When Trustees Disagree
April 6, 2021
No one establishes a trust, or makes a will, intending to have it result in disagreements or law suits. That is one of the reasons why people are best advised to have a lawyer prepare their wills or other legal documents.
Lawyers are trained professionals who know how to gently ask you the tough questions about family dynamics, and suggest options to minimize the risk and cost of conflict.
The case of Dewaele v. Roobroeck is an example, and a lesson. The three adult children of the deceased (“Rose”), who were also jointly the estate trustees, could not agree on how to administer her estate. They could not agree on what assets made up the estate property, the value of the estate assets, or how and when to distribute the estate assets.
Their disagreement had become so profound that the estate was about to lose the preferential tax treatment available for asset distributions prior to the third anniversary of Rose’s death, which would cost the estate, and ultimately, the three of them, considerable extra tax.
One issue was that two of the trustees, Richard and Ronald, thought that decisions could be made by a majority of the trustees. They liked this idea, because they could gang up on their sister Rachel and have things their way.
What they did not appreciate was that unless the will provides otherwise, trustees must act unanimously, not by majority rule. Though this can be more difficult than majority rule, it promotes fair treatment of everybody. One of the tough questions in your will or trust drafting is whether to allow majority rule. This is where family dynamics come into play. The rule of unanimous agreement allows one stubborn person to obstruct the administration of the estate, but avoids some of the problems that a majority might create. Which best fits your family only you can decide, but your lawyer can assist in that decision.
The trustees could not agree on the values of the assets, so the application for probate (now called an Application for a Certificate of an Estate Trustee with a Will) could not be filed. The Estate Administration Tax (commonly referred to as “probate tax”) is based upon the value of the assets, and must be paid to obtain a certificate. Richard and Ronald advocated for lower values than Rachel. The court ordered an independent appraisal of the assets, but Richard and Ronald still refused to sign the documents, including the cheque that must accompany the Application, the income tax returns, and tax elections recommended by the estate’s accountant.
The valuations are important not only for tax purposes, but because each of the children is given an option to purchase the Home Farm, in an order specified in the will, at a fair market value to be determined by a realtor, or at an agreed price. If no one properly exercised this option due to the disagreement over value, the farm becomes just anther asset to be dealt with in the estate. Since both Richard and Ronald say they are interested in keeping the farm, Rose’s intentions may be defeated by the delay in determining value. No doubt if she had seen this possibility coming, the will would have been drafted differently.
A secondary issue concerned firearms previously owned by Rose’s late husband, which now formed part of Rose’s estate – or so Rachel argues.
Richard claims that the firearms were a gift from the father to him, so are not part of the estate. To make this more complicated (and expensive), Richard refused to give Rachel an inventory of the firearms, or permit an appraisal.
Rachel is still prepared to work toward a solution that allows her brothers to keep the farm, but that is only possible if the value can be settled. She proposes putting the farm up for sale, and giving Richard and Ronald an opportunity to match any arms-length offer.
Rachel ultimately asked the court to remove Richard and Ronald and leave her as sole trustee. Richard and Ronald disputed her ability to do the job.
The court found as a fact that Richard and Ronald’s conduct had put the estate at risk of serious negative financial consequences. This is a breach of their duties as trustees.
The judge reviewed key points of law:
- the law, both under the Trustee Act and the inherent jurisdiction of the court to supervise trusts, has jurisdiction to remove a trustee
- this power should be exercised where the trustee’s continuing in that role might be detrimental to the administration of the trust
- not every mistake justifies removal
- conflict between trustees and beneficiaries may not justify removal, but conflict between co-trustees will more often result in removal
- past misconduct that is likely to continue may be grounds for removal
- in some cases, dissension and animosity between trustees may justify removal even without misconduct, if it compromises the administration of the estate
- a trustee should be removed where there is a conflict between their personal interests and their duties as trustee
That last point is a big hidden danger in estate planning. Any time one of a number of beneficiaries is named as a trustee, a conflict of interest might arise. Although there are many good reasons to name one or more beneficiaries as trustees, this is sometimes a reason to select a trusted outsider.
The court then gave directions as to how the issues surrounding the firearms ought to be resolved.
The judge further ordered the filing of the application for probate, using the independently obtained values. This did not bind the parties to those values for dividing the assets, but permitted the administration of the estate to proceed.
Richard and Ronald were removed as estate trustees. Rachel continued as the sole trustee. This is not what Rose wanted, and is definitely not what Richard and Ronald wanted, but was the best decision possible.
The costs of this dispute were substantial – Rachel filed for reimbursement of legal costs of almost $80,000.00. Richard and Ronald represented themselves, but also incurred some costs.
When trustees disagree, it is always best if they can resolve it themselves. Where that is impossible, they may go to court for directions. As a last resort, one or more trustees may need to be removed.
All of these approaches involve cost, delay, and stress. Careful consideration of “what can go wrong”, and in particular, the potential impact of family dynamics, gives an opportunity to create a plan that has a better chance of working. This is one of the reasons why our view is that simply taking a “fill in the blanks” approach to estate planning is not your best option.