Estate Litigation: Challenging a gift given before death
A gift made by a loved one during their lifetime is called an inter vivos gift. This tends to happen when an elderly parent makes a gift to a child or grandchild before their death instead of waiting to distribute gifts through their Last Will. If other family members do not receive a similar gift from that parent or grandparent, they might question why and, sometimes, want to challenge the gift.
Let’s illustrate how this works with a fictional (but very possible!) scenario.
Scenario
Joseph was 80 years old and his wife died several years ago. He had two adult children, Mary and Matthew. Matthew has two children, Mark and Melissa. Joseph sold his home for $800,000. He did not have any other savings or large assets. Joseph gave $600,000 to his daughter Mary a few weeks after the sale of his home and kept the rest in a bank account to use for his retirement home costs. Joseph had a small collection of vinyl records. When he listed his home for sale, he gifted his vinyl record collection to his grandson, Mark, who is an aspiring musician. Joseph did not give anything to Matthew or Melissa. Around the same time that Joseph sold his home, he began to suffer from bouts of dementia. Matthew did not learn about the gift to Mary until after Joseph died.
So, the question is: Can Matthew challenge the gift to Mary?
There are two possible justifications for challenging a gift made during someone’s lifetime: the gift-giver did not have the mental capacity to make such a gift; and/or
- the gift-giver did not have the mental capacity to make such a gift; and/or
- the gift-giver was unduly influenced by the gift recipient.
We’ll use our fictional scenario to examine these two factors more deeply.
Capacity to make a gift
Mental capacity exists on a spectrum, generally referring to a person’s ability to understand and appreciate the impact and consequences of their actions. When it comes to a legal challenge, the need to establish the degree of capacity of the gift-giver varies depending on the nature of the gift.
If the subject matter and value of the gift is trivial in relation to the gift-givers other assets, a low degree of understanding of the nature and effect of the gift will suffice. In our scenario, the vinyl records given to Mark would likely be considered trivial in relation to the rest of Joseph’s assets.
If the gift is of significant value and makes up a large portion of the gift-giver’s assets, then the required degree of understanding of the nature and effect of the gift is high. In our scenario, the $600,000 gift to Mary could be seen as a significant portion of Joseph’s assets. This means that, to make such a large gift, Joseph needed to have testamentary capacity – the same degree of capacity that’s legally required to make a Will.
The recipient of the gift has the burden of proving on a “balance of probabilities” that the gift-giver had the capacity to make a gift at the time the gift was made. Proving something on a balance of probabilities means that it is more likely than not to have happened. In the context of this scenario, this means that Mary has the burden of proving that there is more than a 50% chance that Joseph was capable of making the gift to her.
To do this, Mary would need to present evidence demonstrating that Joseph understood the act of gift-giving and its consequence; that he understood the nature of his assets; and that he was free of any disorder of mind or delusions that might impact his ability to understand the act of gift-giving at the time. Mary could rely on medical records, lawyers’ files, and possibly a capacity assessment of Joseph (if one exists). If there is sufficient evidence that demonstrates that Joseph was suffering from dementia that was severe enough to compromise his capacity at the time the gift was made, then a Court could compel Mary to return the $600,000 to Joseph’s Estate for it to be distributed per the terms of his Last Will.
Undue Influence
Undue influence is related to, but separate from, capacity. A person could have capacity to make a gift, understand its nature and effect, but still be subject to manipulation, coercion, abuse, or control in making the gift.
A Court will not intervene when a person makes a foolish but freely-made decision to give a gift. Capable people who are not influenced are free to make bad decisions.
There are two types of undue influence. The first type is direct or actual undue influence, meaning the recipient of the gift (or someone on their behalf) forced, abused, manipulated, and/or coerced the gift-giver into making the gift. The second and more common type is known as presumed undue influence or undue influence by a special relationship between the gift-giver and recipient.
Relationships where presumed undue influence has been found, include a parent and adult child relationship where the elderly parent trusts and depends on the adult child. A gift from a parent to an adult child does not automatically result in a presumption of undue influence, but it will be found where the parent was vulnerable through age, illness, cognitive decline, or heavy reliance on the adult child.
The burden of proving that there has been undue influence is on the person alleging that undue influence occurred. In our scenario, Matthew would have the burden of proving that Joseph was unduly influenced by Mary. Since Mary is an adult child and Joseph was suffering from some bouts of dementia, there is a presumption that Joseph was unduly influenced in making the gift to Mary.
However, Mary has the opportunity to demonstrate that Joseph made the gift with full, free and informed thought. This can be done through evidence such as showing that Joseph obtained independent legal advice before the gift was made or that there was no opportunity for Mary to influence Joseph before he gave her the gift. If Mary cannot provide sufficient evidence to demonstrate that Joseph made the gift with full, free and informed thought, the Court may compel her to return the $600,000 to Joseph’s Estate for it to be distributed per the terms of his Last Will.
The takeaway
There are a few red flags regarding the $600,000 gift to Mary. Matthew should consult a lawyer about possibly challenging the gift in light of it being a significant portion of Joseph’s assets and in light of it being given at a time when he may have had limited capacity due to dementia.
Estate planning and distribution – including inter vivos gifting – can be a sensitive, emotional process that sometimes involves conflict. When disputes arise, you should always seek legal advice to achieve an effective resolution.