Tag: Even Hand Rule
Last week, Suzana Popovic-Montag blogged about the conflict that can arise between life-tenants and remaindermen with regard to the payment of expenses associated with real estate.
Another potential dispute between life-tenants and remaindermen is whether a trustee must retain a piece of property or sell the property and invest the proceeds in something else. This is particularly the case where the property in question is losing value to the detriment of the remaindermen.
At law, there is an implied duty to sell personal property that is wasting. In other words, if the will does not require the trustees to retain a piece of personal property (e.g. the testator’s car), then trustees have a duty to sell property that will lose value over time or that is invested in unauthorized investments. Proceeds of sale must then be invested in authorized investments.
The foregoing duty is known as the Rule in Howe v Earl of Dartmouth. Howe v Earl of Dartmouth (1802) 7 Ves 137 is an old English case, but the rule was confirmed by the Supreme Court of Canada in Lottman v Stanford,  1 SCR 1065, 6 ETR 34 at para 10:
The rule in Howe v. Lord Dartmouth…is a rule requiring the trustee of an estate settled in succession to deal even-handedly between the life tenant and the remaindermen. It operates to compel, where its operation is not excluded by the testator, a conversion of wasting or unproductive personalty and the investment of the proceeds of such conversion in trustee investments. By this means the life tenant is assured of an income from the assets of the estate and the capital of the estate is preserved for the remainder interests upon the demise of the life tenant.
The rule applies only to testamentary trusts; it is not applicable to inter-vivos trusts. Moreover, this rule does not apply to real property. The rule does, though, apply to mortgages on real property, as mortgages are personalty.
The purpose of the rule is to maintain fairness between the life-tenant and the remaindermen on the basis that trustees have a duty to act impartially or to hold an even hand.
As noted above, a contrary provision in the will can override the application of the rule. When considering leaving consecutive interests in a piece of property, a testator should be very clear about their intentions in order to avoid estate litigation.
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The “even hand rule” is often found at the core of trustee obligations. This is because one of the most fundamental duties of a trustee is to treat different classes of beneficiaries equally and without preference. Often, this entails finding the balance between preserving the capital of a trust for the capital beneficiaries while maximizing income revenue for income beneficiaries. Obviously, this can be a challenge as the interests of capital and income beneficiaries can be inherently opposed to one another. While one class seeks to preserve the trust assets, the other may prefer to engage in riskier investments in order to stimulate higher revenues.
The use of a unitrust (also known as a percentage trust) can be used to mitigate this problem. A unitrust is a trust in which a fixed percentage of the total value of the trust property must be distributed by the trustee in a predetermined period. Although the percentage payment is made from revenue generated by the trust, if there is insufficient revenue to make the payment, the difference is paid from the capital. Any revenue that is generated in excess of the percentage is added to the capital.
In this way, the trustee’s duty is no longer limited to preserving capital while maximizing revenue. The duty under a unitrust is to increase the value of the entire trust for the benefit of both classes of beneficiaries. This is accomplished by providing the trustee with much wider discretion as to making trust investments with the idea being that it will increase the overall value of the trust. It also allows the trustee to distribute funds without being overly concerned about whether the funds are stemming from income or capital. In removing this distinction, and the even hand rule concerns that come with it, the trustee is left free to optimize the value of the trust as a whole.
The concept of the unitrust is not a new one by any means. It was endorsed as far back as 1984 by Ontario’s Law Reform Commission in its Report on the Law of Trusts. Although they are not widely used, these arrangements can be seen in trusts of significant value where the settlor seeks an arrangement in which the trustee’s investments are not hindered by balancing class interests.
The unitrust is not without its own set of challenges. In times of economic downturn or when risky investments fail to yield anticipated results, the trust may not generate sufficient revenue to cover the fixed percentage payable to the income beneficiaries. Under these circumstances, there may be no choice other than to liquidate capital assets in order to meet the requirement. As a result, there is a risk of depleting the value of the trust up to its full amount prior to the right of the capital beneficiaries ever materializing.
Potential solutions to this dilemma have included drafting techniques which account for periodic downturns. For example, in “The Percentage Trust- Uniting the Objectives of the Life Tenant and Remainderperson in Total Return Investing by Trustees”, Anne Werker suggests including a “force majeure” clause. These types of mechanisms provide the trustee with an established process in which he or she can periodically review and revise the percentage payable. Implementing these techniques can be critical in ensuring that unintended consequences do not arise.
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