The Reasonable Exercise of the Discretion to Encroach
In the recent Newfoundland Court of Appeal decision, Dicks v. Dicks Estate, the Court had occasion to consider, among other things, whether the manner in which an estate trustee exercised her discretion to encroach on capital was cause to order her removal.
The Testator created a trust benefiting his wife with the income with the capital passing to his four children (one of whom was the trustee) on her death. The value of the estate was in excess of $1.5 million. In addition to her interest under the Will, the surviving spouse received assets as designated beneficiary and by right of survivorship of over $1 million.
The trustee had the power to encroach for the benefit of the surviving spouse. The terms of the trust also specifically relieved the Trustee from the “even-handed” rule and authorized her to use her discretion without regard to the interest of any residual beneficiary, even to the point of the complete exhaustion of the trust. Notwithstanding this very broad discretion, the estate trustee did not acquiesce to every request for encroachment made by the life tenant. The trial judge observed that this approach was "unnecessarily restrictive and was not consistent with what was contemplated in the Will" yet amounted to a reasonable exercise of discretion.
The Court of Appeal, in upholding the trial judge’s determination, agreed that there was no evidence of lack of bona fides on the part of the trustee and no evidence that her position as a beneficiary influenced her decision making. Friction, hostility or animosity between the trustee and the other beneficiaries was not a reason to remove the trustee. Neither will every mistake or other failure by the trustee in the past result in removal. The appropriate question is whether the trust is likely to be administered properly in accordance with the fiduciary duties of the trustee with due regard to the interests and welfare of the beneficiaries.
Apparently, leave to appeal to the Supreme Court of Canada has been sought. Stay tuned.
David M. Smith – Click here for more information on David Smith.