September 20, 2006 Hull & Hull LLP Uncategorized Tags: , , , , 0 Comments

To carry on with the discussion of trustee/director conflicts of interest: the very stringent duties applying to trustees can clash with the equally stringent duties applying to directors of a corporation, when the trustee and director are one and the same person. Many corporations are speculative in nature. This is fine during a testator’s life, but the prudent investor rule, (as discussed in prior blogs and podcasts) may dictate that a speculative corporation is not the best investment for an estate.

Being a director of a corporation may require an entirely different skill set than a trustee, and may require specialized expertise that the trustee may not have. Since often a trustee becomes a director only as an afterthought, it may well be that the testator has not thought through the fact that the same person will need to fulfil both roles. If the executor also happens to be a shareholder of the corporation and keeps the estate assets invested in the corporation, there may be an obvious avenue for argument by the beneficiaries that the director used the estate assets improperly to enrich his interest in the corporation.

Given the risks of conflict, and even the risk of an allegation of conflict which can lead to litigation, an obvious question is whether the executor should become a director at all. At law however, she probably has no choice if the estate holds a substantial or controlling interest in a corporation and the trust provides for the continuation of the business of the corporation. Using those facts, in all likelihood the trustee must become a director to oversee the management of the estate’s investment. This obligation cannot be delegated. The obligation to become a director in cases where the estate holds substantial shares in a corporation should not be taken lightly by a potential trustee who may be considering whether to accept the trust.

One way to avoid this conflict would be simply to choose not to accept the role of an executor and trustee at all. In addition to the common law fiduciary duties applicable to directors there are numerous liabilities imposed on them by statute in the corporate, labour, environmental and taxation areas. This is another reason to potentially refuse to accept a role as trustee if it were victate also accepting a role as a director. The following factors, among others, can lead to inherent conflicts of interest faced by a trustee director:

1. Risk – successful corporations, in order to be successful, need to take significant risks, but any executor who takes substantial risks with trust assets is exposing him or herself to complaints by the beneficiaries and potential personal liability.

2. Income/Capital – a corporation will often reinvest income or profit over time in order to ultimately benefit the corporation, but in most estate situations there is an income beneficiary who will take all the income from the trust. The need to pay out income and the fact that an income beneficiary will likely immediately complain if the income stops, can mitigate the corporate objective of ensuring there are sufficient assets in the corporation to grow the corporation over time.

3. Time Lines – corporations are theoretically immortal as long as the corporation is successful. Trusts for the most part have a defined end point, usually the end of life of a specific person. Investing in a corporation over an extremely long term may make perfect corporate sense, but for a trust there may well be different timing considerations in play.

Thanks for reading. Sean.

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