I. THE SETTLOR

As reviewed in Introduction To The Law of Trusts, the settlor is the person who transfers the property to the trust. Once this is done, the trust is set up, and the settlor no longer has any rights to the property.

It should be noted, however, that there is no legal impediment for settlors to name themselves trustee or beneficiary, and this actually is quite common. Note that their rights as trustee or beneficiary, with regards to the property, are much less then when they were outright owner.

Settlors can alter the general rule stated above by specifically saying in the trust agreement that they reserve the right to change the trustee or even to revoke the trust. In this situation, a trust operates as a normal trust until revoked. A trust is considered to be "constituted" or finally and completely established only when the property has been transferred to the trustee. Where a trust has been declared without valuable consideration (see the discussion on Consideration in Duhaime on Contract Law), it can be "revoked" at any time before the property has been transferred.

Obviously, this discussion is most relevant to inter vivos trusts since in a testamentary trust, the trust only takes effect on the death of the settlor as it is the settlor's will that creates the trust. Sometimes, it is not so obvious whether a trust is inter vivos or testamentary. The key thing to look for is if the document containing the trust is "dependent" on the settlor's death for it to take effect. Then it is considered to be a testamentary trust.

This is an important issue because testamentary trusts are subject to the rules which regulate wills. Some provinces insist on wills being written or they are not valid. Such an invalidated will also destroys any trust contained therein.

One special difficulty is the case of the minor or the mentally incapacitated that wish to transfer property into a trust. Each province has special rules or legislation that regulates if minors or mentally incapacitated persons are able to make a valid will and under what conditions. In the case of an inter vivos trust, the trust may be voidable at the minor's option.

Exceptionally, the settlor can also have the court set the trust aside if the settlor can prove that he or she was coerced into the trust. For an example of this, see Geffen v. Goodman in the The Big Cases in Canadian Trust Law page.

II. THE BENEFICIARY

Trust triangleAny person can be a beneficiary of a trust, whether minor, mentally incapacitated, bankrupt or corporation or even the unborn. In some cases, it may be necessary for a legal representative to be appointed for the beneficiary.

During the life of the trust, the beneficiary occupies a peculiar position in law. It is the trustee that holds the legal title in the property per se but the law books say that the beneficiary has an "equitable" interest in the property, as in a right that while not recognized at common law, is recognized in the law of equity.

The curious and unique "dual ownership" aspect of trust law is the cause of most of the complexities of the subject matter.

Lawyers speak of the trustee having rights in rem (ownership) and the beneficiary having rights in personam (personal; against the trustee).

But a beneficiary can also exert property rights such as when they call in the trust under the rule in Saunders v. Vautier, or when they try to trace trust property that the trustee has transferred in breach of the trust agreement (for a discussion on tracing, see Trust Law: When Things Get Nasty).

But these in rem or in personam distinctions, it would seem, are of limited practical value and are more for the convenience of the equity court to achieve justice in any particular trying factual situation.

This was revealed in an Australian case, Commissioner of Stamp Duties v. Livingston (1965 A.C. 694):

"Equity in fact calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines."

For example, when a soon-to-be beneficiary tries to rush or pre-empt the administration of an estate, as actually happened in the Livingston case mentioned above, the beneficiary does not even have a equitable interest in the deceased's assets until the estate has been fully administered by the deceased's personal representative. Once the estate has been fully administered, the personal representative then holds the property for the beneficiary and the beneficiary has a valid equitable interest in the trust property.

The other important right of the beneficiary is to prematurely terminate the trust in spite of the wishes of the settlor, and call for the trust property if all beneficiaries are sui juris (ie. under no legal incapacity) and if there is no remaining condition or term to the trust. This known as the "rule in Saunders v. Vautier". Sole beneficiaries who attain the relevant age of majority may be able to terminate a trust and claim the property even if the trust said that they could not get the property until, for example, they "attain the age of 35."

To avoid this, settlors may include a gift-over which means a clause to the effect that if the named beneficiary dies before attaining a specified age (eg. "35"), the trust devolves to another person. This prevents the beneficiary from consolidating perfect title even upon reaching the age of majority, and he or she would then have to wait until they reached 35.

Some provinces (eg. Alberta and Manitoba) have not followed the Saunders v. Vautier rule and have inserted into their trust statute that a court's permission is required to prematurely terminate a trust.

Beneficiaries cannot use the rule to interfere with the trustee's administration of the property. They either call in the property and transfer it to themselves under the rule, or they don't. There is no middle ground, as was demonstrated in In Re Brockbank where a court refused to the beneficiaries the right to try to replace a trustee.

III. THE TRUSTEE

(a) Loyalty

Rule #1 of trusteeship is that they do not have to accept the duty.

Being a trustee can be a thankless job, in spite of the right to remuneration as discussed below. Trustees sometimes have to deal with impatient beneficiaries and their work may be subject to second-guessing by the courts. But, at least, provincial trustee legislation is generous to the trustee which leaves them with only one big headache: the complex nature of trust law in Canada! And do not appoint a minor as trustee as their ability to legally transact is limited. Provincial trustee legislation provides for the option of removing a minor trustee if this were to happen.

The trustee is a fiduciary which means that the relationship to the beneficiary is based on trust, loyalty, integrity and confidence. Ultimately, the trustee "is responsible to the beneficiaries for what occurs in the course of administration, subject to such exoneration as may be afforded by the terms of the (trust agreement), statute or by the exercise of discretionary judicial power to give relief under legislation" (Fales v. Canada Permanent Trust Co. (1977) 2 SCR 302).

Where there are two or more beneficiaries, the trustee must act impartially. This can be tricky when one beneficiary is a life tenant (entitled to the profits, rent, dividends or use of the trust property for life) and the other a remainderman (entitled to the trust property only upon the death of the life tenant) as was shown in the 1971 Ontario case of Re Smith.

Trustees must also act unanimously. When there is friction or hostility between trustees, this is an uncertain area of the law. Where there is disagreement, the common approach is to apply to the court for the removal one or more of the trustees.

(b) First steps

Trustees, upon accepting the position, should immediately read and study the terms of the trust agreement. The intelligent trustee would have done this before accepting.

Next, the trustee should investigate the status of the trust property; that the property is either in the trustee's custody or in safe hands. The trustee will then want to verify that the property is invested in such investments as either allowed under the trust agreement or under provincial trust legislation (see (c) Investment below).

(c) Investment

One must always look first to the trust's constitution to see what, if any, restrictions or liberties have been extended to the trustee in terms of conversion or investment of trust property, such as investments.

The settlor may provide for the re-investment of trust assets by the trustee in safer investments.

If not, reference should be made to Howe v. Dartmouth, (1802) 32 ER 56, where a fundamental and time-honored principle of trust law was laid down: unless there are specific terms in the trust instruments that the trust property is to be kept in it's present state, trustees are under an obligation to sell all "wasting", "hazardous" or "speculative" assets as soon as practical after taking on the trust, and to re-invest the proceeds of this sale into safer investments.

An example of a wasting assets would be a lease in a mine.

An example of a hazardous asset would be shares in a private company.

A trust may provide that Joe may enjoy the revenue of the assets but that it devolves to John at a later date; Joe being an income beneficiary and John being a capital beneficiary. Speculative assets are said to favour the income beneficiary but puts a high risk on the eventual gain by the capital beneficiary.

If the settlor specifically names wasting or hazardous assets to be used as funding for the trust, or as assets that can be acquired, then the rule in Howe v. Dartmouth does not apply, the trustees do not have to convert. In these cases, it is presumed that the settlor approved of the risks associated with the retention of, or investment in, those assets.

Similarly, if the trust gives the trustees the "power to convert" or the "power to convert or retain" certain assets, then the trust wording prevails; there is no recourse to the Howe v. Dartmouth rule. But the rule of Howe v. Dartmouth would still apply to residual assets (instructions to "postpone conversion" would imply an obligation to convert).

There is a presumption in law that residual assets should be invested in safe investments.

One case is worthy of note and that is Ronald v. Wilson (1949) Supreme Court Reports in which Canada's highest court said that the words "shall be invested in such securities as my Executor may deem advisable" required the trustee to invest in authorized investments only.

Provincial trust legislation used to provide a list of those authorized investments, that the trustee must stay within, unless the trust agreement has stated otherwise. The older version of provincial lists of authorized investments are too long to reproduce verbatim but typically include such investments as:

  • securities of Canada, a province, the United Kingdom, the United States of America, a municipal corporation, Canadian schools or hospitals;
  • corporate bonds that are secured by a Canadian government (federal or provincial);
  • Canadian trust company G.I.C.s;
  • deposits in, or non-equity or membership shares or other evidence of indebtedness of, a credit union;
  • first mortgages on land in Canada, but only if the loan does not exceed 75% of the value of the property at the time of the loan as established by a valuator whom the trustee believes on reasonable grounds to be competent and independent. The value of the first mortgage may exceed 75% if the mortgage is a CMHC insured loan.

Increasingly, trustee legislation is backing away from paternalistic restrictions on trustee investment and simply provides, as this example from the Ontario Trustee Act of 2008:

"In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.

"A trustee must consider the following criteria in planning the investment of trust property, in addition to any others that are relevant to the circumstances: general economic conditions; the possible effect of inflation or deflation; the expected tax consequences of investment decisions or strategies; the role that each investment or course of action plays within the overall trust portfolio; the expected total return from income and the appreciation of capital; needs for liquidity, regularity of income and preservation or appreciation of capital; (and) an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

"A trustee must diversify the investment of trust property to an extent that is appropriate to the requirements of the trust and general economic and investment market conditions."

Any delay by the trustee in converting to authorized investments, when they were bound to do so, could result in their liability to an amount equal to the difference in the price they would have received if they had of acted diligently and the price actually obtained (Grayburn v. Clarkson (1868( 3 Ch. App. 605).

(d) Remuneration

Trustees are not to keep, personally, any revenues or gain derived from the trust property; they are prohibited from profiting from their trust, although this principle will not be taken to an extreme.

In Aas v. Benham (1891) 2 Ch. 244, an English court held that to:

"... hold that a partner can never derive any personal benefit from information which he obtained as a partner would be manifestly absurd."

It should also be noted that the trust agreement may derogate from this general principle by allowing the trustee to retain, personally, in whole or in part, profit from the trust property (see, also, the discussion of fiduciary gains in Constructive and Resulting Trusts).

Trustees are entitled to "a fair and reasonable allowance." A sizeable amount of the rights and duties, etc., of the trustee has now been codified by most provinces in their respective trustee legislation (normally called "Trustee Act").

Under English law, trustees served without remuneration. But this has changed and all Canadian provinces now have trust legislation which provides much like section 61 of the Ontario act as follows:

"A trustee, guardian or personal representative is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge ...."

Others, like British Columbia, suggest a maximum fee of 5% of the "gross aggregate value, including capital and income, of all the assets of the estate". Most provinces do not set a maximum but, instead, merely refer to a "fair and reasonable allowance."

What is reasonable will depend on each case.

In Re Atkinson (1952) O.R. 685, the Ontario Court of Appeal allowed an objection to a $389,000 bill from a trustee for the administration of a $12-million estate. In reducing the bill to $149,124, the court said that the statutory principles on trustee remuneration "override everything else and that fair and reasonable allowance is for the actual care, pain and trouble, and time expended."

Another case, Re Toronto General Trust Corp. (1905) 6 OWR 350, gave as factors:

"... the magnitude of the trust, the care and responsibility springing therefrom, the time occupied in performing the duties, the skill and ability displayed and the success which has attended the administration."

In Re Rudy (1995) Alberta Law Reports 332, the courts set $15 an hour as a reasonable rate, given that most investments were in low-maintenance GICs The case reiterated the rule that fair and reasonable compensation was based on the amount and the quality of the services rendered. The hourly rate will reflect the complexity, or specialization required, of the task(s). Routine tasks would not command a higher allowance. But if a lawyer is the trustee, the lawyer can charge the going rate for lawyer work.

Provincial trustee legislation allows the trustee an indemnity to ensure that they are also compensated for costs and expenses properly incurred in the administration of the trust. For example, B.C.'s Trustee Act (§95):

"A trustee, without prejudice to the provisions of any instrument creating the trust, is chargeable only for money and securities actually received by him notwithstanding his signing a receipt for the sake of conformity, and is answerable and accountable only for his own acts ... and not for those of other trustees or ... or other person with whom trust money or securities may be deposited ... unless it happens through his own wilful default, and may reimburse himself ... out of the trust premises, all expenses incurred in or about the execution of his trusts or powers."

The expenses must be properly incurred.

Note also the words "without prejudice to the provisions of any instrument creating the trust." This means that the courts will not interfere with trust agreements that are at variance with these sections of the trustee legislation. If the trust agreement provides for a certain rate or method of compensation for the trustee, the court will defer to the agreement.

If the trustee incurs legal fees defending the trust property in legal proceedings, these may be charged against the trust assets as administration expenses (Thompson v. Lamport (1945) SCR 343).

Normally, the trustee would pay himself from the capital account of the trust (and not from revenue), as this is considered fairest towards all the beneficiaries.

This right to be paid back for trust-related expenses is limited to the size of the trust property. The trustees have no avenue for getting the beneficiaries to reimburse trust expenses unless (1) the trustee accepted his position at the request of the beneficiaries, (2) if the beneficiary is also the settlor, (3) if the beneficiaries are in a position to invoke the Saunders v. Vautier rule or (4) if the beneficiaries agreed to idemnify the trustee.

(e) Delegating tasks

A trustee may be allowed to delegate certain specialized tasks to others because of the provincial trust legislation. For example, §7 of the B.C. Trustee Act:

"A trustee may appoint a solicitor to be his agent to receive and give a discharge for money, or valuable consideration or property receivable by the trustee under the trust, and a trustee shall not be chargeable with breach of trust by reason only of his having made or concurred in making that appointment.

"A trustee may appoint a banker or solicitor to be his agent to receive and give a discharge for money payable to the trustee under or by virtue of a policy of assurance, by permitting the banker or solicitor to have the custody of and to produce the policy of assurance with a receipt signed by the trustee, and a trustee is not chargeable with a breach of trust by reason only of his having made or concurred in making that appointment.

"This section shall not exempt a trustee from any liability he would have incurred if this Act had not been passed, in case he permits the money, valuable consideration or property to remain in the hands or under the control of the banker or solicitor for a period longer than is reasonably necessary to enable the banker or solicitor to pay or transfer it to the trustee."

Besides the legislated exceptions, the general rule is that the trustee cannot delegate routine tasks.

Nor does this power to delegate detract from the trustee's ultimate responsibility for the decisions of the agent. Obviously, the trustee must carefully choose the agent.

(f) Liability

The standard of care to which a trustee will be held is:

"... that of a man of ordinary prudence in managing his own affairs and traditionally the standard has been applied equally to professional and non-professional trustees. The standard has been of general application and objective" (Fales v. Canada Permanent Trust Co. (1977) 2 SCR 302).

Or, Speight v. Gaunt (1883) 9 App.Cas. 1:

"... as a general rule, a trustee sufficiently discharges his duty if he takes, in managing trust affairs, all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own."

In Bathgate v. National Hockey League Pension Society (1994) 16 Ontario Reports 761, the court exonerated the trustee from the allegation of misconduct where the evidence showed that the trustee had based his decisions on competent legal and actuarial advice.

To this should be added the caveat laid down by Learoyd v. Whiteley (1887) 12 App. Cas. 727, that when the trustee serves both a life tenant and a remainderman beneficiary, the trustee must invest impartially and balance the preservation of the property for the remainderman with the need to produce a reasonable income for the life tenant (see also Re Smith).

But the trustee legislation of most of the provinces goes further. Even if the trustee is in a position of a breach of trust, the trustee may apply to the Court to be "excused" from liability. Section 96 of the B.C. Trustee Act is typical:

"If it appears to the court that a trustee, however appointed, is or may be personally liable for a breach of trust, whenever the transaction alleged 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, then the court may relieve the trustee either wholly or partly from that personal liability."

Another method for the trustee to immunize against liability is to apply to the court for guidance. Again, §85 of the B.C. Trustee Act is typical:

"If it appears to the court that a trustee, however appointed, is or may be personally liable for a breach of trust, whenever the transaction alleged 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, then the court may relieve the trustee either wholly or partly from that personal liability."

In McLean v. Burns Philp Trustee Co. (1985) 2 NSWLR 623, an Australian Court summarize the ability of the Courts to assist under this heading:

"A general administration order will be made only in the categories of cases: (1) where the trustees cannot pull together; or (2) the circumstances of the estate give rise to ever-recurring difficulties requiring the frequent direction of the court; or (3) where a prima facie doubt is thrown on the bona fide of the discretion of one or more of the trustees."

The statutory powers given to the court are in addition to inherent jurisdiction Canadian courts already have over trusts.

There is Canadian authority which states that the court can intervene under this section of the trustee legislation if the trustees are deadlocked and this deadlock threatens the trust property (see, for instance, the references in Canadian Encyclopedic Digest: Western, under the title "Trusts" by Ronald Bohlin, Carswell: 1987, paragraph 273).

But this is inconsistent with other Canadian judicial views. For example, in Re Wright (1976) 74 Dominion Law Reports 504, the Ontario court adopted an earlier case which had stated:

"The (trustees) responsibility is theirs and cannot be shifted upon the Court. The (trustees) cannot come to the Court and ask whether the present is a good time or a bad time to sell stock or anything else, or ask whether a price offered is sufficient or insufficient. The advice which the Court is authorized to give is not that type; it is advice as to legal matters or legal difficulties arising in the discharge of the duties of executors, not advice with regard to matters concerning which the executor's judgment and discretion must govern."

Most provincial trustee acts provide for the court to replace a trustee under certain conditions, which might be another avenue to explore to deal with trustee deadlock.

In Re Ocean Man Trust (1993) Saskatchewan Reports 179, it was stated that even without explicit authority in provincial legislation, the courts have inherent jurisdiction to remove a trustee who fails to exercise their legal responsibilities.

Trustees are jointly and severally liable, between themselves, for breach of trust of any of them for all those that participated in it (see §95 of B.C.'s Trustee Act above: "... a trustee ... is answerable and accountable only for his own acts ... and not for those of other trustees ... unless it happens through his own willful default").

This means that one trustee can be held liable if any of the other breach of trust trustees are condemned in court for the breach. In these instances, the trustee held liable by the court can claim a contribution from the other trustees against whom judgment has requested.

A trustee may even claim indemnity from a co-trustee if (1) it was the co-trustee's fraud that was the source of the breach of trust; (2) if the co-trustee was a lawyer and the breach was committed pursuant to specialized advice received from the lawyer; or (3) where the co-trustee is also a beneficiary, to the extent of the beneficial interest.

This was well exemplified in MacDonald v. Hauer (1977) 72 Dominion Law Reports 110 where a trustee, who was also a beneficiary, misappropriated the trust property and had it invested by a stock broker. The stock broker was held to be a constructive trustee. The other beneficiaries decided to sue only the stock broker, who counter-sued the original trustee that had given him the trust property. The court ordered the original trustee to indemnify the stock broker to the extent of the trustee's interest as beneficiary.

Constructive trusts or resulting trust trustees can also be found to be joint and severally liable for breach of trust when the constructive trustee became so as knowingly assisting in a breach of trust.

The liability of the trustee is only one of two main remedies available to the beneficiary.

The other is the tracing of the misappropriated property and is discussed in Trusts: When Things Get Nasty.

Readers should also be aware that Canada's Criminal Code, at article 336, makes it an offence for a trustee to convert "with intent to defraud and in contravention of his trusts, that thing or any part of it to a use that is not authorized by the trust."

(g) Duty to account

Trustees must keep proper financial records (accounts) of their trust decisions and these accounts have to be made available to the beneficiaries upon demand, or within a reasonable amount of time. Provincial trustee legislation usually requires these accounts to be filed in the court on demand, using a unique form (passing of accounts), and it is at this time, unless the trust agreement says otherwise, that the court would review the trustee's proposed compensation.

REFERENCES & FURTHER READING: