Authorising an Estate Freeze
Dr. Donovan Waters, Q.C., recently published an insightful article, “Estate Planning When Authorising Trust Terms are Absent” (2016) 35(3) ETPJ 251, that examines whether it is a breach of trust to carry out an estate freeze that excludes or adds new beneficiaries.
An estate freeze fixes the value of a current trust (“Trust A”) and transfers the future growth to another trust (“Trust B”). Dr. Waters looks at whether Trust B can have different beneficiaries than Trust A. There are various reasons why trustees may want to change the beneficiaries of a trust – such as cross-border tax implications for Canadian citizens living in the US, a divorce or new marriage, to name a few.
However, given the nature of the fiduciary relationship between trustees and beneficiaries and given that a trustee is obligated to discharge the duties set out in the trust instrument, Dr. Waters is of the opinion that it is a breach of trust for trustees to exclude or add to existing beneficiaries by way of an estate freeze, unless authorised by the terms of the trust instrument. Trustees owe a duty to serve the best interests of the beneficiaries, and excluding a beneficiary from Trust B is antithetical to that beneficiary’s best interests.
Assuming authorising terms must be present in the trust instrument in order for trustees to perform an estate freeze, Dr. Waters’ asks what kind of language is sufficient to empower an estate freeze. He is of the opinion that the trust instrument must expressly (and not generally) authorise a freeze.
Assuming that Trust A is already in existence and provides no authorisation to vary or to carry out an estate freeze, Dr. Water’s is uncertain whether a court would grant a freeze, even if the relevant variation of trusts legislation provides the court with the jurisdiction to vary. While Canadian courts have taken a positive approach and facilitated variations when the variation is sought for the benefit of the beneficiaries, there is no benefit to the beneficiaries of Trust A who are excluded from Trust B. As such, for the beneficiaries of Trust A who are excluded, a court would likely require significantly more “benefit” than is granted by the variation sought by the trustees of Trust A.
Finally, Dr. Waters’ offers helpful advice for drafting new trusts that expressly authorise trustees to perform an estate freeze.
As the world continues to “shrink” as a result of globalization and as Canadian beneficiaries may be more likely than in past decades to take up domicile in another country, drafting solicitors should consult with their clients about what powers to grant to their trustees to adapt to a changing world.
Thank you for reading.