Discretionary trusts with a power of encroachment commonly vest the trustee with absolute discretion. But even such broad power cannot protect against litigation.

The prospect of litigation can, however, perhaps be minimized by appropriate drafting. This was one of the takeaways from the 2022 decision of the Ontario Court of Appeal in Walters v. Walters Estate.

In this case, Mrs. Walters (who predeceased her husband) made a will which appointed her children as executors and created a spousal trust. The Trustees had a power to encroach which they were to exercise with due consideration to the guidance as contained in the Will:

I wish to advise my Trustees that my husband’s comfort and welfare are my first consideration and for this reason, it is my desire that my Trustees exercise their powers to encroach on the capital in a manner which will ensure his comfort and well being.”

Despite such an apparently clear mandate, litigation ensued over the refusal of the Trustees to encroach for the benefit of the husband, convinced that he was not in need.

On the issue of a means test, the Court of Appeal looked at the leading and competing authorities and concluded: “Absent other direction in the will, I fail to see how a trustee can satisfy itself that payment of capital to the income beneficiary is necessary or advisable without considering the beneficiary’s financial circumstances.“

The Court went on to make an observation of which will drafters should take note: “Ideally, testators will state in wills that contain a discretionary trust with a power of encroachment whether the income beneficiary’s resources are to be considered. Indeed this would be an advisable practice.”

Ultimately, the Court of Appeal sided with the finding of the Application Judge that an encroachment ought to have been made: on the somewhat slim evidence before the Court, the husband was in need and the Trustees allowed their dislike (as opposed to distrust) of their father to fetter their discretion.

Thanks for reading,

David Morgan Smith