Discretionary trusts often grant trustees broad powers. For example, trust instruments frequently describe powers as “absolute” or “unfettered.” At first glance, such language suggests that trustees enjoy wide latitude in deciding how and when to exercise those powers. This is not exactly wrong, as for centuries now courts have recognized that trustees exercising discretionary powers are generally free from interference where they act bona fide (in good faith) – specifically, since the United Kingdom’s House of Lords decided Gisborne v Gisborne in 1877 [(1876-77) L.R. 2 App. Cas. 300 (H.L.)].
However, long-standing equitable principles do impose meaningful limits on trustees even when the trust is, at its core, absolutely discretionary. While courts will not interfere simply because a trustee’s decision appears unwise or harsh, they have shown a willingness to step in when a trustee exercises discretion for an improper purpose or relies on irrelevant considerations in making a decision.
Extraneous Considerations and Improper Motives
A discretionary decision may be considered improper where it is influenced by irrelevant or extraneous considerations.
The Ontario Court of Appeal’s decision in Fox v. Fox Estate, 1996 CanLII 779 (ON CA), is the leading case in Ontario on this restriction. Here, the trustee exercised a power of encroachment to transfer all of the estate’s assets to the grandchildren, effectively depriving the son of his interest in the trust.
The Court found that the trustee’s primary motivation was her disapproval of her son’s marriage outside her religious faith – a factor which was irrelevant to the purpose of the discretionary powers bestowed on the trustee. As such, the trustee’s exercise of discretion was set aside. The Court noted that Ontario law has made clear that discrimination based on religion is contrary to public policy, and trustees cannot lawfully exercise their discretion on such a basis accordingly.
Fox v. Fox Estate demonstrates that courts may intervene on behalf of beneficiaries when the discretionary trustee takes into account considerations they ought not to consider or acts on a mistaken understanding of the purpose of the power they are granted.
The Proper Purpose Rule
Another potential constraint on trustee discretion is the proper purpose rule, which mandates that a trustee must exercise power only for the purposes for which it was conferred on them.
In Grand View Private Trust Co Ltd v Wong, 2022 UKPC 47, the Privy Council confirmed that this rule applies even to broadly worded powers. There, the trustees had the authority to add and exclude beneficiaries, and they used that power to remove all the family beneficiaries, replace the original trust with a purpose trust, and distribute the entire fund.
Although the language in the original deed granting the trustees power was wide, the Court looked to the trust instrument as a whole and concluded that it was fundamentally a family trust, intended to benefit the descendants of the settlor. The trustees’ decision effectively usurped that purpose. As a result, the exercise of discretion was held to be for an improper purpose and was void.
The key takeaway from this case is that compliance with the wording of a specific power may not be enough. The trustee’s objective must align with the settlor’s intention, as objectively derived from the trust instrument and surrounding circumstances.
Conclusion
Discretionary trustee powers are a central feature of modern trust practice, and are extremely important when establishing certain types of trusts, like Henson Trusts. But discretionary trustees are not without limits. Courts remain reluctant to second-guess trustees, but they will intervene where discretion is misused.
Grand View and Fox reinforce a consistent principle: the validity of a trustee’s decision depends not only on whether the trustee had the power, but why that power was exercised and for what end goal. Where a decision departs from the purpose of the trust or is influenced by irrelevant considerations, it risks being set aside – regardless of how broadly the trust deed is drafted.
Thanks for reading!
Jordan Sarah Head