On today’s podcast, Paul Trudelle and Juanita Valencia discuss the issue of when a person receiving funds becomes a trustee, as analyzed in Green Light Solutions Corp. v Baker 2021 BCCA 287.
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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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Yesterday I blogged about the limited circumstances in which the court will interfere with a trustee’s discretionary decisions while administering a trust. Simply put, as confirmed by the Ontario Court of Appeal in Fox v. Fox Estate in citing to the old English decision of Gisborne v. Gisborne, although generally speaking the court will not interfere with a trustee’s decisions while administering a trust, they may do so under limited circumstances and intervene if the trustee’s decision was made with what is known as “mala fides” which roughly translates as “bad faith”.
While Gisborne v. Gisborne makes it clear that the court will not interfere with a trustee’s discretion unless there is “mala fides“, it does not provide much guidance regarding what would constitute “mala fides” or “bad faith” on the part of the trustee. In Fox v. Fox Estate, in recognizing that there is little guidance with respect to what constitutes “bad faith”, the Court of Appeal cites to the article “Judicial Control of Trustees’ Discretions” by Professor Maurice Cullity (as he then was) in trying to provide some guidance for what will constitute “bad faith”. In summarizing his position with respect to what will constitute “mala fides” on the part of a trustee in exercising their discretionary authority, Prof. Cullity provides the following summary:
“Yet, it seems clear that the mala fides which will justify the intervention of the court must extend a considerable distance beyond the requirement of personal honesty. If the doctrine of fraud on a power permits the courts to intervene to strike down attempts to exercise a power which is vested in a person who is not a trustee, the jurisdiction over trustees must be at least as extensive. In very broad terms, that doctrine invalidates any attempt to exercise a power which is intended to achieve a purpose other than that for which the power was conferred. It is unquestionable that fraud in this sense is within the concept of mala fides.” [emphasis added]
Prof. Cullity’s definition of “mala fides“, whereby he advises that the court’s utilization of such a doctrine is intended to invalidate “any attempt to exercise a power which is intended to achieve a purpose other than that for which the power was conferred“, could offer some guidance on the kind of circumstances in which the court will interfere with a trustee’s discretion. It would appear that the fundamental question to be considered by the court in determining whether a decision was made in “bad faith” is in effect whether the decision is in keeping with the original intention of the trust. If the answer is “yes”, the court will not interfere with the discretionary decision by the trustee. If the answer is “no”, the circumstances may be such that the court will interfere with the decision on the grounds that it was made in “bad faith”.
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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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One of the ways a Will can be declared invalid is if the court finds that there were suspicious circumstances surrounding the preparation of it. In Graham v. Graham, the Ontario Superior Court of Justice found that significant involvement from the testator/grantor’s child was indicative of suspicious circumstances regarding the preparation of a Will and Power of Attorney (POA).
The testator, Jackie, had four children: Tim, Robert, Christine and Steven.
Jackie suffered from terminal cancer. She was hospitalized from November 22, 2015 to December 7, 2015, and again from December 22, 2015 to December 24, 2015, to receive treatment for severe pain.
In mid-December 2015, Robert’s wife, Tammy, searched for and contacted a lawyer to prepare a Will and POA for Jackie. Tammy obtained a Client Information Sheet (CIS) from the lawyer’s office and completed it herself. The lawyer prepared the documents based on this CIS. At Robert’s request, the lawyer went to the hospital to meet Jackie and have her sign the Will and POA. This was the first time Jackie met the lawyer and saw the Will and POA.
Jackie’s Will named Robert as estate trustee and sole beneficiary of her estate. The POA named Robert as Jackie’s sole attorney for property. Robert’s wife, Tammy, was named as the alternate estate trustee and attorney.
On January 4, 2018, Robert used the POA to transfer Jackie’s house to himself as sole owner. Four days later, Jackie died of cancer.
Tim challenged the validity of Jackie’s Will and POA claiming that they were prepared under suspicious circumstances and that Jackie was subject to undue influence by Robert and Tammy.
- Jackie had been in ill health for a long time prior to her death, so it was reasonable to infer she had chosen to die without a will, until Robert’s involvement.
- Jackie was treated with heavy painkillers on the night and morning of the day she signed the will and POA.
- Robert and Tammy “orchestrated virtually every aspect of the Will and the POA”, which included searching for a lawyer, providing instructions, arranging for the lawyer to meet Jackie, remaining in Jackie’s room for part of the meeting, and taking part in the discussions concerning the Will and POA.
- The drafting lawyer relied entirely on Robert and Tammy to provide him with all of the information concerning the Will and POA.
After finding that suspicious circumstances existed, the burden then shifted to Robert to prove that Jackie had testamentary capacity and that she knew and approved of the contents of the Will and POA. Using the test for testamentary capacity as outlined in Banks v. Goodfellow (1870), the court found that Robert could not establish that Jackie had testamentary capacity. In coming to this conclusion, the court considered the following:
- There was no evidence that Jackie was given the Will or the POA to read or that it was read to her.
- Although Jackie knew where she was living, there was no evidence to indicate that she had any knowledge or understanding of the monetary value of her house.
- It was unclear whether Jackie could do more than repeat what she was told.
- Jackie was confused and/or mistaken in certain beliefs about her son, Tim.
- The medications that Jackie was taking for her pain left her confused and drowsy.
As a result, the Will and the POA were declared invalid.
Graham v. Graham serves as a cautionary tale for adult children who become too involved in the drafting of their parents Wills and POAs. It warns us that the courts view this type of involvement as suspicious. Moreover, Graham v. Graham suggests that physical impairment can impact a testator’s mental state, thus making them vulnerable.
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Ian Hull and Celine Dookie
In today’s podcast, Noah Weisberg and Rebecca Rauws discuss executor and trustee compensation, and particularly the circumstances in which a trustee may be able to claim a special fee. This topic was also discussed in a recent paper by Lisa Toner, “When Can a Trustee Claim, and Justify, a Special Fee?”
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A recent decision of the Ontario Court of Appeal considered whether s. 7 of the Limitations Act, 2002 applies to extend the time within which an estate trustee can bring a claim that arose prior to a deceased person’s death.
Section 7 of the Limitations Act, 2002 provides as follows:
7 (1) The limitation period established by section 4 does not run during any time in which the person with the claim,
(a) is incapable of commencing a proceeding in respect of the claim because of his or her physical, mental or psychological condition; and
(b) is not represented by a litigation guardian in relation to the claim.
(2) A person shall be presumed to have been capable of commencing a proceeding in respect of a claim at all times unless the contrary is proved. 2002, c. 24, Sched. B, s. 7 (2).
(3) If the running of a limitation period is postponed or suspended under this section and the period has less than six months to run when the postponement or suspension ends, the period is extended to include the day that is six months after the day on which the postponement or suspension ends.
In Lee v Ponte, 2018 ONCA 1021, the estate trustee of the deceased person commenced a claim more than 2 years after the date on which the limitation period began to run, as determined by the trial judge. As a result, the action was statute barred.
The estate trustee appealed, taking the position that section 7 of the Limitations Act, 2002 should be “liberally construed”. The estate trustee argued that a deceased person is incapable of commencing a proceeding because of “his or her physical, mental or psychological condition”. He also argued that policy reasons support allowing additional time for an estate trustee or litigation guardian to be appointed and take over the management of the affairs of the incapable/deceased person.
The Court of Appeal disagreed and did not allow the appeal. In its view, the “grammatical and ordinary sense of the words of s. 7 are simply not elastic enough to apply to a deceased person and to construe an estate trustee to be a litigation guardian.”
Although the outcome is not surprising, it does serve as a reminder that limitation periods can be unforgiving. Estate trustees would be well-advised to act swiftly in reviewing the affairs of a deceased person in order to determine whether any claims may have arisen prior to death, and whether the expiry of any limitation periods are looming.
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While digital assets constitute “property” in the sense appearing within provincial legislation, the rights of fiduciaries in respect of these assets are less clear than those relating to tangible assets. For example, in Ontario, the Substitute Decisions Act, 1992, and Estates Administration Act provide that attorneys or guardians of property and estate trustees, respectively, are authorized to manage the property of an incapable person or estate, but these pieces of legislation do not explicitly refer to digital assets.
As we have previously reported, although the Uniform Law Conference of Canada introduced the Uniform Access to Digital Assets by Fiduciaries Act in August 2016, the uniform legislation has yet to be adopted by the provinces of Canada. However, recent legislative amendment in one of Ontario’s neighbours to the west has recently enhanced the ability of estate trustees to access and administer digital assets.
In Alberta, legislation has been updated to clarify that the authority of an estate trustee extends to digital assets. Alberta’s Estate Administration Act makes specific reference to “online accounts” within the context of an estate trustee’s duty to identify estate assets and liabilities, providing clarification that digital assets are intended to be included within the scope of estate assets that a trustee is authorized to administer.
In other Canadian provinces, fiduciaries continue to face barriers in attempting to access digital assets. Until the law is updated to reflect the prevalence of technology and value, whether financial or sentimental, of information stored electronically, it may be prudent for drafting solicitors whose clients possess such assets to include specific provisions within Powers of Attorney for Property and Wills to clarify the authority of fiduciaries to deal with digital assets.
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The recent decision of Fletcher’s Fields Limited v Estate of Samuel Harrison Ball, 2018 ONSC 2433 considered whether an appointment of trust funds for a particular purpose created an interest in land.
Fletcher’s Fields is a not-for-profit Ontario corporation which owns land that is predominantly used as a sports facility for rugby football union (the “Land”). Mr. Jenkins was the trustee of the estate of Samuel Harrison Ball. He was also a lawyer, and over the years had been actively involved with Fletcher’s Fields, as General Counsel, and as a member of the board of directors. In Jenkins’ role as trustee of Mr. Ball’s estate, he had the power to appoint money forming part of the estate as he saw fit.
In 1994, Jenkins exercised his power to provide Fletcher’s Fields with $100,000.00 pursuant to a “Deed of Appointment”. The Deed of Appointment provided that (a) the money must be used solely for the purpose of improving the sports facility on the Land; (b) the trustee had the right to revoke any or all of the money if the Land was not kept in good condition suitable for playing the sport; and (c) if revoked, Fletcher’s Fields was required to transfer the fund to the trustee, with interest.
In 2015, a new board of directors for Fletcher’s Fields was elected, which did not include Jenkins. It seems that Jenkins may not have been pleased with this development. The following year, Fletcher’s Fields discovered that a notice had been registered on title to the Land by Jenkins, under s. 71 of the Land Titles Act, R.S.O. 1990, c. L.5. It appears that the notice had been registered after Jenkins had ceased to be a member of the board.
Fletcher’s Fields took the position that the funds provided pursuant to the Deed of Appointment were a gift or, alternatively, trust funds. Jenkins took the position that the Deed of Appointment was not a trust, but rather that it was a loan that was to be repaid if certain conditions crystallized. He characterized it as an equitable mortgage.
The Court noted that the terms of the Deed of Appointment were key to determining whether or not an interest in land had been created. There was no indication of an express intent to create an interest in the Land, or provide that failure to repay the funds would result in a charge over the Land. Without such an express intent, the notice should not remain on title to the land. The Court also held that the parties’ conduct supported the position that there was never any intention to create an interest in the Land.
The Court ordered that the notice that had been registered by Jenkins on title to the Land be removed. The result of this case seems correct, as one would expect that an interest in land should not be created unilaterally and without notice. There are significant differences between types of financial arrangements such as loans, mortgages, gifts, and appointments of trust funds. It is reassuring that the Court in this situation upheld the integrity of the parties’ intentions in crafting their financial arrangement and did not impose a charge-type interest in the Land where none existed.
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The Supreme Court of Canada released a decision last Thursday that is a must read for estates and trusts practitioners. Interestingly enough, Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, arose from a commercial matter.
Bird was a general contractor for a construction project. When Bird subcontracted with Langford, Langford was required to obtain a labour and material payment bond which named Bird as trustee of the bond. If Langford was delinquent in paying its contractors, the bond would permit the contractor to sue and recover from Langford’s surety on the condition that notice of the claim must be made within 120 days of the last date in which work was provided to Langford. Langford became insolvent and some of Valard’s invoices went unpaid. Unfortunately, Valard was not notified of the existence of the bond and did not inquire about whether there was a bond in place until after the 120 day notice period. The surety denied Valard’s claim and Valard sued Bird for breach of trust. This matter was dismissed at first instance by the Alberta Queen’s Bench, dismissed again by the Alberta Court of Appeal, and finally reversed by the Supreme Court of Canada (with a dissent from Justice Karakatsanis).
Justice Brown for the majority (per McLachlin C.J., as she then was, Abella, Moldaver and Rowe J.J.) found that Bird had a fiduciary duty to disclose the terms of the trust, i.e. the bond, to Valard notwithstanding the fact that the express terms of the bond did not stipulate this requirement. Justice Brown was clear that “While the ‘main source’ of a trustee’s duties is the trust instrument, the ‘general law’ which sets out a trustee’s duties, rights and obligations continues to govern where the trust instrument is silent” (para.15). Justice Brown then went on to say that a beneficiary’s right to enforce the terms of the trust is precisely what keeps the trustee from holding the “beneficial as well as legal ownership of the trust property” (para. 18). Otherwise, no one would have an interest in giving effect to the trust.
With this logic in mind, Justice Brown developed the following framework at paragraph 19,
“In general, wherever “it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed” of the trust’s existence, the trustee’s fiduciary duty includes an obligation to disclose the existence of the trust. Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary’s entitlement thereunder. For example, where the enforcement of the trust requires that the beneficiary receive notice of the trust’s existence, and the beneficiary would not otherwise have such knowledge, a duty to disclose will arise. On the other hand, “where the interest of the beneficiary is remote in the sense that vesting is most unlikely, or the opportunity for the power or discretion to be exercised is equally unlikely”, it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.”
Thanks for reading and more to follow later this week on Valard Construction Ltd. v. Bird Construction Co.