Trusts offer a number of advantages in the estate-planning context, from deferring taxes, to sheltering assets from creditors. As a result, trusts are being used with ever increasing frequency as an estate-planning tool. Many clients, however, do not necessarily understand or appreciate the proper purpose for the trust vehicle or the restrictions that will apply to their management of the trust assets. It is important for those contemplating the use of a trust to understand that, if not properly constituted or carried out, the trust they create may be deemed void, and the intended advantages lost.
In order to create a valid inter vivos trust, there must be three certainties: a certainty of intention, a certainty of subject matter, and a certainty of objects. In other words, the person setting up the trust (the settlor) must intend to divest him or herself of ownership of certain assets, and intend those assets to be held by the appointed trustee(s) for identified beneficiaries. As such, it is important to understand that once the settlor transfers the assets to the trust, he or she neither owns or controls them. The assets will be held for the benefit of the beneficiaries in accordance with the terms of the trust and will be controlled by the appointed trustee(s).
Many clients establishing trusts, however, wish to retain control over assets by:
- being appointed the sole trustee,
- retaining veto power over any other appointed trustees, or
- appointing a compliant trustee(s).
These types of arrangements should be treated with caution, as there is a high likelihood they will result in the trust arrangement being deemed a “sham” and void as a result. If deemed void, the trust is treated as though it never existed in the first place, and as a result, any advantages for which the trust was created, such as tax avoidance or protection from creditors, will be lost.
In other words, a sham trust is one in which the settlor does not truly intend to dispose of the assets settled on the trust, but rather, merely wishes to create the impression that the assets have been disposed of, while in reality maintaining control of them throughout.
If a trust is challenged as a sham, the settlor and trustee(s) will be unable to rely solely on the wording of the trust agreement in order to illustrate their requisite certainty of intention. The court is authorized to look further to the conduct of the settlor and trustee in setting up and managing the trust to determine whether the trust was validly constituted. If it can be shown that the settlor and trustee(s) intended to deceive or misrepresent the actual transaction from the outset, that trust will be deemed a sham and will be void as a result.
Thank you for reading,
“Blended costs” were endorsed last year by the Court of Appeal for Ontario in Sawdon Estate v. Watch Tower Bible and Tract Society of Canada. The policy underling such costs orders is that there are situations in which a successful trustee will be entitled to costs where he or she is successful in litigation, but may still be out of pocket. In such cases, the Estate should make up the shortfall as because the money was spent on due administration of the Estate.
In the recent case of Heston-Cook v. Schneider, 2015 ONCA 10 (Ont. C.A.), two sisters were beneficiaries of their mother’s estate. The mother’s house went to one daughter (Estate Trustee, respondent on the appeal) and $100,000 out of residue went to the other sister (appellant).
After the transfer of the house and the acceptance of the specific legacy, the appellant brought claims against the estate trustee for breach of fiduciary duty – basically a POA accounting but with the nice twist that she wished disgorgement of money that should have been spent on the mother`s care while alive.
The respondent brought a Rule 21 motion to strike the Claim. The Motion Judge adjourned the Rule 21 Motion in order to allow the Appellant to apply to remove and replace the respondent as estate trustee so she could press the breach of fiduciary duty claim as she otherwise lacked standing.
Wilton-Siegel J. sat as the Motion Judge on the removal application and dismissed it. He awarded full indemnity costs of $12,000.
In the Court of Appeal, the appeal was dismissed. There was no error in principle by Motions Judge in respect of the substantive decision. The costs award, however, was varied. The Endorsement provided at para 14:
A blended award, in which costs on a partial indemnity scale are awarded against the unsuccessful party and the remainder of the costs are paid from the estate would appear to strike the appropriate balance. See e.g. Sawdon Estate v. Watch Tower Bible and Tract Society of Canada, 2014 ONCA 101 (CanLII) at para. 96. In our opinion the motion judge erred in principle in ordering the appellant to fully indemnify the respondent.
This is a nice case that deals with the common occurrence of the need for proper standing to press a claim on behalf of the estate. A beneficiary ill-advisedly brought the claim in her own name. The Motions Judge on an application to remove and replace the Estate Trustee obviously thought the underlying claim was weak and sanctioned the claimant through an order for full-indemnity costs. The Court of Appeal agreed that the successful Estate Trustee should be fully indemnified, but the full indemnification was to be borne by the Estate in part ($4500) and in part by the unsuccessful applicant ($7500). In other words, the unsuccessful claimant ought not to have been punished (and hence partial indemnity costs – in effect – were ordered) but the estate trustee ought not to suffer (and hence was entitled to a full indemnity).
A nice short case that continues a principled approach to costs.
Today on Hull on Estates, David Morgan Smith and Noah Weisberg discuss the recent decision of Mroz v. Mroz, 2014. If you have any questions, please email us at firstname.lastname@example.org, or leave a comment on our blog page.
Today on Hull on Estates, Paul Trudelle and Stuart Clark discuss the resignation, retirement and renunciation of executors and trustees.
If you have any questions, please email us at email@example.com or leave a comment on our blog page.
Trustees are provided with a broad range of powers in order to fulfill their fiduciary duties to beneficiaries. As trustees are given such extensive powers, their actions are scrutinized subjectively based on the intended consequences of their efforts.
The test for a fraud on a power involves an examination of whether the powers given to a trustee were used in a manner that benefited a non-object of a trust and whether the trustee actually intended for the non-object to benefit. The test tends to be difficult to apply because the purpose and intention of the trustee to go beyond the scope of the instrument that granted and created the power is used as the basis of the fraud.
The finding of fraud on a power can be quite complicated, and often elusive facts are the basis of a determination. However, it is important for trustees to have an understanding of the concept due to the severe ramifications that can arise as a result of such a fraud. These ramifications can include:
- personal liability imposed on the trustee to reimburse lost trust funds;
- depending on the terms of the trust indemnity, a trustee may not be indemnified by the trust for the loss of funds due to fraud on a power;
- trustees have to take all necessary steps to recover proceeds of the fraud from the donee or payee; and
- regardless of the terms of indemnity provided by the trust, courts are still authorized to order trustees to pay costs on a successful claim against them.
As an example of the complexity that can arise in the application of fraud on a power, a trustee may provide trust assets to a beneficiary with the intention that those assets pass from the beneficiary to a non-object. This transfer is prima facie valid since providing such assets to a beneficiary is a valid exercise of the trustee’s power; however, because the ultimate benefit is derived by a non-object, such an action may be found to be a fraud on a power. Alternatively, if the beneficiary has an obligation to the non-object, and has no other assets upon which to fulfill this obligation, there would be a personal benefit to the beneficiary in instructing the trustee in this manner. In such an instance, the actions of the trustee may well fall within the scope of their powers.
Clearly, the concept of a fraud on a power is somewhat fluid and very fact specific. It is therefore advisable that trustees always ensure they act within the terms of the trust, and if they are instructed to pursue actions which may fall outside of the ambit of their powers, to seek court approval in advance of that action to avoid personal liability.
Thank you for reading!
In a recent STEP Bermuda professional seminar about contentious trusts, it was noted that it is easier to “fix” mistakes made in administering a trust, rather than to try to correct errors made in creating a trust’s structure.
Issues that arise in trusts and estates administration often stem from poor record-keeping and questionable document drafting. It is a trite warning to practitioners who deal with these issues to be meticulous in their file-keeping, and to make sure their documents are up-to-date and in order.
However, some of the most common mistakes made in administering trusts – mistakes that can ultimately end up in court, remain:
- Un-notarized trust deeds or other required documents, or too few witnesses to documents.
- No accounts being available.
- No valid trustee: i.e. no documents on file that prove the trustee has been appointed and that the trust has been properly constituted.
- Non-formal (email) notifications only. While email is useful for communications for non-contentious cases, formal notifications are required in those that are contentious.
- Powers to vary the trust are applied retrospectively, but this fact is not included in a new trust deed.
- Variations of beneficial interests, or pushing forward the trust’s perpetuity period when such actions are not correctly recorded in the trust deed.
Several risk management tools are available for trustees. These tools provide a level of protection from liability, if the trustee is able to prove that he or she acted in good faith at the requisite time.
An exculpation clause in the trust deed is a common form of defence for trustees; however, willful default of trustee duties and obligations will still render the trustee in breach of trust – likewise, dishonesty cannot be exculpated, as seen in the case of Amitage v Nurse  Ch. 241 (CA) – Millett LJ.
Such clauses have been viewed as unfair to trust beneficiaries as all risk is allocated to the beneficiary without providing redress or any ability to seek a remedy.
Such concerns have led to proposals for reform, such as requiring settlors of trusts to be provided with independent legal advice regarding the effect of exculpation clauses, where such clauses would only be upheld when such independent advice has been readily provided. Alternative clauses have also been proposed such as limitation periods for actions against trustees and narrower exclusions of responsibility for specific trustee functions.
Offshore courts tend to be somewhat more flexible than those onshore regarding trustee liabilities. This greater leniency is likely a result of fewer tax consequences arising out of trustee errors offshore.
With these trends in mind, trustees in Canada must be aware of the high level of responsibility their positions bestow and of the possible future limitations that they can rely upon in order to assist in their role as fiduciaries.
Thank you for reading.
At the April 24, 2013 Six-Minute Estate Conference, one of the papers presented addressed the topic of trustee compensation. Of note was the discussion on special fees, that is, fees above that which are normally awarded an estate trustee. These fees are not usually awarded in the average estate administration.
To be granted a special fee, what must be established is that the trustee engaged in tasks that were not contemplated by the headings of core compensation under the tariff; and the trustee must demonstrate that without an award for special fees he or she would be undercompensated.
Some examples the authors cite of times when a special fee was awarded are as follows:
· for work done to address an oil spill, an insurance claim and the sale of a house;
· for time-consuming tasks, such as managing and disposing of properties;
· for excessive travel time required to administer the estate;
· for difficult tasks such as valuing and liquidating an art collection and collectables;
· for extraordinary tasks such as determining how payments from the Canadian Blood Agency in compensation for tainted blood should be distributed;
· for extra work required to calculate the value of the estate assets in light of recent changes to capital gains treatment in the Income Tax Act; and
· for accounting services based on the complexity of a testator’s personal and corporate financial affairs.
The amount that should be awarded for a special fee is in the discretion of the judge. Keeping detailed and comprehensive accounting records, as well as details of one’s time spent administering an estate will likely help a claim for a special fee.
Thanks for reading and have a nice day,
When administering an estate, the estate trustee should make sure that any securities that form part of the estate are under his or her care and control. For example, if the securities are held in the deceased’s safety deposit box, it may be a good idea to move them to another location or to make sure with the depository that the safety deposit box is transferred into the estate trustee’s name alone so that only he or she may have access to it.
It is also a good idea to recommend to the estate trustee that they have the deceased’s securities certificates transferred from investment firms and other locations into the estate trustee’s own safekeeping facility. If the securities are to form part if the estate assets, the securities will need to be transferred into the estate trustee’s name via a transmission. If the securities are to be sold, a transfer is also needed requiring a transmission. If foreign assets are held, the lawyer must be aware of the requirements of the foreign jurisdiction and prepare all necessary documentation to complete transfers and dispositions.
In situations where there are marketable bonds or debentures (distinguished from Canada Savings Bonds, GICs, and term deposits) or marketable stock, it is necessary to have a power of attorney executed in favour of the transfer agent or have the certificate endorsed. The endorsement is often made on the reverse of the security certificate itself. Another alternative is to complete a separate power of attorney, since it is necessary for the estate trustee to attend at an institution to verify the signatures to the satisfaction of the stock exchange. Having a separate power of attorney also affords the estate trustee the power to amend any mistakes there might be on the endorsement made on the security certificate itself. This also enhances the safekeeping of the security as well.
Financial institutions often state the need for a certificate of appointment of estate trustee (formerly known as “probate”) in order to effect a transfer. As this is not required by law, we often advise our clients to push back and at least ask the institution to sell the securities and hold the assets pending receipt of the certificate so as not to become a victim of a volatile market.
Lawyers should also be aware of additional requirements relating to foreign jurisdictions, including the United States, shares registered in the name of a limited company, and shares registered in the name of a minor.
Thanks for reading!
Becoming a trustee or an estate trustee can be like an epic adventure. I recently came across an article on wealthmanagement.com that eloquently made this comparison in the context of trustees facing strange requests from beneficiaries and deciding to act boldly. Becoming a trustee can be a long road, full of peril and fraught with hazards. But if a trustee stays true to his or her fiduciary obligations and overcomes all obstacles in the way, there may even be a reward at the end.
There are many dangers out there for the unwary estate trustee. These take the form of liabilities and fiduciary obligations. A trustee can be liable if he or she breaches the duty of care owed to the beneficiaries. If estate assets are distributed before taxes are paid, the estate trustee may be personally liable for the tax obligations of the estate, which can sometimes be quite staggering. If a surviving spouse makes an election for equalization of net family property, he or she can be liable under the Family Law Act for a shortfall if estate assets are distributed without the consent of the spouse or court approval. Inadequacies in accounting can cause problems for our adventurer as well. With all of these risks, why would anyone embark on this journey?
There is some reward at the end of the road for those that successfully navigate their way through their duties. Estate trustees are generally entitled to compensation. If the will does not provide otherwise, there are court-recognized tariffs that may guide an estate trustee in deciding on the appropriate amount of compensation. Generally, a figure equalling the sum of 2.5% of each of the capital receipts and revenue receipts, and 2.5% of each of the capital disbursements and revenue disbursements is used as a yardstick against which to measure compensation. The compensation must nonetheless be fair and reasonable.
In some cases, this trove of treasure at the end of the quest may be worth the efforts. In many cases, some further, more heroic reason must exist to drive an estate trustee to assume the many problems that come with the job.
When compensation seems an inadequate incentive for so much risk, a potential estate trustee must look deeper for a reason to undertake this adventure. There are, of course, non-monetary reasons to take on this responsibility. Some estate trustees take on the role in order to help the beneficiaries. They may be able to assist their beloved nieces, nephews, or grandchildren through the loss of a loved one. Some do it to help the testator, a friend or relative who will never be able to repay the debt.
For those heroes brave enough to take on the role of estate trustee, I wish you luck. May your adventure not be very adventurous at all.
Thanks for reading!
A house can be a lot more than bricks and mortar. A Bowmanville couple recently came to this realization after they learned that the house they recently purchased had been the site of a gruesome double murder. An article from yesterday’s Toronto Star details the mental anguish caused to the homeowners and how it has led them to commence a lawsuit.
Upon discovering the tragic history of their new home, the purchasers immediately tried to cancel the $253,000 sale only to learn that it was too late. Unable to recoup their money, and allegedly suffering from panic attacks and overwhelming stress, the couple decided to commence a lawsuit against the real estate agency, the real estate agent and the previous homeowners for failing to disclose the house’s history.
Section 39 of the Real Estate and Business Brokers Act Code of Ethics (the “Code of Ethics”) provides that licensed real estate agents “shall not, in the course of trading in real estate, engage in any act or omission that, having regard to all of the circumstances, would reasonably be regarded as disgraceful, dishonourable, unprofessional or unbecoming…” If the agent or agency knew of the house’s sordid history and failed to disclose it to the purchasers, they are potentially in contravention of the Code of Ethics and could face sanction(s) by a discipline committee.
According to the article, the couple’s statement of claim describes the murder information as a “material defect … which stigmatized, psychologically impacted and tainted the property.” Does the withholding of this information lead to recoupable damages? Will the case add nuance to the doctrine of caveat emptor or “buyer beware”? We will have to see what the court decides.
Inherited real property is often sold following a testator’s death. For Estate Trustees who are charged with executing real estate transactions, this story serves as a warning to be careful to disclose all pertinent information regarding that property.
Thanks for reading!