STEP Canada Law of Trusts Tutorial STEP Canada Law of Trusts Tutorial Sept 27, 2011 Speaker...
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1 STEP Canada Law of Trusts Tutorial Sept 27, 2011
STEP Canada Law of Trusts Tutorial STEP Canada Law of Trusts Tutorial Sept 27, 2011 Speaker Introduction: Kathleen Cunningham, BComm, LLB, MTI, TEP 20 years in the trust industry Experience
Speaker Introduction: Kathleen Cunningham, BComm, LLB, MTI, TEP 20 years in the trust industry Experience as a Trust Officer Led national team of lawyers Supported trust management and staff Provided estate and trust education to staff responsible for estate, trust and tax administration, business development, financial planning, and operations Former member of Trust Institute (now CSI) Curriculum committee on STI and MTI Past Chair STEP Canada Education Committee Past Chair STEP Vancouver Co-chair STEP Canada Symposium on Trust Law Reform (2007) Former member of the BC Law Institute Committee on the Modernization of the Trustee Act Frequent speaker at STEP Canada national conferences
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Outline
• Housekeeping
• Review key concepts
• Questions/Discussion
• Follow up
Presenter
Presentation Notes
This is not a full review of material. Rather, it is a brief review of some of the most important and/or difficult concepts in the course . You may not have studied all of the chapters at this time. If so, this will be an introduction to concepts. You may wish to return to the slides and audio after reading the materials. Purpose of tutorial: To ensure students have commenced studies. All students should have completed a review of the first 10 chapters by now. To provide an opportunity to ask questions Reinforce concepts and generate discussion Opportunity to ask questions about exam.
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Preparation for Exam
• Open book– Application, not memorization– Do not underestimate difficulty– Review rules for exam day (what is permitted, etc)
• Materials to study:– Course Text ‐ Binder– Online Course Content/ Applying the Concepts
• CRITICALTO EXAM PREPARATION! Do not ignore
– Review Questions to check learning (online)
• A word on sample exam questions
Presenter
Presentation Notes
This is the first course of the STEP diploma. The exam is open book . It requires application of the law to realistic client situations. The sample exam questions in student resources show question styles and examples of how to approach answers. For example, rather than asking students to “Briefly explain the rule in Saunders v Vautier and provide an example”, students may be asked to consider a scenario and respond to a question such as: “Can this trust be terminated? Why or why not?” An examiner will look for an answer that sets out the relevant legal rule(s), identifies relevant facts, and discusses the facts that lead to the proposed conclusion. Student Resources online: Critical to your studies and exam preparation. Take time to review Examinable Content – lists the sections of each chapter that are examinable. Important to review. Some content in text is included to complete a summary of the law and/or to explain a concept, but it will not be tested. Online Course Content/Applying the Concepts. This is part of the text and has two purposes: a) provides examples of the rules being applied in real situations b) provides an opportunity to practice the analytical approach required on the exam. Review Questions – these are provided to assist you in your studies. Close your materials and answer without referring back. This helps you assess your recall Sample Exam – not a complete exam (see comments above) Post tutorial notes from prior sessions. In particular, see May 2011 presentation with recording and review of Chapters 11-19. Recording covers points we do not get to today. However slides are with this pack Also includes summaries of knowledge and skill objectives to help clarify learning expectations Provides links to legislation, resources, sample documents Remember to review Tips for Preparing and writing a STEP Diploma For Canada Exam Access the site as follows: Path: public website/joining step/student route/Diploma route/student resources URL: http://www.step.ca/joining/student/diplomaroute/studentresources.asp Password: dipstu2009
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Course Chapters1: Introduction
2: Classification
3: Creation: 3 Certainties
4: Creation: Constitution
5: Creation: Formalities
6: Creation: Legal & Public Policy Constraints
7: Termination and Variation
8: Using the Express Trust
9: Non‐Charitable Purpose Trusts
Presenter
Presentation Notes
While all of the chapters are important, some are more critical for exam purposes and general knowledge. Each chapter has a detailed set of learning objectives. You should be comfortable that you have met the objectives. Some concepts are complex and/or more esoteric. These are for lawyers who specialize in the field. As a TEP, your responsibility is to be aware of the rules, recognize when they may be relevant and understand the relevance. Therefore, for examination purposes, sections of the text have been deliberately excluded. It is important for you to keep this in mind as you prepare for the exam so that you do not spend time on rules that will not be examined, to the detriment of the critical knowledge you will be examined on. This tutorial deals with key concepts to ensure their importance is not overlooked, as well as the concepts that tend to cause the most discussion and/or confusion. Accordingly, the following notes on each chapter are offered as an overview and to complement the learning objectives and examinable content information already provided. Introduction and Classifications: Terminology and general concepts. Helps TEPs ensure they are speaking the same language and alerts TEPs to times when words should be clarified before jumping to assumptions and/or advice. Classifications demonstrate that trusts can be viewed from different perspectives, influencing terminology and understanding about how trusts are used. Creation of a trust: Fundamental to the course and understanding this area of the law. Knowledge requirements for TEPs will vary depending on the profession. Each element must be understood and a TEP is expected to be able to recognize potential issues in order to ensure appropriate actions are taken if creation is an issue/at risk. We will review the 3 certainties and some legal and public policy constraints. Termination and Variation: As TEPS we see situations where a termination or variation could address a conflict, a legal issue, or a tax liability. The law varies across the country. It is important to understand the rules, when they can and cannot be used, and the mechanics. We will review areas of confusion. Express trusts: As TEPs, we will advise clients on when to consider a trust, and/or be responsible for providing services to a trustee. Accordingly, it is necessary to understand the purposes for which trusts are can be made, and any constraints or rules that may apply. These will not be reviewed in the tutorial unless questions arise. Non-charitable and charitable purpose trusts: “Purpose” trusts are only valid in certain situations. This is an extension of the “creation of a trust/legal constraints” chapter. Given that in Canada, “charitable donations” can be made to organizations that do not meet the requirements of a “charitable purpose trust, it is important for TEPs to recognize the distinction between charitable and non-charitable purposes
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10: Charitable Purpose Trusts
11: Duties of Trustees
12: Powers of Trustees
13: Appointment, Retirement, Death, Removal
14: Breach of Trust
15: Powers of Attorney Compared to Trusts
16: Resulting Trusts
17: Constructive Trusts
18: A Few Points on Drafting Trusts
19: A note on the Trust in Quebec
Presenter
Presentation Notes
Charitable purpose trusts: These rules are important. They determine whether a gift may survive or fail. TEPs will want to be able to recognize the issues and identify situations where a gift which appears to fail, can be saved. Duties and powers of trustees; breach of trust: Ultimately, these three chapters are critical to this course and the advice and/or service that a TEP provides to someone who is a trustee. The online course content is intended to help students consider the rules in the context of real life scenarios. In addition, it is important to be able to recognize that although an action may seem “practical” or “appropriate” in the circumstances, if there is a breach of a duty or power the trustee and/or advisor may be at risk of liability if anything goes wrong. We will review some examples to help students prepare for the analysis required on the exam. Appointment, retirement, death and removal: These rules are established in law. TEPs should be aware of them and know how to advise clients when they need to be addressed. Powers of Attorney, Resulting Trusts and Constructive Trusts: These chapters deal with related legal relationships guided by principles found in trust law experienced by individuals and corporations and/or people engaging in business activities. In order to recognize and deal with the issues, or help a client solve a problem, a TEP must have a firm grounding in the fundamentals of trust law (3 certainties, duties and powers), and the relevant law in these three chapters. They deal with what someone can/cannot do as an attorney, and court ordered remedies where an express trust is not in place. Drafting trusts: This chapter is self explanatory. Students should review it, bearing in mind the course materials, as well as the precedents found on the Student Resource Area. Notes on the Trust in Quebec: This chapter has been deliberately included for students outside of Quebec and should not be ignored. While laws are similar in the common law provinces and territories, there are some differences that need to be noted by a practitioner. The differences are magnified for a TEP in Quebec and the course text does not purport to be a review of Quebec trust law. However, if a trust “moves” (for example, the trustees change or move to another province) a TEP in a common law province may find that a client is a trustee of a Quebec law trust. As a result, TEPs have a responsibility to be familiar with the key similarities and differences so that they can adapt their services and/or recognize when additional legal advice will be required. The content in this chapter is mandatory for common law students. See examinable content.
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Today’s Topics
• Three Certainties (c 3)
• Legal Constraints…Perpetuities Rule and Accumulations (c 6)
• Variation of Trusts & Termination (c 7)
• Charitable purposes (or not) and the court’s cy‐pres power (c 9 and 10)
• Trustee Duties & Powers (c 11 and 12)
• Investment Duties & Powers (c 11 and 12)
Presenter
Presentation Notes
Topics selected reflect core content, key issues, and/or difficult areas. General comment: The first 10 chapters are primarily concerned with creating a valid trust. Chapter 7 deals variation and termination. Chapter 8 reviews how trust’s are used. Some of the discussion refers back to these rules. The remaining chapters deal with trustee roles and responsibilities, and some of the more common issues that arise in daily practice – enduring powers of attorney and joint accounts/assets. These issues are often resolved through trust law. Accordingly they are introduced in this course. The trust professional needs to be ever vigilant when drafting or administering a trust, or providing services to a trustee. The trustee who administers a trust that is not valid will be distributing assets to the wrong people and significant liability can arise. Advisors who do not recognize a trustee’s unique responsibilities will be negligent and/or could become liable for losses. Some examples: trusts that fail to satisfy the three certainties will be undone trustees may only delegate certain responsibilities and/or tasks trusts drafted to defer distribution dates or direct the trustee to hold the income until a far off date in the future may violate perpetuities or accumulation rules conditions designed to avoid the possibility of early termination under Saunders v Vautier could also violate perpetuity rules a purpose trust that is not a charitable purpose trust will not be able to continue These issues are revisited in c 18 – Points on Drafting Trusts
We may not get to all of these. See the May 2011 tutorial and audio for comments. Or, read notes below the slides attached.
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Three Certainties
• Intention
• Objects
• Subject matter
Presenter
Presentation Notes
Definition of a trust: See chapter one for discussion. A common working definition is that a trust arises when someone (a trustee) holds and manages property (subject matter) for the benefit of others (objects). The trustee has legal title to the assets, but does not have the “beneficial” title which is the right to enjoy the “use” of the property. Rather the trustee has a fiduciary responsibility to the beneficiaries who have the “beneficial” title. Note: the beneficiaries do not have the legal title to the assets. This separation of title is unique to the common law. Quebec uses a different legal framework. These legal rights are the hallmarks of a trust arrangement. A trust is not a legal entity. Rather, it is a relationship. The materials set out 5 requirements to create a trust: Capacity of settlor 3 certainties Constitution Formalities Avoiding legal and public policy constraints Focus today: the 3 certainties. If one is missing there is no trust. Relatively simple concept, but can cause problems. Intention: Words in the document or stated. Objects: Who will benefit – must be a person or purpose; purpose must be charitable or it may fail. Subject matter: What property is the trustee responsible for?
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How is intention conveyed?
• What words do courts look for?
• Other considerations? – Words are not enough
Presenter
Presentation Notes
Trusts can be created through actions and/or words. Most TEPs deal with express trusts (trusts where the client appoints a trustee in a will or trust deed and the document sets out the authorities and any restrictions. However, trusts can arise in the absence of a written document. Such trusts have very unique attributes, and the rights of the parties involved differ. Intention: Ideally the words “in trust” or “on trust” are used. BUT, words are not enough. The settlor must also have a true intention to create a trust. This means there is a transfer to a trustee who holds and manages the property (subject matter) for the beneficiary(ies) (objects). Note also that words such as “it is my wish that”, or “it is my hope” are precatory and are not sufficient to establish a trust. The importance of having true intent, and not just using the right words, is well illustrated in the 2010 decision of the Federal Court of Appeal has made it clear that even if a document says “in trust”, the court can look at surrounding circumstances. (Antle v Canada 2010 DTC 5172 FCA) (see discussion in Jan 2011 STEP Inside, and p 37 of course text). In that case there settlor had no intention of relinquishing control, documents were not executed in a timely matter and there were issues about the timing of the transfer of the assets (subject matter).
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Remainder of the test …
• What is an “object”?
• What is “subject matter”?
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Presentation Notes
Objects are the beneficiaries or purposes for which the trust has been created. If objects cannot be identified, then the trust will fail. Subject matter is the property that the trustee is to hold and/or is responsible for. Sometimes, the settlor wants to be able to add property/assets at a later date. In this case, the trust may be settled with a gold coin or $10 or $100 and the trust document gives the trustee the power to accept assets in the future. If a binding transfer of some property/subject matter does not occur, there will not be a trust.
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What are the consequences?
If the 3 certainties are not met …
there is no trust!
So then what?
Presenter
Presentation Notes
The trust never existed, so everything goes back to the settlor (or the) estate it the trust is created in a will. The assets that were transferred “result back” . Or the trustee holds the assets on a resulting trust for the settlor or settlor’s estate. Note that a resulting trust can arise if a trust created under a will fails. Example: A will instructs executor to pay debts and some legacies. The remainder is held in trust. If the trust fails for any reason, the assets will be held on a resulting trust for the testator’s estate. Given that the will probably does not deal with this eventuality, the relevant intestacy rules would have to be applied to determine who is entitled to the assets in the trust. Legal advice would be required to make this determination. It is beyond the scope of this course. Caution: If the trust was established out of a sum that was set aside, then if it fails, the trust only results back to the main trust. Example: Will instructs executor to set aside $250,000 and hold it in trust for a beneficiary. If this trust fails, the $250,000 or amount remaining, falls back into the residue of the estate and is dealt with in accordance with the terms of the will.
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Legal Constraints (c 6) Public Policy & Uncertain Conditions
• If conditions is contrary to Public Policy: • Beneficiary takes interest as if there is no condition, or• Beneficiary does not take the interest and it fails or goes to next beneficiary according to terms
• Whether a beneficiary takes the interest depends on:• Nature of interest• Type of condition
Presenter
Presentation Notes
Students are referred to discussion as well as footnotes about conditions precedent and conditions subsequent on p 76 and the comments in chapter 1 part C III 1 at page 9. P 76 briefly reviews consequences which will depend on the legal analysis. Students should be aware of the different scenarios reviewed and be able to recognize the types of conditions, and come to a conclusion on similar types of facts. P 81 provides a similar analysis for “uncertain “conditions
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Legal Constraints (c 6) Public Policy & Uncertain Conditions
• Step #1: Identify nature of the condition
• Contingent (beneficiary entitled only if a condition occurs)• Condition precedent (if condition occurs, beneficiary’s interest will be legally enforceable)
• Condition subsequent (if/when the condition occurs, a trust ends or other instruction applies and beneficiary’s interest will take effect)
Presenter
Presentation Notes
See discussion and footnotes about conditions precedent and conditions subsequent on p 75 and C 1 C III 1 (page 9) P 76 briefly reviews consequences – it depends on the legal analysis. Students should be aware of the different scenarios reviewed and be able to recognize the types of conditions, and come to a conclusion on similar types of facts. P 81 provides a similar analysis for uncertain conditions Students should also note the definitions: Vested (beneficiary is entitled now, or in the future. Interest cannot be taken away) Vested subject to divestment (beneficiary is entitled to an interest in the future, but if/when a condition occurs, may lose entitlement). Condition may be a condition precedent or condition subsequent. See slide bullets.
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• Step #2: Identify public policy/other issue
• Condition is contrary to public policy. Examples:• Restraint of marriage
• Interference with marital relationships
• Interference with parental duties
• Discriminatory
• Restraint on alienation
• Uncertain condition
• Impossible to perform condition
Legal Constraints (c 6) Public Policy & Uncertain Conditions
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Legal Constraints (c 6) Public Policy & Uncertain Conditions
• Step #3: Apply legal rules [basics only]
• If a condition subsequent is contrary to public policy, condition is ignored. Gift is effective.
• If a condition precedent is contrary to public policy:• And relates to real property, the gift/trust fails
• And relates to personal property• It fails if condition is “bad in and of itself”
• Condition is ignored if it is prohibited by law
Presenter
Presentation Notes
Complex area of the law. The courts would make the final determinations. Students are only expected to recognize facts that could raise these issues and identify the possible outcomes and why.
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Legal Constraints (c 6) Public Policy & Uncertain Conditions
• Step #3: Apply legal rules [basics only] • If a condition precedent is uncertain gift/trust fails
• If a condition subsequent is uncertain, ignore it
• If condition precedent dealing with personal property is impossible at date gift/trust is made, ignore it
• If condition dealing with personal property becomes impossible after trust was created, and for reasons beyond settlor’s control, gift fails
• If condition deals with real property• And is a condition precedent, gift fails
• And is a condition subsequent, gift succeeds (ignore it)
Presenter
Presentation Notes
Note: these interpretation issues do not arise often. They are reviewed here as a reminder of the need for careful drafting, and a warning to not make assumptions on how to interpret a trust when a provision fails in some way.
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Legal Constraints
• Rule against perpetuities ….
• Why so difficult?– Must think about what “might happen”
– And ignore probabilities and likelihood
– Can require complex “contortions”
• Know your province’s “saving rule” if there is one
Presenter
Presentation Notes
Again, this rule does not usually arise, but this is because of careful drafting and usually clients do not want to tie up trust assets indefinitely. However, they can be a trap for the unwary.
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Perpetuities – The Rule• Only applies to contingent interests
• Do not apply to vested interests that are only delayed• Common law rule (NS, NB, PEI, Nfld)
• At the outset, it must be clear whether a contingent interest MUST vest within the perpetuity period
• As stated in text p 84: An interest is valid if it must vest, if it is going to vest at all, within [the period]
• The “period” is:• “lives in being at date instrument takes effect” + 21 years ….or
• As modified by statute
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Presentation Notes
All should be aware of the nature of the rule, when it can apply, and your provincial rules. Provinces that have abolished the rule: Saskatchewan’s new Trustee Act that came into force in 2010 repeals rules against perpetuities (s. 58). Manitoba also repealed the rule. Statutory modifications: Ont, BC, AB, Territories Keep the rule, but do not make determination at the beginning. Wait and see. The general “wait and see language found in Alberta and BC is found below: (see http://www.canlii.org/en/on/laws/stat/rso-1990-c-p9/latest/rso-1990-c-p9.htm ) Ontario students: the Perpetuities Act has a number of provisions to help avoid the rule applying. Presumption of validity and “Wait and See” 4.(1)Every contingent interest in property that is capable of vesting within or beyond the perpetuity period is presumptively valid until actual events establish, (a) that the interest is incapable of vesting within the perpetuity period, in which case the interest, unless validated by the application of section 8 or 9, shall be treated as void or declared to be void; or (b) that the interest is incapable of vesting beyond the perpetuity period, in which case the interest shall be treated as valid or declared to be valid. BC adds an 80 year alternative test, and has other provisions to help avoid the rule (see http://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-358/latest/rsbc-1996-c-358.html) AB also has a number of provisions. (see http://www.canlii.org/en/ab/laws/stat/rsa-2000-c-p-5/latest/rsa-2000-c-p-5.html) NOTE: See also Student Resources area Jul 15 2010 follow up notes summarizing highlights from Feeney’s Law of Wills
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Example: Johan’s will … Think “out of the box”• Johan’s will provides:
– Residue on trust for my daughter Maria.– Pay income or capital for her benefit until her death (fully discretionary)
• On Maria’s death, pay residue to her children when the youngest reaches age 30. If any of Maria’s children die before attaining 30, pay that child’s share to the child’s children
• At the time of Johan’s death, his daughter Maria has one child, Tom, age 2• At the time of Johan’s death, it is possible that:
– Maria will have another child (example: she may have a daughter in 2 years. Call her Anna)
– It is also possible, that one year after Anna is born, Maria and Tom could die in a car accident when Anna is one year old. Anna would have to wait 29 years to take under the trust. If she died before 30, her children would take.
– It is further possible that Anna will have a child and that Anna may die and not reach age 30. For example: Anna has a son Lucas when she is 25 and also dies from a fast spreading cancer when she is 27.
Presenter
Presentation Notes
The perpetuity rule can arise when class gifts or trusts for a class of people are created. This scenario involved a gift to Maria’s “children” and grandchildren. A simple example of just one possibility was created. But the class could be much larger and then the analysis can become more challenging. An analysis that involves a class of people can be complicated by the “class closing rules”. While outside the scope of this course, students should be aware that there are a series of rules that say when the class closes. E.g. Under Johan’s will, are Maria’s “children” determined at his date of death or at Maria’s date of death? Do all children alive when the youngest turns 30 take, or do they still have to be alive when the youngest turns 30? As can be seen, far more complicated scenarios can arise and there can be other dates that might apply. These rules could become relevant in a perpetuities analysis. The point for this course is that assumptions should not be made on whether or not the rule applies or does not apply in those provinces where it is relevant. Students should understand the nature of the rule and know their own provincial provisions if any and how they are applied to avoid the rule.
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Example: Johan’s will … Think “out of the box” (cont’d)• Apply the rule to the hypothetical situation:
– At the time Johan died, the ‘lives in being” were Maria and Tom.– While Anna’s interest is vested subject to divestment (not reaching age 30),
Lucas’s interest is contingent (he will only take if Anna dies before reaching age 30).
– Therefore, if the scenario above unfolded, under the perpetuity rule, Lucas’ gift must vest within 21 years of the death of the last life in being. This is not possible in the hypothetical because Anna’s death is 24 years after the death of the last of the lives in being, so the gift fails under the rule.
• In Manitoba and Saskatchewan this is no longer a problem. • In BC, Alberta, Ontario, the determination is not made until the lives in being
are deceased. E.g. the “hypothetical” analysis is not carried out. If the lives in being all die before the interests vest, it is necessary to determine whether there are any contingent interests, and if so, will they vest within 21 years? Also consider the many other options for avoiding the rule.
• In most cases, people live full lives (e.g. Maria and/or Tom would survive longer, and this trust would not have a problem.
Presenter
Presentation Notes
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Accumulations • The general concern:
– There are rules in legislation which limit the accumulation of income in a trust.
– Only Manitoba & Sask (since Jan 2010) have abolished the rules– Review materials for your provincial rules
• When a rule applies:– Income can be accumulated for a period, but after that it MUST be
distributed– If the trust does not provide for the distribution after the
accumulation period expires, then the income has no “object” or beneficiary, the income results back to the settlor or estate
Presenter
Presentation Notes
Each province has its own rules. Materials provide overview. Key point to watch when drafting or administering a trust: when income is being accumulated on direction of the trust document, determine whether or not and when the rules apply, and when they apply, determine where the income earned going forward should be paid. General note: If any part of a trust fails (e.g. where the income is to be paid or who is receive capital), the failed gift results back to the settlor for an inter vivos trust (or the settlor’s estate if deceased), and to the estate if it is a testamentary estate. Usually testamentary trusts are trusts of residue. When a gift of residue fails, the gift must be distributed as if there was an intestacy. However, if the trust was created from assets set aside to create a trust fund, and before the residue is dealt with, the failure of the gift means the gift falls back into residue and the relevant provisions of the will govern. While failure of gifts is a subject for the third TEP Diploma course, it is useful for students to be aware that there are rules which will apply when part or all of a trust fails to provide for certain situations.
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Termination & Variation• Termination of a trust:
– Common law: Saunders v Vautier
– Manitoba/Alberta: Court approval required
• Saunders v Vautier– Requirements: ALL beneficial interests must consent
• Variation of a trust: – Requirements in legislation: Court approves on behalf of beneficiaries who cannot consent (see list)
– Line of cases suggest variation under Saunders v Vautier is possible. Trustee cannot be compelled to continue. Legal advice would be required.
Presenter
Presentation Notes
Typo to correct: p 100 Copies out Ontario legislation. Item (d) should end before the end of the 3rd line. It should say: (d)……failed or determined, any arrangement by whomever…. Termination of a trust can occur by: terms of the trust (on the happening of an event; at trustee discretion; etc) revocation by settlor (if right of revocation was retained) invoking the common law rule known as the rule in Saunders v Vautier not available in Alberta or Manitoba Saunders v Vautier (S v. V) a) All beneficiaries, vested and contingent, must agree b) All beneficiaries must be legally capable (age and mental capacity) c) then they can call on trustee to wind up trust and distribute Trustee concerns: a) have beneficiaries requesting the termination properly identified all the beneficial interests b) tax consequences (likely more of a concern for beneficiaries, but the instructions could trigger certain tax results on final T3 return. Variation of a trust may occur by: trust may allow certain terms to be varied trustee or beneficiaries may apply to court to vary, or if Saunders v Vautier does not apply (Alberta and Manitoba), to wind up court’s role: Approve on behalf of those who cannot. Students should know the list There must be a benefit (or at least no detriment) Query: can SvV be used to vary a trust? Traditional view: No. But some case law seems to suggest it can. A trustee could not be compelled to comply with a variation, and the tax consequences of a variation must be carefully considered. See pp 98-99
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Charitable Purposes
• Definitions
• Why does it matter?
• Non‐charitable purpose trusts – Consequences
– Exceptions
Presenter
Presentation Notes
Someone must be able to enforce a trust. This is normally done by the beneficiaries. If the trust is for a purpose, there is no-one to enforce it. The law allows charitable purpose trusts. It does not allow non-charitable purpose trusts. Case law has identified 3 exceptions: erection of a monument at a gravesite maintenance of a gravesite care of specific animals In addition, Ontario, Alberta, BC, and the territories have provisions in their perpetuities legislation addressing the validity of non-charitable purpose trusts. Generally: If a purpose is not “charitable”, see c 10, an exception must apply or the trust is not valid.
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Charitable Purposes
• Charitable Purpose Trust requires:– Exclusive dedication for charitable purposes that provides public benefit
• Charitable Purposes:– 4 categories (“heads” of Charity)
• Cy‐Pres (saving provision)– Gifts to charities, charitable purpose trusts
– Sometimes classified as a way to “vary” a trust
Presenter
Presentation Notes
Definition of Charitable Purpose First: There must be an exclusive dedication to charitable purposes that provides a public benefit (p 147) “public” cannot be restricted (p 148) 4 heads or categories of charitable purposes (see material for examples) 1. relief of poverty 2. advancement of religion 3. advancement of education 4. other purposes beneficial to the community Note: political purposes are not permitted Warning: #4 is not as broad as some might think. See examples and limits p 153-4 Exclusivity requires review of settlor/testator “charitable intent” Court scheme making power: Where there is charitable intent, but clarification is needed Cy-pres power. Points to note: a) Court must decide (not the trustee/executor) b) It is not a way to “improve” the terms. Changing terms is a variation. c) Where charitable purpose trust fails because impossible or impractical to carry out, � trustee can apply to court to: i) establish charitable intent (if failed/impractical before trust was constituted) ii) and ask court to substitute a charity or purpose
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Chapter 11: Trustee Duties
• Trustee duty => Required
• Trustee power => Permission (c 12)
• Duty coupled with a power
• Trust powers and mere powers
NOTE: For audio for remaining slides go to May 2011 review session.
Slides and notes are duplicated here for convenience and include minor edits
Presenter
Presentation Notes
NOTE: For audio go to May 2011 review session. Slides and notes are duplicated here and have some updates: Fundamental to the trustee’s role is the concept of trustee duties and trustee powers. Subject to specific instructions in the trust document, the trustee has to be aware of his or her duties … those things that must be done or complied with and where failure leads to liability for loss and/or a requirement to remedy the breach of that duty. Powers on the other hand, give the trustee authority to do something A power may also give the trustee discretion in how to exercise a duty That is why we often say a duty may be coupled with a power. The text also distinguishes a trust power … a power that must be exercised within the guidelines of the terms of the trust, and a mere power … one that may be exercised Two examples provided are: a ) the power to invest. Trustee duties require that it be done prudently, and the powers guide the trustee. But, the trustee must exercise the power. b) the trustee may have discretion on who to pay income to. But, again, if the income must be paid, it is just a question about who to pay it to and when, then it is a trust power. Mere powers on the other hand do not have to be exercised. This could be a power to accumulate income, or a power to purchase a certain kind of property. However, trustees cannot ignore these powers. There is a duty to consider whether or not they should be exercised.
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Trustee Duties – The main list• Comply with terms of the trust• Duty of care
– What standard?
• Do not delegate– Exceptions
• Impartiality (v “equality”)• Loyalty
– Conflicts of interest
• Provide information– To who? What? When?
Presenter
Presentation Notes
The text reviews the core trustee duties. Those familiar with director’s duties to a company will notice the similarity. These seem obvious and easy enough to understand, but they can become a challenge for a trustee in practice. Therefore, it is important to understand what they entail and how they can be applied in practice. This informs the planning and drafting of the terms of the trust so the trustee is not unnecessarily constrained. The duty to comply with the terms seems trite. But, what it also means is that a trustee cannot disregard the terms of the trust because the trustee or a group of beneficiaries think it is appropriate to do so. The duty of care as set out in the text, was confirmed in the Fales case … the standard is that of a person of ordinary prudence in managing his or her own affairs. Sometimes people will talk about “managing the affairs of others” as it suggests more caution since some people may take more risks with their own money. One of the issues that the text raises is the standard for professionals… e.g. a trust company, a trustee who is an investment expert etc. To date, while the courts have not made a distinction, they tend to look at the facts and if the trustee’s action were not justifiable, liability will follow. However, watch legislative changes . For example: Jan 2010 – Saskatchewan’s new trustee act s. 7(2) requires a trustee with a particular knowledge or skill to employ that skill or knowledge in the administration of the trust (p 174.1) Delegation is also one that becomes problematic. A trustee is to exercise the duties and powers personally. However, the law permits delegation of tasks that are often delegated by a person when he or she does not have the knowledge or skill, and the task is administrative in nature. Now, most provinces specifically permit delegation of investment powers. But, delegation does not mean abandoning responsibility. It must be done prudently with proper consideration of who to select, the reasonableness of the fees to be paid, and the scope of the delegation. Then there must be monitoring of the delegate. Impartiality is another duty that is sometimes confused with equality, especially when making decisions to encroach or to pay income where there is discretion. The trustee must be fair, and not favour one beneficiary over another, but that does not necessarily mean that every beneficiary in a class should receive the same amount. The duty of loyalty deals with conflicts of interest. The rule is strict. This can become an issue where trustees have services that they can offer to the trust (e.g. investment management). A trustee cannot hire himself or his firm unless it is permitted. Finally, the duty to account or to provide information is fundamental to ensuring enforcement of the trust. The materials review these obligations and discuss the challenges with discretionary trusts.
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Duties ‐ Examples• Care:
– Protect assets: Insurance
• Impartiality– Capital v Income
– Distributions/encroachment
• Information– Beneficiary rights
– Discretionary trusts
– Recommended practices
• Exculpation clauses
Presenter
Presentation Notes
Some examples are provided for you to consider: The duty of care includes a duty to protect assets. All of us probably carry insurance to protect our homes, cars and personal effects. A trustee needs to consider the need for insurance as well. But, if the cost of insurance is high, then a careful decision is required as to whether or not a reasonable person would still take out that insurance. Impartiality. This is reviewed in 2 contexts: a) should an expense be paid from income or capital of the trust? b) discretionary payments: A trust may give a trustee power to pay income to one or more of a group of beneficiaries. It may also authorize discretionary payments from capital for specific purposes or the beneficiary’s “benefit”. If there are 3 children of the testator who are beneficiaries, and one is often in trouble with the law, one is a struggling actor and one has a solid professional career, a trustee might be tempted to direct the income to the actor, and consider extra encroachments as well. This may be appropriate, but the trustee must still turn his or her mind to whether or not payments should be made to the others. Circumstances can change over time. One common error is to make a decision and not review it for a number of years. Another is a view that if $10,000 is paid to one, then $10,000 should be paid to each of the others. Sometimes beneficiaries think this way as well. The duty to provide information requires the trustee to consider how much and when to provide information. Generally, beneficiaries need to be aware of the trust and the terms. For example, if a discretionary beneficiary is not aware of the potential entitlement, he or she may not make a request and it is not possible to review the trustee’s management of the trust to ensure compliance with the duties and the terms. Unless there are sound reasons not to provide information a trustee is well advised to ensure all those currently entitled do have sufficient information. See your materials for a discussion of the balance of interests approach. Sometimes, trust documents will include a provision saying that a trustee is not liable for loss caused by a breach of a duty. As noted in the text, the courts will uphold these clauses, but there is some question as to how far they can go. As a trustee I would hesitate to rely on them.
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Investment ‐ Duties
• Standard of care
• Delegation
• Liability
• Know the rules in your province
Presenter
Presentation Notes
The investment duty could be the subject of a whole lecture in itself. Take the time to look up the investment provisions in your provincial legislation. Most provinces now have a prudent investor rule. I will speak to this in the next series on trustee powers. For purposes of trustee duties, note: the standard of care that is set out in the legislation itself. Depending on the province, you will find A) the “prudent person” test: “exercise the judgement and care that a person of prudence , discretion and intelligence would exercise in administering the property of others”, or B) the prudent investor test: “exercise the care skill diligence and judgement that a prudent investor would exercise in making investments” Most provinces also deal with delegation of the investment power but are very clear on how that is to be done Most provinces have the Prudent Investor rule, so they also deal with liability and generally, if the trustee can demonstrate that a prudent approach was taken to the investment approach, they will not be liable for loss. This reinforces the need to now document the process of establishing an investment strategy and policy and to ensure the evidence is on the records of the trust, including periodic reviews of performance and whether allocations should be changed.
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Trustee Powers• Administration Powers
– Managing the assets
• Dispositive Powers– Decisions to pay income or capital
• Encroachment– Terms of the trust– Impartiality v equality– Document the decision (how much?)
Presenter
Presentation Notes
As we reviewed the duties, we touched on trustee powers. The chapter is quite self explanatory. What follows are highlight of some of the key powers that a trustee will also need to look for: Administration powers or the powers to manage the trust. This ranges from the power to insure to the power to repair property, settle debts, invest, and hire agents. Most legislation provides default powers. Well drafted trust documents set them out to ensure they are covered. Some powers are implied, even if not in the deed as they are required to carry out a duty. For example: even if the trust does not expressly allow the trustee to sell an asset, the duty to invest and to be prudent in the management of the assets will require a power to sell assets. The dispositive powers deal with paying out the income and capital. Encroachment powers deal with paying out capital for specific purposes. The terms of the powers are in the trust document and will guide the trustee on when it is permitted, and the purposes. Sometimes it can be broad e.g. “benefit” Other times it can be limited to medical needs, education or emergencies.” In the latter case, it is not always clear if a request fits within the scope of the more restricted categories. This is where “compliance with the terms of the trust” becomes relevant. If a request is made, but it doesn’t fit the criteria, the trustee must not make the payment. For example: if a beneficiary’s doctor recommends a vacation to relieve stress, is that a “medical need”? Good minds could argue either way. But, the trustee must take the question seriously. Sometimes, legal advice will be needed to determine if a request does fit. When decisions are made, the trustee must determine how much to document it. Sometimes, it is prudent to set out reasons for a decision, and even to explain the decision to the beneficiary. However, it is a double edged sword. A court will not substitute it’s decision for a trustee’s honest exercise of discretion, but if the reasons are faulty, then a decision could be set aside. Similarly, if on its face a decision with no reasons appears to be suspect or “mala fides”, and there are no reasons, it can reverse a decision. The materials review examples of court cases. While students do not need to know these cases, you should be familiar with the types of scenarios so you can analyze another situation within the context of the law on trustee duties and powers.
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Investment Powers• Prudent Investor v Prudent Person
– Know your legislation and level of detail• Prudent Investor:
– Standard of care– Considerations– Diversification– Delegation– “Plan”– Liability
• Whole portfolio– Role of each asset
Presenter
Presentation Notes
The prudent investor and prudent person rules were noted earlier. Students need to be familiar with their provincial rules say. The materials provide an overview of the powers and the trustee responsibilities. Points to note include: Prudent investor rule provisions: the standard of care as stated in your legislation what must (e.g. Ont, AB) or may (e.g. PEI) be considered when selecting investments this list is important as it speaks to the role of an asset to the purpose of the trust, the need for income and growth, the role of each asset in the portfolio, the relevance of economic circumstances, etc. the duty to diversify. Some provinces set out duty to diversify and acknowledge the need to consider the circumstances. Others do not. But diversification is also a matter of investment prudence. The level of diversification however, will depend on the purpose of the trust, the duration of the trust, and any specific instructions. evidence of the “investment plan”, as mentioned earlier is critical now. In the past a court would look at each investment and consider the growth and income potential. If one asset was “unauthorized” and it suffered a loss, the trustee could not offset that loss with the gain of another unauthorized asset. Now the courts will look at the overall portfolio and the plan. Offset, is usually no longer relevant.
• Who can appoint/replace and in what circumstances?
• Remuneration & reimbursement of expenses.
Presenter
Presentation Notes
This chapter is self explanatory. Students do not need to be able to solve complicated scenarios, but should be aware of the general principles which are reviewed in the text. Students are responsible for knowing the legal rules, and if applicable the legislation, that governs so that an analysis of entitlements, rights to reimbursement, and process for approval can be discussed. General rule on remuneration: Most trustee acts permit compensation for services as a trustee. And reimbursement for reasonable out of pocket expenses. Some provinces have limits (e.g. BC) and most have a general approach that has evolved based on a percentage of assets and a percentage of income each year. Ontario has a complicated system of tracking value of what comes in and value of what goes out. Many trust companies have moved to fee agreements that are incorporated into the will or trust and different approaches are taken to how fees will be calculated. Trustees who provide their professional services to the trust must be careful to distinguish work as a trustee, and work as a professional (e.g. investment services, accounting/tax services, legal services). Hiring oneself to provide the services must be contemplated in the trust document as it would otherwise be considered a conflict of interest and self dealing, both of which are a breach of trustee duties.
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Chapter 14: Breach of Trust• Failure to comply with duties
• Improper exercise of powers
• Liability for loss– Put back to same place, not punitive
– Share liability with co‐trustee
– Statutory relief if “ought fairly & reasonably to be excused for breach” • Ontario exception (not available for investment breach)
• Exculpation clauses
Presenter
Presentation Notes
This chapter is fairly self explanatory. But, it is worth highlighting some of the points it addresses since this goes to the heart of trust law and the trustee’s role – given all these duties and powers, what happens if the trustee doesn’t follow them or is negligent in the process? As we’ve noted, the trustee must comply with the duties. Failure to do so leads to liability and/or could lead to the trustee being removed. When exercising a power, if it is not done properly, or is done negligently, again, liability and/or removal could follow. In the investment context, failure to properly hire an agent and ensure the agent acts within the scope of the delegation, would be a breach. Or, purchasing or retaining an asset that does not fit with the purpose of the trust or a prudent investment portfolio, would also lead to liability for losses. Payment to the wrong beneficiaries, or for unauthorized purposes is another example. When considering liability, it is important to note that unlike other legal claims, the trustee only has to put the trust/beneficiaries back into the position they would have been in. Punitive damages are not considered as in a negligence claim for personal injury for example. One also has to be aware of the joint liability of trustees, as well as the court’s power to relieve a trustee from liability for a breach where it was an honest breach and the trustee acted reasonably, and the trustee “ought fairly to be excused”. Ontario students should note however that the statutory relief under s. 35(1) does not apply to breach of the investment duty. In that case, the trustee must look to the investment provisions for what is required to defend one’s actions. PEI students should note that there is no statutory relief provision. (see Waters Law of Trusts in Canada App C at p 1414 for provincial comparisons. Exculpation clauses are sometimes included to waive a trustee’s liability for certain breaches of trust, including negligence. They can be narrow in scope or broad. The courts have upheld them but there are strong views on whether or not they should be permitted. Clients must understand the potential scope of an exculpation clause. Whether to include it may depend on the choice of trustee, or whether the settlor wants the trustee to take certain actions which could be a breach.
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Breach of Trust – Trustee Defences
• Laches
• Limitation periods
• Acquiescence
• Instigation by beneficiary
• Statutory relief
Presenter
Presentation Notes
The materials review these defences. They are self explanatory. Students should be aware of these and should be able to recognize where a trustee might have a defence. Generally, consider liability for breach from both sides: What are the beneficiary rights/reasons for liability, and what is the scope of that liability? What defences might a trustee be able to rely on?
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Chapter 15: Power of Attorney v Trust
• Agency v Trust• Fiduciary roles
– POA: Accountable to Donor– Trust: Accountable to Beneficiaries
• POA terminates on death• Donor can terminate a POA at any time if competent to do so• Trustee takes title• POA:
– Limited; “business” (non continuing)– “Enduring” or “Continuing” when donor incapable– Starts when signed unless “springing”.
• Compensation for attorney must be in document unless legislation provides for it (Trustees look to trust document, or statutory provisions)
Presenter
Presentation Notes
This is a short chapter, but given the prevalence of powers of attorney, and the use and misuse of them, it is a critical chapter to be aware of as future TEPs. Powers of attorney are, at law, an agency relationship. But, given the nature of the relationship, and particularly once the donor is incapable, there are significant fiduciary obligations that parallel the duties of a trustee. Be aware of the legal distinctions. Some of the key ones are on this slide. Generally, in our line of work, we are talking about enduring powers of attorney, the “planning” tool that may if a client becomes incapable. You will study it in more depth in the Wills and Administration course. It is raised here, because of the fiduciary elements, but also because in the next chapter, the other “planning” tool that many consider is the joint account. Often a power of attorney may be a better way to handle a client’s needs. It avoids “confusing” who has legal title and rights to the assets.
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Chapter 17: Resulting Trusts
• Resulting trust as a concept– “returns” to the settlor (or estate)
• Presumptions
• Resulting trusts and joint tenancy – Pecore: Presumption reversed
• Joint ownership with an adult child is a R/T
• Burden on survivor to prove a gift
Presenter
Presentation Notes
Chapters 17 and 18 deal with non-express trusts. While TEPs will not set out to create these trusts for clients, they arise in the context of our client’s lives, and become particularly relevant when things go wrong in relationships. Resulting trusts also arise when a trust fails. Generally, a resulting trust will “return” the assets to the settlor, or the deceased testator’s estate. The person with legal title will hold as a trustee on a resulting trust for the settlor and will require guidance on how to distribute the assets depending on the situation. This happens when the terms of the trust do not cover off who is to take the assets, or if the trust fails for other reasons. These are reviewed in chapter 6 – legal and policy constraints. However, resulting trusts also arise when assets are transferred into the name of another person and it is not clear whether the transfer was a gift or there was another intention/expectation. The law sets up presumptions when transfers without consideration (fair payment) occur between strangers (presumption is that a gift is not intended), and between spouses or a parent and children (generally a rebuttable presumption of gift). This becomes important when parents make assets and accounts joint with right of survivorship with their adult children. In the Pecore case, the SCC ruled that there is not a presumption of advancement (gift) when the joint asset/account originally owned by a parent, is made joint with an adult child. This means that every joint account needs to be reviewed and it is up to the surviving child to prove that a gift was intended. If the child fails to prove this, then the asset/account is owned legally by the child (under the joint with right of survivorship rules), but the child holds the asset/account on a resulting trust for the deceased owner’s estate and the asset/account must be returned to the executor.
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Joint Accounts, Joint Ownership, POAs and TEPs
• Focus on the client• Joint ownership: CAUTION
– Document intentions– Ensure client understands legal consequences and risks– Watch tax consequences– Watch for risk of creditors of other joint owner(s)– Don’t let probate “tax” concerns override proper arrangements
• POA: – Ensure client understands the authority being given and addresses issues like
compensation, delegation etc– Ensure attorney understands duties, responsibilities & limitations on what can
be done– BC: Note new laws for enduring powers of attorney effective Sep 1, 2011
Presenter
Presentation Notes
This slide is just a reminder that it is incumbent on TEPs to understand these concepts, and ensure that client’s understand what they are doing when they set up these arrangements.
Chapter 19: Quebec law overview• Understand the concept of constructive trust and how it
might apply when one person is unjustly enriched by the contributions of another (corresponding deprivation)
• Review chapter 18 for discussion points• Chapter 19: see “examinable content”
– Important to be aware of unique differences, AND similarities– Quebec law trusts sometimes move to common law provinces
• Must administer according to Quebec law unless trust has power to change law of administration, or court variation is possible
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References to cases & legislation
Cases: Don’t use name unless sure it is correct.
• “Under the rule in Howe v Dartmouth, the trustee would be required to…”
• “The rule in Saunders v Vautier applies where …”
Legislation: Don’t cite it unless it is correct name
• “The Trustee Act of [province]”
• “The Variation of Trust Act provides …”
• Section numbers not required
Presenter
Presentation Notes
Generally, the golden rule is: don’t refer to something if you don’t have the name correct. Full citations etc are not needed. Some examples provided here. Where students go wrong on exams is in making sloppy references to legislation and which leaves marker with a sense that the student does not understand where the “rule” they are talking about comes from. Refer to table of legislation in materials.
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Exam • Reread rules and regulations; Open book; limited desk space• 3 hours includes reading time; Be early (rooms available 15‐20 minutes) • Allocate time according to marks• Full sentences strongly recommended. Point form responses can be used
but it must be appropriate (e.g. lead in with a statement followed by a list). Remember: markers cannot read in words and explanations that are not on the paper and it must be legible.
• Answer the question. Do not waste time writing out rules and information if not requested or necessary for your explanation.
• Top 7 errors: confuse rules and concepts, do not answer the question, do not relate law to facts or facts to the law, repeat information (waste time), write on an aspect of the law not relevant to question, attribute facts to the scenario that were not offered or invited, provide cryptic statements that do not demonstrate understanding of the issue or legal rules.
• Marking at end of October/early November; Results by end of November
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Questions?
Send follow up questions until Friday Oct 7
Answers will be posted by Monday Oct 17
Presenter
Presentation Notes
Quick and/or clarifications will be answered within a week. Others will be addressed at next session.
