The use of a “discretionary trust” that grants the trustee with the absolute discretion to determine when and if a distribution is made to a beneficiary, and in what amount, is a fairly common estate planning tool. If you are a beneficiary of a trust which provides the trustee with such broad discretion you may question whether there is anything that you can do prior to the final distribution to question the discretionary decisions that have been made by a trustee, and whether there are circumstances in which the court will intervene to overturn a trustee’s discretionary decision. The short answer is that while the court is generally reluctant to interfere with a trustee’s discretionary decisions, there are certain limited circumstances in which they will intervene and overturn a trustee’s decision.
The leading decision in Ontario concerning when the court will interfere with a trustee’s discretion is Fox v. Fox Estate. In considering when the court may interfere with a trustee’s discretion, the Court of Appeal provides the following commentary:
“The entire question of the degree of control which the courts can and should exercise over a trustee who holds an absolute discretion is filled with difficulty. The leading case, or at least the case to which reference is almost always made, is Gisborne v. Gisborne (1877), 2 App. Cas. 300 (H.L.). It stands for the proposition that so long as there is no ‘mala fides’ on the part of a trustee the exercise of an absolute discretion is to be without any check or control by the courts.” [emphasis added]
Fox v. Fox Estate cites to the English authority of Gisborne v. Gisborne for the proposition that, so long as there is no “mala fides” on the part of the trustees in exercising their discretion, the court will not interfere with a trustee’s discretion. In Gisborne v. Gisborne, Lord Cairns provides the following commentary with respect to when the court may interfere with any discretionary decision undertaken by a trustee:
“My Lords, larger words than those, it appears to me, it would be impossible to introduce into a will. The trustees are not merely to have discretion, but they are to have “uncontrollable”, that is, uncontrolled, “authority”. Their discretion and authority, always supposing that there is not mala fides with regard to its exercise, is to be without any check or control from any superior tribunal.” [emphasis added]
Simply put, the court will generally not interfere with a trustee’s discretionary decisions unless they were exercised with “mala fides“. “Mala fides” roughly translates as “bad faith”, such that the principle from Gisborne v. Gisborne can be summarized as providing that so long as there is no “bad faith” on the part of the trustee in making a discretionary decision the court will not interfere with such a decision.
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An article published in The Columbus Dispatch, an Ohio publication, shows us how vulnerable seniors can be to fraud through the purchase of financial products that are technically legal but not in their best interest.
An 83 year-old woman had her life savings placed in an annuity but was subsequently solicited to cash in her existing policy and buy a new one. The 83 year-old suffered from partial blindness as a result of diabetes, dementia and she had recently moved into a nursing home. After being convinced to purchase a new annuity, the woman died two weeks later. She received one monthly payment of $1,500 before she died.
The beneficiaries of her estate received half of what they thought they should have from the new annuity and sought to recover from the investment company. The arbitration panel of the Financial Industry Regulatory Authority sided with the deceased’s estate and awarded the beneficiaries of her estate compensatory damages.
The article states that this is not an uncommon practice. In January 2008, the Financial Industry Regulatory Authority fined the broker $225,000 for “making unsuitable sales of deferred variable annuities to 23 customers”.
Annuities can be great investments, but BUYER BEWARE. If there are questions about the age and health of the potential purchaser, it may not be in their best interest to purchase the annuity.
Thank you for reading,
Listen to Will Challenge Litigation – Part 2
This week on Hull on Estate and Succession Planning, Ian and Suzana continue their discussion on the Will Challenge Process, step by step.
They cover how a comprehensive preliminary investigation can help litigation and discuss how a motion of claim is filed to set the stage to move forward with a trial.
Core documents that accompany these stages are:
- Medical records
- Solicitor’s notes
- Financial disclosure
The next stage is the discovery process and will be the topic that gets next week’s podcast off to a start.
If you have any comments, send us an email at firstname.lastname@example.org or call us on the comment line at 206-457-1985 or leave a comment on our blog.