It is not uncommon for a trust or a Will to provide a trustee with broad and unfettered discretion in the administration of the trust or estate. We have previously blogged about the powers and duties of estate trustees, stating that it can be difficult to determine how such discretion should be exercised. Often, a trustee is given broad discretion to encroach on the capital of a trust or estate, for the benefit of a beneficiary. The issue then is: what factors can a trustee consider in determining whether to exercise their discretion to make a capital encroachment?
Broadly speaking, if a trustee is given unfettered discretion by a settlor or testator, the court will only intervene in the trustee’s decision-making if the trustee has exercised his or her discretion on the basis of mala fides, or bad faith. While there are a number of specific factors that a trustee may properly consider, for the purpose of this blog I will focus on one, namely the extent to which a trustee can consider a beneficiary’s income and/or assets.
Where a trustee is being asked to encroach on capital for the benefit of an income beneficiary, the trustee must consider the application of the even hand rule (briefly discussed in this blog). In doing so, a trustee may be tempted to consider the income beneficiary’s financial circumstances, as this information could illuminate how the trustee’s decision may affect the income beneficiary as compared to the capital beneficiary. However, the case law seems to indicate that this would not be a proper consideration.
In Re: Luke,  O.W.N. 25, the court considered whether the income beneficiary, who was also the trustee, should first look to her own financial resources before exercising her power to encroach on capital for her own benefit. The court determined that she did not have to first exhaust her own resources, as the testator had not expressed an intention in his Will that she do so. Similarly, in Hinton v. Canada Permanent Trust Company, (1979), 5 E.T.R. 117 (H.C.), a corporate trustee requested information from an income beneficiary as to the beneficiary’s own financial resources in the context of the trustee exercising its discretion to encroach on capital. Again, the court found that the testator had not indicated an intention in his Will that the income beneficiary’s income should be a factor in determining whether to encroach on capital, and the income beneficiary’s resources were, accordingly, not relevant.
The foregoing principle has been followed in a number of other decisions over the years, thus appearing to support the impropriety of considering a beneficiary’s personal financial resources as a factor in making capital encroachments, absent an intention by the testator in this regard.
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The answer is no according to Borges v. Santos, 2017 ONCJ 651.
In Borges v. Santos, a garnishment proceeding was commenced by Maria, who was entitled to child support from Antonio. Maria sought to garnish a trust that was established from the Estate of Antonio’s mother. Pursuant to the Will of Antonio’s mother, the Trustees were given an absolute and unfettered discretion to pay any part of income or capital for Antonio’s benefit and to keep Antonio’s comfort and well-being in mind in exercising their discretion. In this case, the Trustees also happened to be Antonio’s brother and sister as well as the gift-over beneficiaries of this Trust such that they will be entitled to all income and capital that were not distributed to Antonio 21 years after their mother’s death.
In one of her arguments, Maria contended that the Trust was not truly discretionary because of the non-arm’s length relationship between the Trustees and Antonio since they were siblings. The Court in case clarified that Tremblay v. Tremblay, 2016 ONSC 588, “does not stand for the proposition that all familial relationships between trustees and beneficiaries automatically demonstrate that the trust is under the control and hence the property of the beneficiary” for the purposes of the Family Law Act.
Interestingly, Antonio gave evidence in this proceeding that he wanted the Trustees to honour his child support obligations to Maria, although they chose not to comply with his wishes. Ultimately, as obiter, the Court also asked the Trustees to consider making a distribution to Antonio for his comfort and well-being by supporting his son, Christopher, while acknowledging that he could not order them to do so.
For those of you who are interested in the essential elements of a Henson Trust, click here, for a previous blog on this topic by Ian Hull.
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Being a trustee of a trust can be perilous, with trustees facing potential personal liability should they make the wrong decision. As a safeguard against such potential liability, when issues arise in the administration of a trust, trustees may consider commencing an Application for the opinion, advice or direction of the court in accordance with the Trustee Act. Section 60(1) of the Trustee Act provides:
“A trustee, guardian or personal representative may, without the institution of an action, apply to the Superior Court of Justice for the opinion, advice or direction of the court on any question respecting the management or administration of the trust property or the asserts of a ward or a testator or intestate.”
Should the court accept such an Application, and provide the trustees with directions regarding the issue, the trustees are insulated from liability as it relates to the beneficiaries regarding such an issue so long as they act in accordance with the directions of the court. This is made clear by section 60(2) of the Trustee Act, which provides:
“The trustee, guardian or personal representative acting upon the opinion, advice or direction given shall be deemed, so far as regards that person’s responsibility, to have discharged that person’s duty as such trustee, guardian or personal representative, in the subject-matter of the application, unless that person has been guilty of some fraud, wilful concealment or misrepresentation in obtaining such opinion, advice or direction.”
Notably, while section 60(1) of the Trustee Act allows trustees to direct a specific issue for the “opinion, advice or direction” of the court, the court has been clear that on such an Application the court will not exercise discretionary decisions on behalf of the trustees. Such a point was recently made clear by Justice Broad in Keller v. Wilson, where at paragraph 25 the court states:
“The fact that trustees are expressly permitted by the Trustee Act to apply for the opinion advice or direction of the Court does not authorize the court to exercise discretionary powers on behalf of trustees, thereby shifting responsibility from the trustees, on whom the settlor of the trust placed such responsibility, to the court. This is so even though subsection 60(2) of the Trustee Act provides a specific indemnification to trustees who act upon the opinion, advice or direction of the court.” [emphasis added]
Cases like Keller v. Wilson make it clear that on an Application for opinion, advice, or direction, the court will not exercise discretionary decisions on behalf of the trustee, with their jurisdiction to provide directions being limited to questions of a “legal” nature relating to the discharging of the trustees’ duties. To this effect, the court’s direction can be thought of the court advising whether the trustee “can” not “should” do a particular action. While the court will advise whether the trustee has the legal authority to do a particular action, they will not make such a discretionary decision on behalf of the trustee.
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Being an Attorney for Property is often a thankless job. You are often required to make difficult decisions on behalf of an incapable person regarding their ongoing financial wellbeing, in doing so opening yourself up to potential liability not only to the incapable person themselves, but also potentially to the beneficiaries of the incapable person’s estate. As a result of the difficult decisions which Attorneys for Property often have to make, and the risk of liability that comes with the job, it should come as no surprise that some Attorneys for Property turn to the court for guidance.
Section 39(1) of the Substitute Decisions Act (the “SDA“) provides the statutory framework under which an Attorney for Property may apply to the court for directions, providing:
“If an incapable person has a guardian of property or an attorney under a continuing power of attorney, the court may give directions on any question arising in connection with the guardianship or power of attorney.”
In Keller v. Wilson, 2015 ONSC 6962, the Ontario Superior Court of Justice was faced with an Application for directions brought by two Attorneys for Property under section 39(1) of the SDA, whereby the Attorneys asked for the assistance of the court with respect to whether they should comply with the request of the incapable person’s son that the Attorneys provide him with funds from the incapable’s property, and that the Attorneys should sell certain real property owned by the incapable to finance such a transfer.
In determining whether it could make such a decision for the Attorneys, the court looked to sections 37(1) and 37(3) of the SDA which authorize the Attorneys to make expenditures to support the incapable person’s dependants, as well as to make gifts or loans to the incapable person’s friends and relatives. The court also looked to the evidence on hand that the incapable had specifically advised her lawyers that she did not want to provide her son with an allowance, and about the difficult relationship which the incapable had previously had with her son.
The court ultimately refused to exercise the discretionary decision on behalf of the Attorneys, looking to the 1903 decision of Re Fulford, 29 O.L.R. 375, wherein the court provided the following:
“The executors cannot come to the Court and ask whether the present is a good time or a bad time to sell stock or anything else, or ask whether a price offered is sufficient or insufficient. The advice which the Court is authorized to give is not of that kind; it is advice as to legal matters or legal difficulties arising from the discharge of the duties of the executors, not advice with regard to matters concerning which the executors’ judgment and discretion must govern.” [emphasis added]
Keller v. Wilson makes it clear that discretionary decisions ultimately rest with the Attorneys alone, and the court will not exercise their discretion for them. While the court will provide direction with respect to legal issues which arise within the management of an incapable person’s property, they will not exercise discretionary decisions for the Attorney for Property. Such discretionary decisions ultimately rest with the Attorney for Property alone.
The “Henson trust” is a type of trust often used in estate planning to deal with situations where there is a disabled beneficiary who is entitled to receive support payments from the Ontario Disability Support Program (ODSP). The name of the Henson trust originates from an Ontario case, The Minister of Community and Social Services v Henson,  OJ No 1121, aff’d  OJ No 2093 (Ont CA), where the Court held that a discretionary trust established for a disabled beneficiary would not result in a loss of government benefits, as the beneficiary had no vested right to receive income or capital from the trust.
Under the Ontario Disability Support Program Act, if a recipient of ODSP has assets, or receives income over a prescribed limit, they will cease being eligible to receive support payments. An individual cannot hold more than $5,000.00 in assets (with some exceptions, including their principal residence and a vehicle) and continue to receive ODSP. However, ODSP often does not provide sufficient income, and the restrictions on income and assets cause recipients to subsist on very little, or risk losing their ODSP. One way to address this issue is through the establishment of the Henson trust.
The essential elements of a Henson trust are: (i) that the trustee must have absolute discretion, (ii) that the assets of the trust do not vest in the beneficiary, and (iii) that there is a gift-over following the death of the beneficiary. While usually a beneficial interest in a trust is taken into account in determining an individual’s assets, the Henson trust is an exception, due to the fact that the beneficiary in this type of trust has no vested interest in the assets, nor any right to demand that the trustee pay them from the trust. As such, the beneficiary is not required to treat the trust assets as his or her own and consequently, the Henson trust provides a method of providing additional income to a disabled beneficiary without causing them to become ineligible for ODSP.
The Henson trust, however, is not a perfect solution. First, it relies on the absolute discretion of the trustee in order to meet the requirements of the trust. Because Henson trusts are often created in a will by parents of a disabled beneficiary to ensure that their child will be properly looked after, the parents are forced to repose complete trust in their chosen trustee. That trustee consequently holds a great deal of responsibility. Thus, it is vital to choose a trustee that is unquestionably trustworthy, who will prioritize the best interests of the child and will not take advantage of their position.
Second, the Henson trust cannot avoid the rules with respect to income limits for recipients. Therefore, the payments to the beneficiary from the trust still cannot exceed the income limits for ODSP. Although the trust helps to provide a guaranteed, steady income to a disabled beneficiary, they will likely still be living on quite a low income.
If a settlor of a trust has sufficient assets to provide for a disabled beneficiary, they may want to consider a regular trust arrangement, as opposed to a Henson trust. The downside of course, is that, depending on the amount of payments to the beneficiary, they may lose their eligibility for ODSP. However, it may be worth the trade-off to ensure that your loved one can live comfortably. Before making a Henson trust arrangement, talk to a trusted advisor who can help determine the best fit for you.
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The use of a Family Trust is a common estate planning tool, whereby an asset, whether it be cash, a family cottage, or otherwise, is placed into a trust to be held for the benefit of the family. More often than not, when such a Family Trust is established, both spouses are named as trustees of the trust, and the beneficiaries are often the two spouses together with any children that they may have. The trust is often discretionary, whereby the trustees may distribute some or all of the trust assets to any one of the beneficiaries to the exclusion of the others.
While the administration of the trust often goes smoothly while everything is going well in the relationship, the question emerges of what should take place should the spouses later separate and commence divorce proceedings. Although we do not tend to see arbitration used as often within the estates and trusts context, the same cannot be said for family law proceedings, where, anecdotally at least, it appears that parties are much more willing to enter into binding arbitration in order to settle their dispute rather than adjudicate the matter before the courts. When the two spouses (who are also the trustees) separate, and as part of the divorce proceedings agree to enter into binding arbitration, the question often emerges of whether the internal administration of the trust can be caught up in the arbitration process?
Inevitably, as part of such an arbitration, one of the spouses will often take the position that as both trustees have signed the arbitration agreement, that the arbitrator has now assumed the powers of the trustees, and may utilize the discretion afforded to the trustees to determine how the trust assets should be distributed as part of the divorce process. Without commenting on whether a trust may be bound to the arbitration process in the event that the trustees have only signed the arbitration agreement in their personal capacities, and not their capacities as trustees, the courts have been clear that unless the terms of the trust specifically contemplate otherwise, that trustees may not delegate the fundamental decision making powers entrusted to them as trustees to any person (whether it be arbitrator or otherwise). As put by Professor Waters in Waters’ Law of Trusts in Canada:
“The courts, however, continue to adhere to the principle that a delegate may not delegate his duties when the nature of the task is one which he is required to perform personally. This prevents the trustee from appointing an agent to perform the task of this kind, whether or not he has an express, implied, or statutory power to appoint agents. Indeed, any act of an agent purportedly carrying out such a task would have no legal effect; it would bind neither the trust nor any third party.“ [emphasis added] (4th ed., pg. 913)
Using this rationale, unless the deed of trust specifically contemplates that the trustees may delegate their decision making to an arbitrator, the trustees may arguably not delegate their fundamental decision making powers to an arbitrator, for to do so would be an improper delegation of their authority. As made clear by Prof. Waters, any decision made by the arbitrator concerning the internal management of the trust would arguably not be binding upon the trust or any third party, as they could arguably not have assumed such powers in the first place.
The division of personal property left by a loved one on his or her death can be a thorny issue. Often, the deceased gives directions to the Estate Trustee with respect to his or her intentions. These can be in the form of a memorandum incorporated into a Will. In some cases, the wishes of the deceased are just that: wishes that are not binding on the Estate Trustee. Still in other cases, the deceased gives all of the personal property to the Estate Trusee with discretion on the part of the Estate Trustee to decide how the property is to be distributed.
In Borisenko Estate, 2013 ABQB 245 (CanLII), the court was faced with the question of whether one of the deceased’s sons was entitled to a Russian icon owned by the deceased. The icon was said to have a value of $1,600. The deceased died leaving four children. One of the children, Vera, was appointed as Estate Trustee. The deceased’s Will provided that the Estate Trustee had full, uncontrolled discretion in selling, converting into money any property, postponing conversion, retaining property in the form it was in at the time of death and fixing the value of the estate or any part. The decision of the Trustee was final and binding. Further, failing agreement on the disposition of an asset, the Estate Trustee was to have absolute discrection to determine which beneficiary shall receive the asset in dispute.
Despite these provisions, one of the deceased’s children brought an application for a declaration that he was entitled to the Russian icon. The application was dismissed. The court noted the absolute discretion of the Estate Trustee to deal with the icon. “It is not for the court to become involved in dividing up personal assets of an estate when the power and discretion to do so has been left with the Trustee”.
The court rejected the argument that because the Estate Trustee may want to keep the icon herself, she was in a conflict. The court stated that this neither takes away from the Estate Trustee’s discretion, nor puts her in a conflict.
The court also noted (again, without taking away from the discretion of the Trustee) that, normally in the Russian culture, the icon would go to the oldest son. The fact that the Applicant was not the oldest son was not lost on the court.
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Read the transcribed version of "The Trustee’s Power to Encroach on Capital"
During Hull on Estates Episode #51, Ian Hull and Suzana Popovic-Montag discuss the circumstances surrounding a trustee’s power to encroach on capital.
Ian and Suzana cover various principles which affect the power to encroach including the Armchair rule of construction, the Evenhand approach and the concept of malafides.
They also touch on various cases including the U.K. case of Gisbourne v. Gisbourne, and Fox v. Fox Estate (1994), 5 E.T.R. (2d) 174 (Ont. Ct. (Gen. Div.))
For more information on the power to encroach, see Ian’s article in Estates, Trusts & Pensions Journal, "Discretion to Encroach: Do the Beneficiary’s Personal Resources Matter?"