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

2. 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

3. 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

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

5. 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!”

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

7. 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

8. 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.)

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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?

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

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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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!

25. 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

26. 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

27. Closing thought
Hope for the best
but
expect the worst!