Archive for ‘Trusts’

May 23, 2014

Whither Walt Disney’s Fortune: I don’t think Mickey would approve

According to the Hollywood Reporter, the real-life Walt Disney World may not be the happiest place on earth.

January 13, 2014

Excellent Judicial Analysis of Tests on Passing of Accounts in Ontario

A recent Ontario Superior Court of Justice decision provides a very good analysis of the tests to be applied in passing the accounts of both an attorney under power of attorney and an estate trustee – Re Aber Estate

January 4, 2014

Beware the “Pour-over Clause”

The formal requirements for a valid will can pose problems when testators seek to incorporate by reference other documents into a will. This is especially problematic where the document intended to be incorporated is changed after the date of the will. This was the issue in a recent British Columbia case.

In Kellogg Estate v. Kellogg, the Court was dealing with what is referred to as a “pour-over” clause. The purpose of the clause was to make a gift under a will to an existing trust. A husband and wife established a family trust for estate planning purposes with their three children as the primary beneficiaries. The trust included a provision that upon the death of the survivor of the husband and wife, the primary beneficiaries were to receive equal shares in the balance; one half distributed on the surviving parent’s death and one half five years later.

The husband and wife both executed wills dated the same date as the trust. Their wills included a bequest of the residue of their respective estates to the trust, to be administered in accordance with the trust, “including any amendments thereto made before my death”. The Wills also included a clause stating that if a bequest to the trust was invalid, the residue of the respective estates were to be managed and distributed under the terms of the trust as it existed immediately prior to its determination of invalidity and incorporated the trust by reference into the will.

Subsequent to the execution of the wills, the parents amended the trust, the primary change being the removal of one child as a beneficiary.

The issue for the Court was whether, firstly, incorporation of the trust into the wills of the parents generally was valid and, secondly, whether the subsequent amendment to the trust was likewise incorporated into the wills.

The Court conducted a review of the relevant law of incorporation into a will. It concluded that incorporation of a document into a will is valid if (1) the document is in existence at the time the will is made and (2) the document is beyond doubt the document referred to. The Court found that the original trust met this test and could properly be incorporated into the parents’ wills.

As for the amendment though, because it post-dated the wills, it did not meet the test for incorporation. As a result, it could only have testamentary effect if it met the requirements of the B.C. Wills Act, in particular the requirement for two witnesses (s. 4 of the Succession Law Reform Act in Ontario). The trust amendment was not witnessed.

But what of that part of the incorporation provision in the wills stating, “including any amendments thereto made before my death”. This provision was not effective to include the amendment as a testator may not reserve the ability to make gifts upon death after the date of the will without complying with the requirements of the Wills Act.

The effect of the decision is that the residue of the estates was a valid bequest to the trust as it existed before the amendment; i.e. with all three children as beneficiaries.

This decision underlies the need to always keep in mind the formality requirements for documents intended to have testamentary effect.

December 5, 2013

Do Will Beneficiaries Claiming to Have been Wronged Have an Interest in Land?

The transfer of property from a parent to an adult child gives rise to a rebuttable presumption that the child holds the property in trust for the parent. If the parent dies and the child sells the property, using the proceeds to purchase another property, can sibling beneficiaries under the parent’s will obtain and order for the issuance a certificate of pending litigation (CPL) against the new property? An Ontario court says yes.

In Jordan v. Jordan, the Superior Court of Justice was asked to grant leave to certain siblings to issue a CPL over property owned by another sibling that he purchased with proceeds of two properties transferred to him by the mother before her death. One property was purchased for nominal consideration and the other allegedly far below market value. The siblings’ claim appears to be that the child holds the property as trustee for the mother’s estate as traceable proceeds of the maligned transfers. The issue on the CPL motion was whether the moving siblings had claimed a sufficient interest in the property to permit a CPL to issue. The siblings argued that they did not need to show a claim to an interest themselves in the property. Because there is a rebuttable presumption of a trust for the benefit of the parent and an allegation of dependence by the parent on the child, they argued such should be sufficient to show that title to the original property was at issue and therefore that a CPL should issue.

While not giving significant analysis to the issue, the court accepted this position while relying on other factors as well, including a finding that no third party would be prejudiced by the issuance of a CPL. However the concept is interesting as the court seems to have accepted the principle that a party does not need to claim a direct interest in property (or perhaps more properly the proceeds that purchased the property) but need only show that beneficial title is in issue by way of the presumption of trust. I would venture that the siblings, as beneficiaries of the parent’s will, did have a claim to an interest in the property/proceeds but that does not seem to have been the deciding factor for the judge.

March 21, 2013

Can the Court “Fix” a Trust Deed?

A popular form of estate planning is the family trust. The trust allows for accumulated wealth to pass from one generation to the next in a tax efficient manner – provided the trust is actually set up to do that. What happens when, perhaps in error, it is not? Will the courts rectify the trust so as to give it the effect intended?

That was the issue for the Ontario Superior Court of Justice in the recent case of Kanji v. Lawton. A family trust was created by indenture made March 26, 1992, with Mr. Kanji as the settlor and Mr. and Mrs. Kanji as the initial trustees. Mr. Kanji transferred $5,000 in cash to the trust. The beneficiaries of the trust were Mr. and Mrs. Kanji and their children. All beneficiaries were eligible to receive income and capital from the trust. Under the terms of the trust, Mr. Kanji could remove any of the trustees and appoint substitute or additional trustees. By 2013 the trust had grown to approximately $62 million. There was a problem with the trust though.

Because Mr. Kanji was the settlor of the trust, one of the two trustees and a capital beneficiary, the combined effect of sections 75(2) and 107(4.1) of the Income Tax Act (Canada) may deny a tax-deferred distribution of assets from the trust to any trust beneficiary other than the settlor – Mr. Kanji. The 21-year rule would deem a distribution and reacquisition by the trust on March 26, 2013, triggering a substantial capital gains liability. For Mr. Kanji to distribute to himself before that date would likewise trigger a significant liability and defeat the tax efficiency benefit of a trust.

Mr. Kanji applied to the Court to “rectify” the trust to avoid this result. The Court dismissed the application.

Rectification is a remedy available to correct a mistake in a document of legal effect. With respect to a trust, the Court found that to benefit from the remedy, an applicant “must show that (i) a common, specific intention existed amongst the creators of the instrument effecting the transaction to accomplish a particular result and (ii) a mistake caused the instrument not to comport with the common intention of the parties”. The Court emphasized the need for the applicant to establish as a fact that the true intention was, at least in part, to establish the trust such that the tax liability at issue would be avoided.

The Court here was not convinced that the true intention of the trust was to avoid the tax consequences at hand. The Court noted the lack of contemporaneous evidence as to intention and in particular the lack of evidence from the lawyers acting on the creation of the trust (there is litigation pending between Mr. Kanji and his lawyers). The Court found that based on the evidence of intention available, Mr. Kanji had not established “that at the time [he] settled the Family Trust he intended to structure the Family Trust in a tax efficient manner which would allow for a tax deferred transfer of the trust’s assets to his children in the future or that a mistake was made which resulted in the trust indenture failing to give effect to that intention”.

I would not presume to comment on the issues that exist between Mr. Kanji and the lawyers acting on the establishment of the trust but it goes without saying that it is crucial that lawyers ask all the right questions in order to determine from clients precisely what they are seeking to accomplish in any estate plan.

December 18, 2012

Gifts and Resulting Trusts – Lawyers Need to be Aware of Pitfalls

As a recent Manitoba case shows, it is important for lawyers tasked with effecting a gift of property to deal up front with a potential challenge to the gift in the form of a resulting trust claim.

In Hill v. Poquet Estate, the deceased signed a transfer of land adding the plaintiff as a joint tenant to certain real property.  The deceased and the plaintiff “were like brothers” and the consideration for the transfer was $1.  On death, the plaintiff claimed that the transfer was a gift and sought a declaration that he is entitled to be registered as owner of the property by virtue of his right of survivorship as a joint tenant.  The estate of the transferor opposed, taking the position that, as the transfer was without consideration, the plaintiff held the property as a resulting trustee for the deceased.  The Court reviewed the facts and the law regarding resulting trusts and agreed with the estate, refusing to register the transfer.

The Court set out some of the key elements of a resulting trust as stated by the Supreme Court of Canada:

  1. “A resulting trust arises when a title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original owner”;
  2. “In certain circumstances … there will be a presumption of resulting trust or presumption of advancement”;
  3. “The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers.  When a transfer is challenged, the presumption allocates the legal burden of proof.  Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended …  This is so because equity presumes bargains, not gifts”;
  4. “[T]he onus is on the transferee to rebut the presumption of a resulting trust”
  5. “In cases where the transferor is deceased and the dispute is between the transferee and a third party, the presumption of resulting trust has an additional justification.  In such cases, it is the transferee who is better placed to bring evidence about the circumstances of the transfer”.

 

In this instance, the Court found that the presumption of advancement had not been rebutted, despite the deceased having retained and instructed a lawyer to prepare the transfer and have it executed.  The Court found that the actions of the lawyer dealing with the transfer fell “well below the standard of conduct required by a solicitor looking out for the interests of his client”.   The lawyer had known the deceased for many years as both a client and an acquaintance.  The deceased attended his office and instructed him to draft up a transfer of land to add the plaintiff as a joint tenant, a power of attorney giving the plaintiff complete power to deal with the deceased’s assets and a will leaving his entire estate to the plaintiff.  The lawyer made no enquiry of or provided any advice to the deceased as to why he would do this.  When the time came to execute the documents, the lawyer acted for both the deceased and the plaintiff.  The Court found that this was “a situation which called out for the lawyer to make enquiries as to why the deceased was taking this course of action” and “was a situation that required [the deceased] to receive legal advice”.  In light of the failings of the lawyer and the lack of any other evidence to rebut the presumption of resulting trust, the Court found that beneficial title to the property rests in the estate of the deceased. 

If we presume for the moment that the intention of the deceased was to gift the property to the plaintiff, the deceased could reasonably assume that in having his lawyer take care of the matter his intentions would be carried out.  In such situations there is a clear obligation on the lawyer to take measures to ensure that a potential resulting trust claim can be properly rebutted, including assessing the transferor’s wishes and having a written intention to gift as part of the transaction.  While the Court did mention instructions to prepare a will favouring the plaintiff, there was no indication that this was done.  I suspect not as such would have gone a long way to either support the gift in the first place or otherwise result in an eventual transfer of the property to the plaintiff by will.

December 13, 2012

Percentage Trusts/Unitrusts – Guidance from the Ontario Court of Appeal

The Ontario Court of Appeal released a decision last week that provides insightful guidance with respect to the use of “percentage trusts”, also known as “unitrusts”. 

In The Canada Trust Company v. Browne (Primo Poloniato Grandchildren’s Trust), the settler, the founder of a successful food products company, set up a substantial trust in favour of his grandchildren (income beneficiaries) and his great-grandchildren (capital beneficiaries).  On consent of the beneficiaries, including the Children’s Lawyer on behalf of minor, unborn and unascertained beneficiaries, the trust was varied in 1997 to change it to a percentage trust.  As a percentage trust, the trustee was permitted a freer hand to make investments (for example in equities) in order to maximize the value of the trust for the benefit of all beneficiaries, without concern as to whether those investments were income-producing or growth-oriented.  The entitlement of income beneficiaries was altered such that they were no longer entitled to income produced by the trust, but to yearly distributions based on a percentage of a yearly rate of return of the trust as defined in the trust variation. That percentage is subject to a formula that restricts increases year over year but also provides that distributions shall not be less than those in the preceding year.  If the income-producing investments chosen by the trustee do not produce sufficient income to make the distributions, the trustee is permitted to sell equities or other capital investments in order to generate sufficient funds to make the percentage distributions to income beneficiaries.

Of course the reason for the amendment of the trust was the bullish performance of stock markets in the 1990s and the comparatively poor performance of a trust restricted to interest-based investments.  Based on expert evidence as to the likely continued upward performance of equity markets, the Court in 1997 approved the variation on the grounds that was for the benefit of all beneficiaries.

Of course what goes up sometimes comes down.  The downturn in equity markets had the effect of reducing the trust’s rate of return.  In order to maintain distributions to income beneficiaries under the percentage interest formula of the trust as varied (remember distributions could not be less than the previous year), the trustee was required to sell trust assets.  The trustee brought an application to the Court for advice and directions to clarify the trustee’s obligations, in particular “whether it retained a duty to maintain an even hand between the income and capital beneficiaries in managing Trust distributions, and therefore a discretion to stop making the prescribed percentage payments to the income beneficiaries that were eroding the value of the Trust”.

The application judge found that by the wording of the trust as varied, the trustee did not have such discretion.  The Children’s Lawyer appealed on behalf of capital beneficiaries.  The Court of Appeal upheld the lower court decision.  In essence, the Court of Appeal agreed with the application judge that the mandatory language of the trust as varied required the trustee to make the payments to income beneficiaries and permitted the sale of trust assets to do so.  After a review of the law, the Court found that the trust as varied ousted the trustee’s “even hand” obligation with respect to management of trust disbursements.  The Court rejected the capital beneficiaries’ attack of the 1997 variation as having the intent and effect of benefitting income beneficiaries at the expense of capital beneficiaries.  While it found as a fact that such was not the intent, the issue before the Court was not the intent and effect of the 1997 variation (as that had been determined in 1997), but interpretting the obligations of the trustee as a result of that variation.  The Court noted that “in a percentage trust, the trustee’s duty is not to obtain a large income yield while preserving the capital but, instead, to increase the size of the entire trust for the benefit of both classes of beneficiaries. This includes increasing the capital rather than preserving it, and therefore involves an investment strategy that may include more risk.” [my emphasis]

In obiter, the Court of Appeal did address how percentage interest trusts can be prepared in order to avoid the situation in this case.  The Court stated:

“The experience of this Trust has reinforced the need for percentage trusts to be drafted with specific safeguard mechanisms in place that will allow the trustee to review and revise the annual percentage payable to the income beneficiaries based on the changing value of the trust to ensure that one set of beneficiaries is not favoured over the other. Commentators on the percentage trust concept have recommended including a “force majeure” clause to protect against unforeseen anomalies. …

Two options would be to include a clause providing for a periodic reset by the trustee of the percentage payable to income beneficiaries, or an option for the trustee to apply to the court for advice and directions on such a reset.

It is also clear that the material provided to the court in support of a variation application seeking to convert a trust into a percentage trust must include not only upside projections but also potential downside projections that take into account a possible future market downturn. This will give the approving court the basis to include the appropriate safeguards that will ensure, to the extent possible, that the variation will in fact continue to be for the benefit of the future capital beneficiaries.”

February 16, 2012

Constructive Trusts – The Problem of a Duty to Inquire

The development of the law with respect to constructive trusts and its interrelation with the remedy of unjust enrichment continues to evolve.  Where the subject matter of the alleged trust is proceeds connected to a fraud, the issue of whether a trust exists relies on a difficult factual determination as to whether the alleged constructive trustee either had knowledge of the fraud or otherwise failed to make proper inquiry in circumstances where an honest and reasonable person would realize that the funds were from a suspicious or improper source.

In a recent Ontario Superior Court of Justice decision, the Court had to make such a determination.  The defendants, who had loaned funds to a fraudster, were repaid by the fraudster with funds obtained from the plaintiff, also on a fraudulent basis.  On the scheme being exposed, the plaintiff sought judgment requiring the payment of such funds from the defendants based on grounds that they were constructive trustees for the plaintiff. 

In its reasoning, the Court determined that in order for a constructive trust to arise, there must have been either knowledge of the fraudulent source of the funds or circumstances whereby the defendants ought to have inquired as to the source of the funds.  Of course, determining this is highly reliant on the facts of each situation.  In this instance, the Court found that while there was concern regarding repayment of the funds as the defendants’ money had not been invested as they had been informed it would and they had gone so far as to involve counsel, there was no obligation on the defendants to go behind the cheques received from the fraudster in order to determine their source.  In recognition of the difficulty faced by a Court dealing in hindsight, the Judge stated “Whatever is required to demonstrate that there is a duty to inquire, it cannot be such that it fails to accept that we are all human and can be misled”.

As constructive trust claims are generally coupled with claims for unjust enrichment, the Court was not able to conclude that there was no juristic reason for the payments to the defendants.  They were owed money and were paid.  Without more, there was no reason to find unjust enrichment.

Sarhan v. Chojnacki

February 9, 2012

Appointment of a Receiver – Do Trust “Powers” Constitute “Property”?

The British Columbia Court of Appeal recently considered the issue of whether certain powers over property in a discretionary estate trust could be considered to be “property” over which a receiver of a debtor’s personal assets is entitled to take control.  The issue was whether the debtor, who was a discretionary beneficiary of the trust and its Protector (meaning he had the ability to appoint a trustee), had a “property interest” in the trust.  The argument in favour of the receiver was that the debtor had discretion or power over the appointment of a trustee (which could be himself) such that he had the ability to direct discretionary payments from the trust if he so chose.  The Court rejected this rationale, finding that “powers” over the administration of trust properties are not equivalent to property itself and therefore do not fall within the authority of a receiver.

Quest Capital Corp. v. Longpre