Tag: fiduciary obligation
Broadly speaking, a trustee cannot personally profit from his or her role as a trustee. “Profit” can mean a variety of things. One way in which a trustee could potentially profit from a trust is through the purchase of trust property.
A trustee may not purchase trust assets unless there is an express power in the Will or trust instrument allowing a trustee to do so, or if the purchase is approved by the court. Even where a trustee has the express power to purchase trust assets, he or she must still act in accordance with his or her fiduciary obligations to the beneficiaries of the trust or estate. Additionally, a trustee who has been authorized to purchase trust assets would be well-advised to obtain consents and releases from the beneficiaries, or to consider seeking court approval in any event, given that such a situation is ripe for claims that the trustee breached his or her fiduciary duty.
The court should only approve the sale of trust property to a trustee where the sale is clearly to the advantage of the beneficiaries. Demonstrating that a sale is clearly advantageous to the beneficiaries can be difficult, as it is not enough to just show that the purchase price is fair. For instance, even if a trustee has offered a fair price, if there is another purchaser who is willing to purchase the asset for a greater price, the trustee’s purchase will not be to the advantage of the beneficiaries.
The problem with a trustee purchasing trust assets is that in doing so, he or she is practically putting him or herself in an irreconcilable conflict of interest: the trustee has a duty to maximize the value of the trust assets for the beneficiaries, but in his or her personal capacity, will want to minimize the price paid for an asset. A trustee seeking to purchase trust property will need to ensure that he or she has taken sufficient steps to satisfy the court that he or she has maximized the value of the asset.
In Re Ballard Estate, (1993) 20 O.R. (3d) 189, a trustee, S, obtained certain option rights to purchase trust property. The trustees obtained two valuations of the property in question, and S and the other trustees negotiated a purchase price for the property in question at the upper end of the range of values pursuant to the valuations. However, the property was not offered for sale on the open market, and the trustees did not take steps to identify other potential purchasers. The court found that the trustees could have done more to ensure the maximum value was obtained for the asset, stating that the trustees should have taken “all reasonable positive steps to ferret out the best price”. Trustees cannot avoid their obligation to maximize the value of the assets by taking a passive stance and hoping that other potential purchasers will find them.
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I blogged earlier this week about the availability for a trustee to bring an Application for the opinion, advice and direction of the court under section 60(1) of the Trustee Act, and, in so doing, potentially alleviate themselves from liability concerning the decision so long as they act in accordance with the court’s direction. But what should happen if, when confronted with a difficult decision, the trustee does not ask the court for direction, but rather should act of their own volition? If a beneficiary should later successfully argue that the trustee acted improperly in making such a decision, and committed a breach of trust, will the trustee always be liable for such a decision?
The Trustee Act is clear that just because a trustee commits a technical breach of trust, it does not necessarily follow that the trustee will be held liable for any corresponding damages. Section 35(1) of the Trustee Act provides:
“If in any proceeding affecting a trustee or trust property it appears to the court that a trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or may be personally liable for any breach of trust whenever the transaction alleged or found to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, the court may relieve the trustee either wholly or partly from personal liability for the same.” [emphasis added]
As is made clear by section 35(1) of the Trustee Act, so long as the trustee acted “honestly and reasonably” in committing the breach of trust, the court may in its discretion relieve the trustee from liability concerning such a decision. The leading authority regarding what is to be considered “honestly and reasonably” is the British decision of Cocks v. Chapman,  2 Ch. 763, at 777, where the court states:
“It is very easy to be wise after the event; but in order to exercise a fair judgment with regard to the conduct of trustees at a particular time, we must place ourselves in the position they occupied at that time, and determine for ourselves what, having regard to the opinion prevalent at that time, would have been considered the prudent course for them to have adopted.” [emphasis added]
If the court is of the opinion that the opinion prevalent at the time would have considered the decision prudent, it may alleviate the trustee fr
om liability concerning such a decision in accordance with section 35(1) of the Trustee Act. If not, the trustee may continue to be liable for the decision.
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A recent decision of the Ontario Superior Court of Justice, The Estate of Ingrid Loveman, Deceased, 2016 ONSC 2687, considered a passing of accounts, and specifically considered whether the Estate Trustees in this case, among other things, met the requisite standard of care in administering the Estate.
The Court briefly reviewed the case law with respect to the standard of care of Estate Trustees, noting that an estate trustee is a fiduciary to the beneficiaries of an estate, must exercise the degree of diligence that a person of prudence would exercise in the conduct of his or her own affairs, and may not prefer his or her own interests over the interests of beneficiaries.
Pursuant to the Deceased’s Last Will and Testament dated July 12, 2006 (the “Will”), two of her seven children, Peter and Heidi, were named as Estate Trustees. The Will provided, in part, that a house (the “House”) was to be retained for six months, at which time Peter had six months to exercise an option to purchase it for 70% of its fair market value as of the date of death. Should he exercise that option, the proceeds were to be divided into six equal shares, with each of four of the Deceased’s children (David, Heidi, Douglas, and Dirk) receiving one share, and the two remaining shares to be equally divided amongst her four grandchildren, and kept in trust.
Peter exercised the option to purchase the House within the twelve month time period. However, he only gave notice of his decision to purchase it; he did not actually act on the decision, nor complete the transaction within the time limit. He claimed that he delayed the purchase as he did not have access to the funds required in a way that was most economical for him. However, the Court found that postponing the sale in this manner was convenient to Peter, but not to the Estate nor to the beneficiaries, and he therefore breached his fiduciary duty.
There was also a delay in obtaining probate, which the Court concluded was likely due to Peter delaying the application until he deemed it necessary, being when he decided to exercise his option to purchase the House. The Court found that Peter accordingly placed his interests before those of the Estate and the beneficiaries. Furthermore, the Court found that, had the Estate Trustees adhered to the time frames stipulated by the Will, it is likely that litigation involving a claim by one of the Deceased’s grandchildren would have been avoided.
Although the Estate Trustees in this case did not act in a malicious or egregious manner, the mere fact that there was a delay related to the preference of an Estate Trustee was sufficient for the Court to find that Peter had breached his fiduciary duty. Fiduciaries are required to act with utmost good faith. This is an extremely high standard, and therefore, the interests of beneficiaries should never be anything but a trustees’ first and foremost priority.
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