June 13, 2023
If you are a trustee, such as an estate trustee, you have a wide variety of duties that you owe to the estate and the beneficiaries. One of these is the duty of even-handedness, sometimes no one has the duty of impartiality.
The will or other document setting up the trust can change the nature of this duty, to allow preferential treatment of one beneficiary or group of beneficiaries. If you are setting up the trust (or doing a will) this is a question that you should consider at the time the trust is established or the will is drafted. It really comes down to how much you trust your trustee to know when impartiality is necessary, or when preferential treatment would actually be more fair or otherwise more suitable for your particular situation and your particular beneficiaries.
The estate trustee must be very careful to make sure that their interpretation of the will is correct. Even an honest mistake in how they treat the beneficiaries may be considered a breach of trust and create liability on the part of the trustee to repay the beneficiary who suffers unfair treatment. This applies whether there are special rules being interpreted, or a mistake is made by believing that a provision in the will creates a special rule.
This is particularly problematic when there are groups of beneficiaries who have successive interests in the estate property. For instance, the deceased may leave a life interest in the house to their spouse and provide that after the spouse’s death the house is to be sold and the proceeds divided between children or grandchildren. The trustee must be careful not to deplete the estate entirely for the upkeep of the house but must maintain the asset for the benefit of the ultimate beneficiaries.
It becomes more problematic when the assets involved are investments rather than a residence. Just imagine the potential controversy where step-mom has a life interest in the income from the investments, with the capital to be paid out to the children or grandchildren upon step-mom’s death. The trustee must invest wisely to provide a suitable income for step mom, while preserving the capital for those entitled to the remainder upon her death. Higher current returns are often achieved at the expense of the growth of capital, or by taking more risk with the capital. There is no one-size-fits-all solution to this problem.
Good estate planning upfront can reduce the problems for the trustee by specifying whether they have a power to postpone converting the assets into so-called authorized investments or whether they have an obligation to convert as soon as possible. Where the assets are hazardous or decreasing in value in the absence of other direction in the will, they must be converted as soon as possible.
And what about an asset not producing income, such as vacant land? It is unfair for the trustee to hold onto that property waiting for an increase in value, which favours the remainder beneficiaries, instead of converting the current value into an income-producing asset, even though that appears to favour the income beneficiary. If the deceased had particular plans for that property, one hopes they were spelled out in the will. The rules that apply if the will is silent are complex.
Another issue is which estate expenses are to be paid out of the income or the capital of the estate. Good drafting will specify how they are to be charged. If the will or trust instrument is silent, the general law is that expenses related to the income are charged to that income, whereas expenses to maintain the capital are charged against the capital. Examples of income expenses might be taxes, insurance, and repairs to the property. Capital expenses could be the costs of improvements to the property and expenses related to the ongoing administration of the trust other than those related exclusively to the life tenancy interest.
Sometimes the problems that arise are very intricate. For instance, the allocation of income to save tax may disadvantage other beneficiaries and there is law which says that “there may very well be situations where it is inappropriate for the trustees to take advantage of all of the schemes available to individuals when calculating their tax”.
TAKEAWAYS
As you may appreciate, this may get somewhat complicated even in estates which on their face appear simple. It is for this reason that most estate trustees continue to seek advice from an experienced estates lawyer throughout the administration of the estate to avoid liability.
WHAT WEILERS LLP CAN DO TO HELP YOU
At Weilers LLP, we have over 75 years of experience in assisting trustees of all types, including estate trustees, in administering trusts and estates. If you are an estate trustee, or any other sort of trustee, and require experienced professional legal advice, please give us a call and see if we are the right lawyers for you.
(As in many trusts matters, The Law of Trusts: A Contextual Approach, edited by Mark Gillen and Faye Woodman, along with The Law of Trusts by Eileen E. Gillese were consulted. Any errors or omissions are ours.)