A TRUSTEE’S EXERCISE OF DISCRETION. Jim Haughn A TRUSTEE’S EXERCISE OF DISCRETION Jim Haughn MD Private Trust Company March 19, 2007

Our agenda The exercise of discretion generally A fact situation Factors considered Examples of specific requests for funding Judicial review of decisions Summary and closing thought

What is discretion? A power or right conferred upon [a Trustee] of acting officially in certain circumstances according to the dictates of their own judgment, uncontrolled by the judgment or conscience of others Black’s Law Dictionary

It all depends! Some decisions are very simple Some decisions are extremely difficult and unpopular Far from an exact science!!

The dilemma Two competing interests “It’s my money!” right of the Testator to give his Trustee the ability to make decisions right of the Beneficiary to question the decision of the Trustee “It’s my money!”

The Trustee’s powers Look to the documentation: the specific trust provision other provisions which relax or alter the rules precatory memorandum

The standard of care Governed by general fiduciary standards exhibit the diligence of an ordinary prudent man not to delegate responsibility avoid conflict of interest maintain an even-hand

The Corporate Trustee Is a higher standard of care applicable? In England: clearly, yes In Canada: draw your own conclusion!! Fales v. Canada Permanent Trust (1976) (S.C.C.)

Common exercises of discretion Arise from trusts having: the power to pay income the power to encroach on capital the power to distribute assets among a class of beneficiaries

The family Pete, age 57 His spouse, Bindy, age 61, with severe addiction problems and unable to manage money Two children, ages 27 and 28 No love lost between Bindy and the children

The objective Objective was to provide for Bindy during her lifetime and At Bindy’s death, any balance of the estate was to be transferred equally to the children

The spousal trust Qualifying spousal trust (s. 70(6) ITA) net income to be paid to Bindy encroachment upon capital at the discretion of the Trustee for the lifetime of Bindy MDPT appointed as sole Trustee

The story Pete met an untimely death The spousal trust amounted to $400,000 Few other assets to support Bindy During Pete’s lifetime, they had income of $8,000 per month After Pete’s death, Bindy had pension income of $900 per month No prospect of future income other than OAS

The issue Provision for Bindy’s ongoing financial support Spousal trust permitted encroachment on capital How was the Trustee’s discretion over the capital to be exercised? How much, when and for what purpose?

Factors….the size of the trust The amount of capital available for distribution The bigger, the better

Factors….the purpose The purpose of the encroachment What will the funds be used for? examples to follow…..

Factors….age and health Age and health of Bindy Long or short term view? retirement projection reviewed periodically required regular monthly encroachment on capital

Factors….personal financial resources Bindy’s personal financial resources Need not exhaust Bindy’s funds or the trust’s funds first Bindy’s external income was severely limited

Factors….needs of all beneficiaries The needs of Bindy whose income would be reduced by encroachment Bindy could not afford a future reduction The needs of the children who would be disadvantaged by encroachment children were much better off than Bindy

Our discretionary decision Retirement projection to age 90 years Resulted in monthly payment which included: all of the income and a regular encroachment on capital Projection is reviewed regularly

Additional requests for capital Aside from the monthly encroachment on capital: $2,000 for dental work $27,000 to attend a substance abuse clinic $400 per month to lease a vehicle plus $2,800 for vehicle insurance $500 for health club membership $30,000 to upgrade her residence

When will the Court intervene? Court retains inherent jurisdiction Gisbourne v. Gisbourne (1877) (H.L.): only in cases of fraud or mala fides What constitutes mala fides? unreasonable decision irrelevant considerations failure to give proper consideration

Direction from the Court Court will not exercise discretion Re Boukydis (1927) (Ont. S.C.) Court will provide direction: if question is one of construction if Trustees cannot agree

Consent of the beneficiaries No requirement to obtain but…. May provide a resolution. beneficiary is the only person with a right of action. Often easier said than done!

Avoiding judicial review No Trustee can avoid it as it is against public policy: wide discretionary clauses general exculpatory clauses Be clear and precise in drafting: especially if it would be ordinarily reviewable

Summary Look to wording of trust and other documentation Consider all the facts Apply proper standard of care Carefully document everything Always subject to review by the Court Court direction or consent of the beneficiary may help

Closing thought Hope for the best but expect the worst!