $200,000. In most cases, the surviving spouse would have owned half of the home. Thus, it is the deceased’s half of the house that, presumably, the survivor has “gained.” But if the deceased had lived, the survivor would have had the benefit of that half of the house. It is difficult to see, therefore, what it is that the survivor has “gained” and, therefore, why there should be some deduction of the “accelerated’ inheritance.

The leading doctrine in damage assessment is restitutio in integrum, restoration of the plaintiff to his or her “original position.” The original position of the survivor is that he or she enjoyed use of 100 percent of the family home and some percent (usually, approximately 70 percent) of the other spouse’s (after-tax) income. For the Court to rule that some portion of the equity in the home should be deducted from the survivor’s claim against the dependency on income is tantamount to a ruling that the survivor should not be returned to his or her original position.

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In a companion article, Scott Beesley considers these same issues, and offers a different perspective.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).