May 8, 2022
Unfortunately, family members do not always get along, and this may affect the administration of your estate. What happens if this leads to trustees of your estate abusing their power?
The traditional approach to reviewing duty of a discretionary trustee is to consider whether and when they should exercise their discretion. As long as they act in good faith, and meet the “prudent business person” standard they will not have breached their duty if they do this. A court will not interfere. This goes back to at least the 1800s.
In more recent cases, Ontario courts have indicted that bad faith is not limited to fraud. It may also arise where trustees consider factors which they should not take into account.
In Walters v. Walters, Ollie left her estate (a home, a vacant lot plus some money) in trust with her children as trustees. Her husband Gerald was beneficiary for the income for life. The children inherit the remainder upon Gerald’s death. The trustees were directed to encroach on the capital to ensure Gerald’s “comfort and well-being”.
After Ollie’s death, Gerald moved into an unlicensed “retirement home”. He asked the trustees to use the proceeds of sale of Ollie’s properties to fund his cost.
The trustees did not trust Gerald. They did not believe his expenses were legitimate. They believed that Gerald had once had over a million dollars in investments. Gerald refused to tell them about that, or what he had done with his money. They refused to pay. They said they had discretion, and did not have to pay. Gerald took them to court.
Both a Superior Court judge and a panel of the Court of Appeal agreed with Gerald and ordered the trustees to pay.
The Court of Appeal considered earlier cases where the exercise of the trustee’s discretion was motivated by extraneous factors, such as disapproval of the beneficiary marrying outside their religion or, in an opposite situation, where the trustees paid simply upon request of the income beneficiary without considering necessity.
The court restates the test from “bad faith” to “abuse of discretion”. This is more easily understood wording, but also broader. It includes not only bad faith as we commonly think of it – a bad motive – and also simply having a wrong motive, if that wrong motive is because the trustees considered irrelevant factors, such as disliking Dad.
But was Dad’s own wealth a proper or improper consideration?
The court reviewed a number of cases, each of which dealt with slightly different wording or surrounding facts. They conclude that the answer is case specific, based on particular facts.
In an unusual move, they give a drafting tip:
“Ideally, testators will state in wills that contain a discretionary trust with a power of encroachment whether the income beneficiary’s resources are to be considered.”
Because Ollie’s will contained no such direction, the trustees acted unreasonably when they asked questions about Gerald’s means.
Though Gerald had refused to cooperate with the trustees, in court his evidence was that his funds were depleted. The trustees had no evidence to the contrary, merely suspicions. Gerald’s comfort and well-being was a priority to Ollie, so any doubt was resolved in his favour.
Whether you are preparing your will, or have an existing will:
- you may want to more carefully consider your intentions about life beneficiaries and encroachment on capital for their benefit, providing clear instructions to your trustees’
- this is another reason to take care in your choice of trustees, a topic we have written about before; and
- you need to review and update your will regularly as circumstances change.
These are not easy or simple tasks. Having a discussion with one of the experienced wills and estates lawyers at Weilers Law may save your estate a lot of money and grief after you are gone. Our lawyers have a range of experience with trusts; for example, I teach trusts at the Bora Laskin Faculty of Law.
If you’re a trustee, the estates lawyers at Weilers Law can help you with difficult questions about your duties, or the administration of the estate in general. If going to court is necessary, we have a full range of experience for any situation from an application for directions to a full blown dispute such as in Walters. Our litigation team is skilled in identifying issues, understanding the evidence required to prove your point, and presenting the case in court.