Listen to Delegation in Investment Accounts
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss delegation issues that arise when dealing with Investment Accounts and address a listeners question about the family cottage.
Delegation in Investment Accounts – Hull on Estate and Succession Planning Podcast #119
Posted on July 1, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #119 of our podcast on Tuesday, July 1st, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Suzana Popovic-Montag: Hi there, Ian.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: How are you today?
Ian Hull: I am great.
Suzana Popovic-Montag: That’s good.
Ian Hull: I think this podcast will actually be lodged into the internet through the mysteries of digital technology on Canada Day.
Suzana Popovic-Montag: Happy Canada Day everyone.
Ian Hull: Yes, big day here in Canada, and a big day for us as we continue our march towards our 200th podcast. That’s our next benchmark, I guess, in some ways. We’re now at 119.
Suzana Popovic-Montag: Just a quick reminder to anyone who’d like to call in and give us feedback, comments on the show, please feel free to call us at 206-457-1985.
Ian Hull: And feel free, of course, to e-mail us at email@example.com, or jump on our webpage at hullandhull.com and surf around, find our blog, find all of the backup information that we tend to be using for a lot of these podcasts. And we’re hoping to put more on where this summer’s project is looking toward trying to get some more video on there and certainly keeping the white papers on the website as well.
So, before we begin our further analysis of the ever-pressing issue of investment accounts, when you’re putting together Court format accounts, I just wanted to talk about an e-mail that we received last week on our discussion about the prudent investor rule. And we got a great e-mail, again this is tied into some specific advice they were seeking so I’m just sort of summarizing what was being asked of us. And the focus of the question was, just how much of a balanced portfolio do you have to maintain or how important is diversity when you have the main asset of the estate being the family cottage? And remember, we talked about the unique quality of a family cottage as an illustration of the escape clause that the Act and the Courts have allowed trustees to maintain an asset that, on the face of it, looks like it isn’t prudently being invested in the sense that it may be a wasting asset or it may be costing more than it’s making. And this person e-mailed us asking us what happens if it’s a fairly modest estate and you have essentially the bulk of the estate is indeed the family cottage?
So it’s a tough question and one that, as all lawyers have to say because we are right when we say it, it depends on the facts and it depends on the circumstances. We didn’t get into any more detail on what this specific question was, but I’m going to add one layer onto that and that is, is that let’s say it is a trust for a surviving widow. So in this case, a happily married couple, they have Wills that say all to the other in trust, and on the death of the final last person standing, everything to the child or the children, in this case there’d be two kids. So in that kind of scenario we have a surviving spouse, she’s 84 years old, the trust is only, and when I say only it’s made up of $900,000, $800,000 of it is the family cottage and $100,000 of it is cash. Well, in that kind of scenario, if the surviving spouse needs the money, then in that kind of situation it may be that the Court would say, you know what, you do have an obligation to diversify. Notwithstanding the fact that the two children are probably chirping away saying don’t sell the cottage, mom, it may be that that situation where, as a fiduciary, you have to assess it as being a unique asset certainly, but when you need cash, you need cash. So, again, it would depend on the personal circumstances of the surviving spouse and if she had her own wealth she may say, don’t worry, keep it. So that scenario works well, I think, as an illustration, because if the surviving spouse has their own wealth, and chooses to say to the fiduciary, don’t sell, then you’ve got some comfort to hang onto, it’s completely undiversified portfolio. But, if the surviving spouse says, I need the dough, then you’re faced with a difficult decision. And the third question would be, what about the children of the children, i.e., the grandchildren? And what would the representative, the legal representative of the grandchildren, say about that diversification question?
Suzana Popovic-Montag: And that also raises, of course, the issue of the even hand rule and how a trustee has to maintain an even hand between the income and the capital beneficiaries of the estate. And I know we’ve talked, Ian, on previous podcasts a little bit about that rule as well as how a trustee would go about exercising discretion in light of the fact that the surviving widow either does or does not have her own assets in her own estate.
Ian Hull: And there’s that other layer, of course, that we’ve talked about, is that we’re not actually as a fiduciary allowed to ask the surviving spouse typically what they have or don’t have. So you’re hoping there’s some co-operation and some discussion that is frank and maybe outside the boundaries of what we’re allowed to ask. But I have seen cases where you’ve got the even hand rule tugging away at you and then, and that being basically, look, we’ve got to balance these three generations. That this is the trust, the trust says look after the income beneficiary, the surviving widow, look after the children and keep in mind the grandchildren. So, I’ve seen cases where government agencies that monitor the grandchildren’s interest have insisted that that is not a diversified portfolio and that you have to seriously consider, notwithstanding the provisions of the Act, seriously consider selling the cottage. So really, from our perspective, I think what’s important to keep in mind is, if you keep, if you really want to keep a special cottage issue, or a chalet, or some recreational property, unique characteristic property, in a trust after you die, you’d better think through what all of the competing interests are going to be, and think through what the Court’s going to say to you. Because you may end up forcing the sale of this cottage property inadvertently, because of these competing interests.
Suzana Popovic-Montag: It really does underscore the importance of planning with proper professionals before these kinds of situations can unfold, so that you can sort of not predict but certainly try to anticipate the issues that can arise and perhaps creatively plan around that so that at the end of the day, you do have someone upholding what you ultimately intended to be your intentions.
Ian Hull: So I think that, anyway, I really appreciated the input from our e-mail participant on that one. But it’s a good dovetail into the next concept I think that’s worth flushing out, because at the end of the last podcast, Suzana, you talked about this mutual funds and delegation and the kind of twists and turns that come up in the investment account environment. Let’s talk for a few minutes, if we could, about this concept of delegation first of all, and then dovetail it into this investment account problems that get created.
Suzana Popovic-Montag: And generally speaking, what we start with is the fact that as fiduciaries, we are somewhat restricted in terms of the level and the extent of delegation that we can make in doing our fiduciary responsibilities. And one of the things that, in particular as I was saying previously years ago was a big issue with mutual funds, to what extent trustees could hire mutual fund advisors to actually help them administer these pools of funds and these assets.
Ian Hull: So when we say delegation, I guess we’re saying that we can’t hand off even the littlest jobs of any responsibility as a fiduciary. For example, signing a cheque. There is some authority that says that as a fiduciary we can ask someone else to give a Power of Attorney and ask someone else to sign the cheques. So in this situation, where we’re talking about delegation, we would say, hey we’ve got, the fiduciary is actually out of town most of the time but we’re running a bank account here. That fiduciary can delegate the job of signing the cheques probably. but what he can’t do is delegate the decision-making to sign the cheque. So every time, say there was an income payment that had to be made and the fiduciary was out of town and their lawyer, for example, was in charge of sort of making sure the cheques went out once a month. Every time a cheque is written and signed, it has to be on the express instructions of the fiduciary. Now the fact that the lawyer, under a Power of Attorney, may sign the cheque is probably okay, but that’s a good illustration of what we say delegating. As long as you don’t give up the mental and the judicious decision to have the cheque signed, although you’re passing on the actual mechanics of it, you probably haven’t breached the delegation rule. Again, twists and turns, depends on the facts, but that’s an illustration of this delegation. And your example is the perfect one, because with a mutual fund, that was sort of like the ultimate delegation from a fiduciary standpoint, where you were a fiduciary, you handed $100 to an investment advisor and that investment advisor turned that money over, bought into different funds. In the old days, they’d buy a bit of IBM, a bit of Bell Canada and you’d give them direct instructions. Well, with a mutual fund, of course, you’re handing it over to a further person, that is the fund manager of the mutual fund. So you give it to your investment advisor, who then hands it off to a fund manager. And until the Act was changed in Ontario, there was some concern that that was essentially over-delegating. You had pushed out the decision-making too far. And it’s a really important point when you come to the expectations of the investment account which we’ll talk about more in our next podcast, but an important step.
So in summary, we’ve got the old fashioned broker-client relationship untouched, but then we twisted it, we pushed it one step further and now we have some statutory protection to allow this sub-delegation, so to speak.
Suzana Popovic-Montag: And just to close the loop on that as well, we always underscore the importance of actually reading the documents and here the trust instrument or the Will, because that can be something that’s specifically planned for and language can be put into these documents that can authorize things over and above what the statute or what the common law itself provides for. So just another thing that we try to keep in mind in these situations.
Ian Hull: Well that’s great, Suzana. Hopefully we’ve had a good discussion on the question of delegation and certainly answered the question that came in from the listener. So thanks very much Suzana.
Suzana Popovic-Montag: Thanks to you, Ian and thanks to everyone who has joined us. Again, just a quick reminder of our call-in number for any questions or any comments that you might have on the show, 206-457-1985.
Ian Hull: And any direct feedback, go to our blog at estatelaw.hullandhull.com or our e-mail at firstname.lastname@example.org. Thanks so much.
Suzana Popovic-Montag: Thank you.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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