Trustee’s Discretion to Encroach
Trustee's Discretion to Encroach - The Limits Revisited
February 3rd, 2022 was eState Academy’s webinar “Trustees Discretion to Encroach - The Limits Revisited”, where Jordan Atin and Ian Hull discussed key considerations in advising a trustee on how to exercise their discretion in determining whether to encroach on the capital or income of a trust.
Both inter vivos trusts and testamentary trusts are often drafted to give trustees the widest possible discretion in determining whether to encroach on capital or income in favour of the beneficiaries. Planning lawyers often draft trusts that make the life tenant beneficiary the top priority and oust the even hand rule (frequently seen in spousal trusts), encourage generous encroachment, and use words such as “absolute discretion” or “as determined by the trustees in their sole discretion” to give trustees unfettered discretion to encroach generously in favour of the spouse or other beneficiaries.
Does “absolute/unfettered discretion” really give the trustee’s absolute unfettered discretion? It would seem the answer is an unequivocal NO!
Clients find this difficult to understand and it might appear counterintuitive; however, a trustee is at its core a fiduciary and the Court has a supervisory role over all fiduciaries.
In the recent case of Walters v. Walters (2022 ONCA 38), the Court examined the limits of the exercise of discretion and the key takeaways can be summarized as follows
- Trustee’s in exercising discretion to encroach, must consider the testator’s intention by looking at the will and surrounding circumstances referred to by the Court in Walters as the “the armchair principle”.
- The Court will not get involved just because they would not have made the same choice as the trustees. Rather, the Court will look at whether the trustees breached their fiduciary duty, and consider whether the trustee exercised discretion with mala fides (bad faith) and whether there is an “Abuse of Discretion”. If so, a Court will interfere.
- If discretion is exercised in a manner that is unauthorized by the power conferred, the Court will interfere.
- The Court will interfere if there is an “Abuse of Discretion”, which occurs if:
a) Extraneous matters/irrelevant are considered (Barnes v. Barnes ((2008) 42 ETR (3d) 16)
- Discriminatory Factors ( Fox v. Fox Estate, (1996) 28 O.R. (3d) 496)
- Dislike for the beneficiary (Re Walters)
b) Proper facts are not considered– Trustees have “The duty to consider all relevant matters has as its obvious corollary, a duty to make all necessary inquiries so that the trustee is adequately equipped to make a decision” (Re Walters)
- Trustee must obtain sufficient information to decide whether to exercise discretion
- Some due diligence is required
5. The Court will intervene if the decision reached was:
- So unreasonable that no honest or fair-dealing trustee could have come to that decision?
- Based on considerations which are irrelevant and should not have been taken into account?, or
- Without evidence that the trustees gave proper consideration to facts that they should have taken into account in determining whether they ought to exercise discretion. (Re Walters)
6. Distrust of the beneficiary was found not to be an extraneous or irrelevant consideration when supported by facts.
7. Financial resources of the beneficiary is a proper fact to be considered and the trustees have a duty to make sufficient inquiry (unless he Will or trust provides otherwise) -“A beneficiary’s financial circumstances is relevant to determine if the payment is necessary or advisable”.
Practice Points for Advisors:
Prior to Re Walters, many practitioners took the position that no inquiry into the financial resources of the life tenants was necessary and such disclosure was not appropriate. Following Re Walters, not inquiring into the financial affairs of the beneficiary could be grounds for the Court intervening in the Trustee’s decision to exercise discretion (unless the governing document provides otherwise).
Trustees should exercise discretion in a judicious manner. Every time trustees determine whether to exercise discretion to encroach, they should make notes or a memo writing down the basis of their power to exercise discretion (look to the Will and surrounding documents), the proper factors considered, and inquiries made to ensure that they took all proper factors into account (due diligence) in coming to their decision.
If Trustees come to their decision based on improper or irrelevant motives (such as dislike of a beneficiary), a Court may intervene.
Drafting lawyers might consider including language in the trust or Will setting out whether or not trustees should consider the financial resources of the life tenant beneficiary in exercising their discretion to encroach.
Joanne Golden, TEP