Lawyers who work with trusts will certainly have come across the words “absolute discretion”, used to describe the nature and scope of a trustee’s power in administering the trust property.  

One would, in the normal course of a conversation, safely assume that “absolute discretion” means unfettered power to decide as one pleases. However, as more often than not the case with the law, words carry along a nuanced history. The term “absolute discretion” in the context of trusts is no exception.  

It is well established that a trustee, as a fiduciary, has an obligation to act in good faith and for the benefit of the beneficiaries. Acting outside the bounds of good faith can open up a trustee to potential liability in regards to the exercise of their discretion.  

In Walters v. Walters, 2022 ONCA 38, the Court of Appeal had the opportunity to clarify the limits on powers of an estate trustee granted by the term “absolute discretion”.

This case involved the interpretation of a will (the “Will”) that provided the trustees with the right to encroach on capital, in their  absolute discretion, for the benefit of the income beneficiary, the surviving spouse and father (the “Father”) of the Applicants in the appeal. The children of the Father were named as the estate trustees and instructed, pursuant to the Will, to exercise their discretion for the comfort and well-being of their Father. 

The dispute arose when the Father requested the estate trustees to encroach on the capital of the estate to pay for his living expenses. The estate trustees refused, on the grounds that they did not trust their Father and the proprietor of the residence in which he lived. The Father filed an Application seeking an order for the financial assistance he had requested, which was successful at first instance on the basis that the exercise of discretion had been influenced by extraneous factors.  

The estate trustees appealed, on the basis that the Application judge had erred in substituting her discretion for that of the trustees and the finding that their decision to refuse the encroachment on capital was based on extraneous factors. 

The Court of Appeal upheld the Application judge’s decision, albeit lowering the value of retroactive payments. In reaching this decision, the Court of Appeal emphasized that: “The court may intervene even where the testator has conferred an absolute discretion on the trustee. Mala fides and improper consideration of extraneous matters are encompassed by this analytical framework.” 

The estate trustees were not entitled to take into consideration their dislike and/or distrust of their Father and the proprietor of his residence. However, the Court of Appeal did depart from the lower court’s decision on one significant point, stating that the estate trustees were permitted to take other income of the beneficiary into account where a Will did not provide contrary instructions. 

This decision is a reminder of the significant duties owed by a trustee; even where language may seem to extend a trustee power’s significantly, the fiduciary status of the trustee will always be an overriding consideration, albeit subject to some limitation. 

Thank you for reading and have a great day!  

Suzana Popovic-Montag & Raphael Leitz