305 Unknown Equity and Trusts 0

8/2/2019 305 Unknown Equity and Trusts 0

1/96

TRUSTS

JOSHUA KRANE

Historical Introduction

The law studied in this course derives from the Chancery Courts inEngland. Every English lord had his local court to resolve disputesbetween tenants. The Royal Court, created and staffed by the King,resolved relatively few disputes. Local courts applied local custom,but the Royal Court applied the COMMON LAW.

People would petition the King to resolve their disputes. However,

other dispute mechanisms continued to address legal questions,which included Parliament and the Chancery. All litigation in thecommon law was conducted in the name of the King. A WRIT wasan order in the name of the King that ordered the defendant toappear in court. The Chancery issued the writs.

Complaints about the legal process itself were channelled to thechancery, since the Royal Court may not recognize some pleas.1

Early Chancery proceedings were inquisitorial and were veryinformal.2 The Chancellordid not administer a system of law, ashe merely responded to a petition based on a failure of the systemof law. The orders compelled people to act because of conscienceor natural obligations. The Chancellor, often a religious figure,made orders, under threat of imprisonment (SUBPOENA). A partymight behave lawfully, but unconscionably. This has survived as ajustification today.

Equity does not declare rights in rem but acts in personam byenjoining the party to act or to restrain them from acting even if theparty has a common law right.

The Chancery evolves from a secretariat to a court. Even today,

some people can conceive the Chancery as repairing deficienciesof the common law (i.e. enforcement of uses/trusts and theproduction of documents). In cases of conflict, the Chancery rule

1 For example, if a defendant has paid a debt, but the plaintiff kept the deed,the common law might compel the defendant to pay again, because of theparole evidence rule.2 The Chancellor questioned the parties under oath.


2/96

prevails. This provides a precept of the modern system of civiljustice. If we say that Chancery only supplements the common law,then no conflict exists, because of the corrective/ameliorativefunction.

By circa 1600 (until circa 1800), equity became a system of law;however, until 1813, only the Lord Chancellor judged cases inequity. By the 1850s, Parliament began to fuse the remedialpowers of the two courts. By 1875, the Judicature Acts created asingle court the High Court of Justice to administer bothsystems.

The history of equity leaves us with several legacies: Equity is based on conscience whereby the court will correct

errors in law so as to ease the conscience of the parties, Equity is discretionary (such as specific performance of

contracts), Equity supplements but it does not contradict the common law

remains a predominant maxim. This false, however, becauseequitable interventions arise when errors occur in common law.

People still debate the relationship between common law andequity (whether the Judicature reform is merely a proceduralchange or a change in the substance of the law3),

A trust is defined as an obligation (and the property rights growout of this obligation). Equitable property rights are alwaysmediated by a trustee, since someone always owes anobligation. For example, the transfer of an equitable interest inland is considered, for the most part, as an assignment of a right

not a transfer of land.

The Trust

A feoffment is a transfer of a legal estate in land. The transfereewas the feoffee and the transferor is the feoffor. A USE is afeoffment subject to uses or obligations.4 This allows the transfereeto do things unrecognized by the common law:5

Make a will to grant land, Give benefit of land to those unable to hold it, and

3 Are claims to remoteness of loss in equity and common law the same?4 The tenant holds the land (in legal title) for others.5 The rules of primogeniture prevented a feoffee from granting land to othersnot in the line of heirs.


3/96

Avoid burdens arising on legal transfers (relief andwardship incidents).

Nobody takes on death, because the feoffee holds the land.6 Forthe time being, the conveyor can enjoy the benefit of the use, as the

cestui que use or the beneficiary of the use.

What happens if the feoffee to uses does not comply with thefeoffor/cestuis demands? The feoffee to uses would hold the deed,which is evidence of legal title. By the 15th century, cestuis could goto the Chancellor to require feoffees to act in accordance with theiruse obligations. The Chancery not only enforced the promise(claim in personam) but it also recognized the cestuis interest in the

land (claim in rem).

By 1634, Sambach v. Dalston, the Chancellor recognized that thesecond use creates a trust.

* Even if the feoffee conveys legal title to a third party, then the thirdparty is bound to the uses. This is true for the feoffees heirs andhis creditors. The cestui maintains his interest even though heconveyed his property away. The only person who could take theland from the cestui was a bona fide purchaser of the land from thefeoffee for value without notice.7 This is why a creditor cannot take,since value is not exchanged at the time of the transfer.

The third party cannot keep the property for themselves, because ineach of these cases, save the bona fide purchaser, because the

conscience of the third party would be affected by displacing thecestui. It would be unconscionable for the third party tointerfere with the obligations between the trustee and thebeneficiary. From this, we conclude that a third party cannotinterfere unless that person has a clear conscience.

6 For example, B (legal title) holds the land for A (equitable title, cestui queuse). When A dies, B conveys the land to C. B has a bare use as B would

essentially do as A tells him to do. This is a bare trust.

WHENEVER SOMEONE HOLDS PROPERTY FOR ANOTHERSBENEFIT, A BARE TRUST EXISTS.

7 A purchaser can apply to the recipient of a gift. That is why the purchasermust pay value. In the modern law, the cestui would have a claim againstthe feoffee for breach of trust.


4/96

Feudalism is long gone as a social structure in England by 1500,because tenants used uses to avoid incidents. The Statute of Uses,1538, was an attempt of fiscal feudalism to compensate for theavoidance of incidents. The Statute of Uses executed uses, but itdid not operate on four occasions (see Common Law Property

notes). The Statute of Wills, 1540 allowed a tenant to transfer landvia will without the use of uses.

We create trusts for a variety of purposes: estate planning, taxplanning, financing and investment as well as charitable purposes.

Definitions and Classification

A TRUST, according to Underhill, is: An equitable obligation in relation to particular property,

That binds a person, known as the trustee, To deal with property over which he has control, For the benefit of persons who may enforce that obligation, the

beneficiaries.

A SETTLOR is the person who creates the trust. A TESTATORcreates a trust by will. There is no settlor if the trust is created byoperation of law.

A TRUSTEE is the person who holds the legal title of the trustproperty. A trustee may have certain powers (see below). Thetrustee holds the powers in a fiduciary capacity.

A BENEFICIARY obtains the benefit of the trust property.

The same person can be in more than one role. Multiple partiescan fulfil the same role.

Consider the following example: In trust for A for life, and then toB. B becomes a beneficiary with a vested interest as soon as thisis set up, but receives no money until As death. A is the income

beneficiary, while B is the capital beneficiary. B is entitled to anaccount of the property as a beneficiary.

A disposition may provide that a real trust may have discretion,which includes the power to encroach on the capital in favour ofA or B, and the power to accumulate income into capital infavour of B.


5/96

Income actually paid to A ceases to be trust property. The trustends when the capital is paid to B. We also know that you cannotcreate a perpetual trust, unless it is to a charity (simply because ofthe Rule Against Perpetuities).

Types of Trusts

We can classify trusts in different ways. For example, we candistinguish bare trusts from active trusts, because in a bare trusteewill follow the instructions of the settlor or beneficiary, while theactive trustee will follow the terms of the trust.8 However, the majorclassification of trusts are categorized by their mode of creation.

1. A settlor can create an EXPRESS trust deliberately for thebenefit of persons or corporations, or for the benefit of purposes tofulfill a particular objective. A charitable trust is an example of atrust for purposes (public trust). The income may be exempt fromtaxation and the rule against perpetuities.

The settlor can determine all of the interests in advance (executedtrust) or he can leave the final determinations to the trustee(executory trust).

If a settlor does not completely constitute the trust by transferringthe trust property to the trustee, the trust is not enforceable.

2. Trusts may also arise BY OPERATION OF LAW. TheRESULTING TRUSTjumps back to locate a trust. It occurs, forexample, when the settlor does not dispose of all of the beneficialfee simple. The settlor becomes the beneficiary, because theequitable interest goes back to the settlor. This solves the problemof the trust having failed.9

We can have intentionally created resulting trusts, to B in trustfor C for life. This is a trust resulting in pattern. So where does it

belong? Is it express or does it arise by operation of law?

8 A bare trust usually requires the trustee to hand over the property.9 The casebook provides the example of a person who gives money toanother in contribution for the acquisition of property. The other holds legaltitle, but the person may have a beneficial interest in the property. This canbe construed as a resulting trust or a constructive trust (see Hussey v.Palmer).


6/96


7/96

POWERSOF ADMINISTRATION

A POWER is the authority to manage property that one does notown. Unlike an obligation, a power is an enabling mechanism.11

An APPOINTMENT POWER is the power to select persons (orobjects of power) to receive property.

A donee need not exercise his power (facilitative), but a trusteemust perform his obligation (obligatory). Failure of a trustee to

perform can render him liable for breach of trust.

Unlike an appointee, a beneficiary has a proprietary interest in thetrust property. The objects of power only have a hope of receivingthe property, however, they may complain of the donee attemptsto exercise the power incorrectly.

If no one is appointed, those who the settlor names in the

disposition take in default (by GIFT OVER). These people have avested interest in the trust property subject to defeasance byappointment.

More discretion as we move from right-to-left. The differencebetween fiduciary power and discretionary trust is hard to articulate.A fiduciary cannot release a power, because it is inconsistent withits obligation as a fiduciary. Similarly, a trustee is under a fiduciaryobligation to the beneficiaries. The holder of a personal power canrelease the power.

In a discretionary trust, there is no need for a gift-over or default,because all of the property must be disposed of by the trustee. In afiduciary power situation, the fiduciary need not dispose of all of theproperty to the beneficiaries.

11 For example, the power of attorney is the authority to represent a personunder certain circumstances.


8/96

Re Lloyd (1938) Ont. Supreme CourtFacts: A testatrixs will read: I give my husband power to devise,bequeath, and appoint all my estate among my sisters and niece in his discretion.

Issues: Did the provision create a trust with the remainder to thesurviving heirs or did it merely create a power of appointment suchthat intestacy would result?Holding: The provision created a trust.

Reasoning: Justice Rose determined that the court must examinethe construction of the disposition to make the determination. Thewill is more complicated than in Re Weekes because the parties are

singled out in the will.

Rose quotes from Halsburys Laws to state that a court may implya trust in default of appointment and no gift over is stated, and aclear intention that the donor intended those named to benefit.

Turner v. Turner (1984) Chancery Division

Facts: A settlor created an inter vivos trust to benefit his wife,children, remoter issue, and their spouses. He appointed his father,sister-in-law and her husband as trustees. They exercised theirpowers three times upon the instruction of the settlor.Issues: Were the appointments valid?Holding: No.

Reasoning: Justice Davies explained that trustees with powers to

appoint must consider:

1. Whether they should exercise their powers,2. The range of the objects of power (who can/should take),3. Appropriateness of individual appointments.

The trustees did not give consideration as to the appointments,because they merely acceded to the settlors will and perRe

Hastings-Bass as court may set aside the exercise of a fiduciarypower if the trustee did not turn his mind to its exercise.

Re Weekes Settlement (1897) Chancery DivisionFacts: A testatrix died leaving her husband with the power ofappointment to dispose of property by will amongst the children.The husband died without exercising the power. There was no gift


9/96

over.Issues: Can the children claim as beneficiaries of a trust?Holding: No.

Reasoning: The husband chose not to exercise the appointment

power. Nothing in the will suggested that the testatrix created atrust for the children.

Certainty about Objects of Power of Appointment

Re Gulbenkians Settlement Trusts [1970] House of LordsFacts: The settlor attempted to create a trust to benefit Gulbenkian,his wife, children, remoter issue, and he gave the authority to thetrustees such that they shall at their absolute discretion direct theincome to any person who company/care, with whomGulbenkian might be employed/residing.

The second disposition was a default clause. If they do not give theincome away, the clause directs the income to go somewhere else.

Issues: Did the disposition create a power?Holding: Yes, but it is akin to fiduciary power.

Reasoning:Power IssueThe default clause in Gulbenkian is a clue as to whether thedisposition created mere powers, or a trust. The default clause is astrong indicator that the donor granted a power.

The absence of a default clause is not necessarily indicative that itis a trust, because the donor may not have thought aboutundisposed income (to be held in resulting trust).

A settlor or testator who entrusts a power to his trustees mustbe relying on them in their fiduciary capacity so they cannotsimply push aside the power and refuse to consider whether it

ought in their judgment to be exercised.

Certainty IssueEven if the words are ambiguous, the trustees/appointors can applyto the Chancery Court for interpretation. The court will consider thefollowing test:


10/96

1. It must be clear that the donee can properly perform thepower, such that the donee does not face conceptualuncertainty as to whether an individual is a member.

2. The power cannot be capricious/impulsive.

For example, if the settlor left money in trust for John Smith and heknew several, or left money to my old friend but he had many,without additional powers, the trustee would be incapable ofdeciding who gets the property, and therefore the disposition failsfor conceptual uncertainty. Even with all of the evidence in theworld, we could not determine what the settlor meant by old friend.

Additional Notes:

Gulbenkian lowered the standard of certainty. This creates aparadox, because a more relaxed test is more likely to lead to asituation where the trustees end up giving income to a person whothe settlor may not have wanted to receive income to. However, ifthe power fails because the test is too strict, then none of thenamed persons (potential appointees) will receive nothing. This ishardly consonant with the testators intention.

The point of setting up the trust this way is because the widenessof the class makes it unattractive for re-sale.

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________


11/96

______________________________________________________

______________________________________________________

______________________________________________________

Mere Power Trust Power (DiscretionaryTrust)


12/96

The donee has the authority tomanage property. It need notexercise the power. If it doesexercise it, it must do so inaccordance with the terms of the

power.

The trustee has an obligation tomanage property. It mustperform the obligation.

Powers can be exercised in afiduciary capacity. A person whoexercises power in a fiduciarycapacity cannot release thepower unless expresslyauthorized.

The exercise of trust obligationsis always done in a fiduciarycapacity. A trustee cannotrelease itself from an obligationunless he retires.12

Failure to exercise a power doesnot necessarily lead to liability.

The trustee is in breach of trustif it fails to perform its obligation.

The test for certainty of objects ofthe power is the individualascertainability test, perGulbenkian

The test for beneficiaries of adiscretionary trust is theindividual ascertainability test,perGulbenkian.

However, the court will alsoconsider whether the class isadministratively unworkable.

The presence of a default clause(gift over) in a disposition give anindication that the donor createda power.

The donee must determinewhether it should exercise thepower. If so, the donee, whoexercises power in a fiduciarycapacity, must survey thepossible objects of the power. Ifthe donee exercises power in anon-fiduciary capacity it may be

The trustee must survey thepossible objects of the power.

All the residents of Londonwould probably be invalid, forcapriciousness.

12 A trustee may retire if the other trustees consent to its retirement. Theywill appoint a new trustee in its place. There is, however, lack of harmonyas to the various rules in the different provinces. A trustee can seek adischarge from the court if it wants to retire. It would be hard to imagine thecourt denying this request. The court, may, however, compel the trustee topay the fees associated with retirement. Although again, this seemsunlikely.


13/96

able to wait for appointees tocome to it. The donee mustdetermine whether theappointment to an individual isappropriate (Turner).

The settlor of an express trustcan retain certain powers. Onesuch power is the power ofrevocation. If the settlor holdsthe power of revocation, it candefeat the beneficial interests ofthe appointees.

Trustees exercise certainpowers. For example, trusteeswill exercise administrativepowers to manage the trustproperty. The trustees will alsoexercise dispositive powers,such as the power of

appointment, to convey the trustproperty to the beneficiaries.The power of advancementallows the trustee to encroachon the capital so that abeneficiary can take advantageof an opportunity. The power ofencroachment allows the

trustee to distribute income to abeneficiary.

The potential object of a powercan challenge the doneesexercise, by alleging the doneeexceeded its power or that itbreached its fiduciary duty, perFox.

A trust beneficiary canchallenge the trustees exercise,by alleging the donee exceededits power or that it breached itsfiduciary duty. Trustees mustexercise their powers in theproper motive, and not to putthemselves in conflicts ofinterest (Fox).

Can still have a power without agift over.

If the donee of the power does

not exercise the power, themoney reverts to the settlorsestate.

If the trustee does not exercise

the power of appointment in adiscretionary trust, the court willmake the choice for it (Lloyd).

EXPRESSTRUSTS


14/96

There are several requirements to meet for an express trust to bevalid: capacity, certainty of intention to create the trust,certainty as to the subject matter, certainty as to the objects,construction of the trust, and other requisite formalities.

Capacity

Generally, minors, the mentally ill, and bankrupts cannot createtrusts subject to certain exceptions. Likewise, they cannot act astrustees. A non-incorporated association, not being a recognizedlegal person in Ontario, cannot hold property as a trustee.

Any legal person can benefit from a trust. In the case of a non-

incorporated association, a trustee may hold property for the benefitof the groups individual members.

The three certainties are related, because as Re Walkershows,when there is uncertainty as to the subject matter of the trust, orwhich property is trust property and which property is not, the courtmay also question whether the settlor intended to create a trust atall or whether a proposed beneficiary is an object of the trust. Thethree certainties are conceptually different, because of theresults if one certainty is uncertain.

If the subject-matter is uncertain, there is no trust, because atrust requires trust property. The property belongs to the donor.If however the intention is uncertain, the result may be that thedonee receives the property without obligation; see Johnson v.

Farney.

Re Walker (1925) UK Court of AppealFacts: A testators will read: should any portion of my estate stillremain in the hands of my wife at her death un-disposed by her,such remainder shall be divided.Issues: Does the property of the wife at her death belong to herbeneficiaries or her late husbands?

Holding: Her beneficiaries. No trust was created.

Reasoning: Justice Middleton explained that the court could have


15/96

adopted one of two choices.

1. Either the transfer creates a life interest and the rest of thehusbands property becomes a gift-over to the beneficiariesnamed in his will, or,

2. The husband transferred the property to his wife and anyconditions afterward are void for repugnancy.

The court accepted this choice, because the widow had the right todispose of the property as she chose and therefore the property hadbeen fully alienated to her.

Rationale: When a person has power of full disposal orencroachment on property, the court can interpret that to meanexclusive ownership of the property, not subject to control ofthe previous owner.

We can contrast this disposition with the one in Re Shamas, whichread: to my wife all will belong to my wife until the last child turns21. If my wife marries, she should have her share like the children.If not, see that every child gets his share when she dies.

This disposition created a trust. The wife has a defeasible lifeinterest on re-marriage. She also has the power of encroachmentuntil the last child turns 21. The children are not merely objects of apower, but are beneficiaries in a discretionary trust.

The 3 Certainties: Certainty of Intention

If I intend to produce a trust, I should go to a lawyer to produce atrust deed. This may not be the last step, since transfers of realproperty will have to be registered, and transfers of shares mayrequire corporate approval.13

The problem with intention arises when there is an absence of legal

advice (when people write their own wills).

13 Today, trustees seem to have more discretion, because circumstanceschange. These discretions allow modern trustees to be more flexible, whilestill being incompliance with the trust: power to change the place ofadminsitration of the trust, Power to add beneficiaries, and others.


16/96

The creation of a trust is a unilateral act. However, the trusteemust agree to be a trustee (however, the common law does notconceptualize the trust in this way). Technical language is notrequired to create a trust. What is required?

Prof. Smith contends that the court must find two important things: The settlor intends to create legal obligations. The property

will not belong to the trustee beneficially (the trustee will hold theproperty for the benefit of another, the trustee will be liable forbreach, the trustee must invest, etc.). See Johnson v. Farney.Would the wife in that case be an income beneficiary or a capitalbeneficiary? Did she have the power to encroach?

The property should not be at the free disposal of thetransferee-trustee. The trustee has obligations in relation toparticular property.

Johnson v. Farney (1913) Ontario Supreme CourtFacts: The husbands will read as follows: leave all you are tomy people and your people to be divided between them.

Issues: Did the husbands will create a trust for both his and herfamilies or was the wife free to dispose of the property to her family(he intended beneficiaries) alone?Holding: No trust was created. The wife could do as she pleasedwith the property. The wife received the property outright.

Reasoning:1. Either the transfer creates a life interest and the rest of

the husbands property becomes a gift-over to the beneficiariesnamed in his will, or,

2. The husband transferred the property to his wife and anyconditions afterward are void for repugnancy.

The condition was a wish and not a legal obligation. The court willnot reduce an absolute gift to a life interest merely by the inclusion

of precatory language. Since the husband sought to advise the wifeover herentire property (and not the property that he left her), thecourt interpreted the intention to mean advice only.

The trust only affects the property remaining at the end of herlife. The words leave her with such a large interest, but this castsdoubt on the intention of the settlor. This shows how the three


17/96

certainties are related and reflexive.

Rationale: A settlor must be specific as to his intention tocreate a trust and name the specific property to be held intrust.

This case is very similar to Re Walker.

Maitland reminds us that a disposition will be effective as intendedor not at all. The court likely will not confer upon a party thebenefits of property as a beneficiary, when the party intended thedisposition to be a gift (see topic below).

Certainty of Subject Matter

A trust absolutely requires trust property, because the trust is a wayof holding property. The residue of an estate is capable of formingthe subject matter of a trust, because the residue is ascertainableeven if it is yet unascertained.

This is partly a rule about property transfer. For example, if I intendto create a trust using a Royal Bank account, but I have 6 and I donot specify which one, the trust fails.

Hunter v. Moss (1994) Court of AppealFacts: The defendant Moss held 50 shares for the benefit of theplaintiff Hunter, but Moss did not actually separate the 50 shares outof the 950 he owned.

Issues: Do the 50 shares constitute the subject matter of a trust?Holding: Yes.

Reasoning: This case does not deal with a gift, because thedefendant did not deliver the share certificates to the plaintiff (nordid he intend to create a gift). Therefore, a trust is the onlyconsideration. We know that a trust of personalty may be createdorally so a deed is not necessary.

Lord Dillon distinguishes this case from Re London Wine because


18/96

this case amounted to a declaration of a trust and not thepurchase/appropriation of personalty. The plaintiff never claimedthat he had title (nor was there receipt of a title or anything thatresembled a title), but that the defendant held the property on trust.

Dillon distinguished another case, Mac-Jordan Construction v.Brookmount, in which the court determined that Brookmount didnot hold moneys owed to Mac-Jordan in trust, but that Mac-Jordanmerely had an equitable charge on the money in a mixed fund (suchthat Mac-Jordan was going to be treated as an ordinary creditor andnot the owner of the money).

A chargee cannot insist on specific performance, because of its

position as an ordinary creditor.

In this case, the company was named, as well as the content of thetrust namely, 50 shares. The shares are nearly indistinguishableand there is no difference between share #1 and share #950.

Rationale: It must be clear that the trustee holds a separateproperty in trust for the beneficiary.

Re Goldcorp shows that when potential beneficiaries must drawproperty out of an undifferentiated mass and where individualallotments of property are not ascertained, the property (beneficialtitle) never passes from the debtor to the potential beneficiaries.

If this transfer had occurred in a will, the executor would have

transferred 50 shares to Hunter.

The question that arises in this case is: which 50 shares are subjectto the trust? It is impossible to isolate which property he holds in


19/96

trust. If, for example, Moss gave 800 shares to a third party, did hebreach the trust? Can we intepret this to mean that Moss held1/20th of each share on trust? No, because this would havecontravened Moss intention.

Consider what would happen if Moss gave all of this shares awayand of the 50 remaining, he gave them away and squandered themoney. Hunter would attempt to claim against the third partybecause the third party is not a good faith purchaser for value.

At the moment the settlor creates the trust, people must know whatproperty is in the trust it must be ascertained or ascertainable.

When we know what property comprises the trust, but the quantumto each beneficiary is uncertain, the trust will also fail. Except when:

1. The trustees have a discretionary power to determine thequantum themselves [not a fixed trust],

2. The court may rely on the maxim equity is equality todivide the trust property equally among the beneficiaries,

3. The court may determine for itself who gets what (see ReGolays Will Trust)14

Re Golays Will Trust (1965) Chancery DivisionFacts: The will directed the testators executors to let thebeneficiary receive a reasonable income from his other properties.Issues: Is the term reasonable income uncertain to the void thedisposition? Are the beneficial interests uncertain?

Holding: No.

Reasoning:This case is about the terms of the trust who gets what out of thetrust property. We know what the property is, but we do not knowhow much income will be paid to the beneficiary or back into thecapital.

Justice Ungoed-Thomas states that whether the trustees determine

14 The authors of the text state that when the quantum to each beneficiary isuncertain, the trust fails for want of certainty of subject-matter. We canconsider this uncertainty as an uncertainty as to the objects, because theterms of the disposition of trust property is unclear. A failure of certainty ofshares leads to a resulting trust.


20/96

what constitutes reasonable income, or the courts do so, theoutcome yardstick would be identical. I think Ungoed-Thomasmeans to say that both the trustees and the courts can usereasonable discretion to make such a determination, and therefore,it should not void the disposition for uncertainty.

The court is in the business of making objective assessments ofincome as to what is reasonable and what is not.

Rationale: Where the disposition provides some discretion tothe trustees in the form of determining reasonable incomethe disposition likely will not be void for uncertainty.

Golayillustrates the same paradox as in Gulbenkian. The courtcould have failed the trust so as not to make a mockery of thetestators intention. The judge was creative, and turned the matterinto a factual question thinking it better to uphold the trust, even ifthe beneficiary gets an income that is less/more than the settlor hadintended.

Certainty of Objects Certainty of Terms of the Trust[Powers arealso subject to the requirements of certainty of objects]

The settlor must tell the trustees to whose benefit they hold theproperty. If the certainty of objects fails (and the other certainties donot), there will be a resulting trust.15 We know that the trusteetook the property as a trustee, and therefore, we know that thetrustee cannot benefit.

In many cases, there may not be a problem: in trust for A for lifeand B absolutely. A and B are objects of the trust. The problemsarise when the settlor names a class of beneficiaries that isconceptually uncertain my old friends, my nice professors, etc.Evidentiary uncertainty will not cause a trust to fail. The court cangive direction if need be.16

15 The trustee will hold the legal title, for the benefit of the settlor/beneficiary.

16 A trustee can go to court to seek direction by way of application. Thereneed not be a conflict. The court retains a supervisory jurisdiction overtrusts.


21/96

Fixed trusts for equal division in a class trustees need a completelist of trustees to effect the distribution. This uses theclass acscertainability test.17

Discretionary trusts for division in a class - in Broadway Cottages,

the court will treat a discretionary trust as a fixed trust, and willdivide the property equally, based on the maxim equity is equality.This gives rise to the class ascertainability test. The classascertainability test requires that the trustee be able to determineexactly who is a beneficiary of a trust. Consider, to members of myfamily equally. Without knowledge of who is a family member, thetrustees cannot perform the obligation.

A complete list can protect the settlors intention (without theBroadway Cottages argument); however, this may be too strict,because if it fails, no one will take.

The individual ascertainability test requires that the trustee be ableto determine whether an individual is a beneficiary (or is not abeneficiary). The following case, McPhail v. Doulton, determinedthat the individual ascertainability test has replaced the classascertainability test.

The case also recognized the similarity between a discretionarytrust and power of appointment. The trustee of the discretionarytrust must survey potential objects of the trust, rather than waitback to determine who asks for money.

If the words are clear, but the class is administratively unworkable,the certainty of objects will fail (i.e. all of the residents of greaterLondon). This would satisfy the conceptual certainty requirement,because residency is a certain concept at the individual level. Itwould require the trustees to survey the entire class. This isprobably acceptable as a power, but not as a discretionary trust,because the obligations on the discretionary trustee are moreonerous. In case of powers, the trustees may still have to

advertise.

McPhail v. Doulton (1971) House of Lords [Baden #1]Facts: Baden settled a trust for the benefit of any officers andemployees or ex-officers or ex-employees of the company or to anyrelatives or dependents in such amounts at such times and on

17 For example: in trust to my three children.


22/96

such conditions as they [trustees] see fit.Issues: Are objects of the trust uncertain to void the disposition?Holding: No.

Reasoning: The court of appeal applied the test from Inland

Revenue Commissioners v. Broadway Cottages, without thebenefit of the House of Lords holding in Re GulbenkiansSettlement.

Difference between a discretionary trust and power of appointmentIn both cases, the trustee/donee will be acting in a fiduciarycapacity: he is most likely to have been selected as a suitableperson to administer the trust from his knowledge and experience,

and would consider he has a responsibility to do so according to itspurpose.

A trustee would surely never require the preparation of a completelist of names he would examine the field, by class and category;might indeed make diligent and careful inquiries, depending on howmuch money he had to give away.

Lord Wilberforce determined that in this disposition, the clause usesmandatory language shall apply to create, along with thepower of selection, a trust for the beneficiaries. Wilberforce remittedthe clause back to the Chancery Division to determine whether theclause was void for uncertainty.

Test for uncertainty

In obiter, Wilberforce re-states the rule from Broadway Cottagesas he says that a trust cannot be valid unless, if need be, it can beexecuted by the court, and that the court can only execute it byordering an equal distribution in which every beneficiary shares.This is paradoxical, because equal division is the last thing that Mr.Baden would have wanted. It would have left many people with littlemoney!


23/96

The cases cited in Broadway Cottages (Harding v. Glyn, forexample) were put aside as anomalies; however, Wilberforce saidthat these cases illustrate that equal division does not rest on aprinciple inherent to the nature of a trust. Quoting from Farwell onPowers, Wilberforce said that the trustee must survey the field at his

discretion to determine who deserved the trust property. Thetrustees have a duty to consideralong with a duty to distribute.This is what the settlor would want the trustees to do.

Rationale: Wilberforce overturns Broadway Cottages andstates that the trust is valid if it can be said with certainty thatany given individual is or is not a member of the class adopts the individual ascertainability test.

There are problems with this test, however, as identified by thejudges of the court of appeal in Baden #2. They are as follows:

i. How does the court distinguish conceptually certain fromuncertain classes of beneficiaries?

ii. What happens if some categories are certain, while othersare not?

iii. Must the beneficiary show that he is included, or notexcluded?

iv. Can a person apply to be a member?v. How many people must be ascertained so that the category

becomes certain?

Re Badens Deed Trust #2 (1972) Court of AppealFacts: The case was remitted to the chancery Division to determinewhether relatives and dependants were sufficiently certain toenable the court to determine who is/not a beneficiary.Holding: The words are sufficiently certain.

Reasoning:


24/96

The three judgments agree that the objects are certain, but offerthree different judgments. This judgment water down the individualascertainability test, because we can interpret Wilberforcesarticulation of the test as the individual ascertainability test.

Per Lord Sachs, the instrument must be examined through the eyesof a businessman looking to improve the welfare of his employees.Once the class is determined conceptually, it becomes a question offact and evidence whether one falls within it or not.

Solution #1: A stream of authorities exists to support theproposition that dependants is a viable/certain category. Theword relative is also sufficiently certain, because a relative is

someone who an employee would introduce as a relative not as akinsman or a distant relative.

Per Lord Megaw, few trusts would stand for certainty if the worddependant was uncertain. Megaw effectively considers theconsequences for trust law if dependant is uncertain. The trust isnot administratively unworkable (he states a practical reality).

The trustees could ascertain many objects of the trust who arerelatives and dependants. The trust should not fail, simply becausemany objects could not be ascertained. This is the classascertainability test, which was rejected in Wilberforces obiterandin Re Gulbernkians Settlement. For Megaw the category iscertain if a substantial number of objects is ascertainable. Itis more difficult to prove a negative and therefore, so long as the

court can identify a substantial number of people who are in, thatwill validate the class.

Solution #2: Megaw starts from the proposition that the two tests aredifferent. The defendant poses a problem: when Wilberforce saysis/is not, this should mean that every person either is or is not inthe class. This is the class ascertainability test.


25/96

Megaw re-conceives Wilberforces test, because Megaw woulduse evidence to start to define the class. Otherwise, thedistinction between the two tests is not clear, when a trusteemust go through every possible person and say that eachperson is/is not a member. That looks like a class

ascertainability test.

Per Lord Stamp, it is not enough for the trustees to show that oneperson can fit the category, to uphold its validity. The trustee mustsurvey the range of objects or possible beneficiaries to carryout the duty. They should not distribute the money to those whoare easily/readily identifiable. This seems to be a positive obligationto do something.

Solution #3: The trustees must do their best to find beneficiaries thatfall within the class. The word dependant refers to a financialdependant. The trustee must be satisfied that the beneficiarysatisfies the qualification as financially dependant.

Rationale: The strict test for certainty is not the courtsposition. Rather, the court will consider whether the categoryis sufficiently certain by determining whether it is possible toidentify a sufficient number of members of that category to bebeneficiaries.

Note: that a test proposed by Lord Denning would find conceptualcertainty should the court be able to place one person in the class.

In addition, when we talk about powers we do not face the sameproblems, because the appointor is not compelled to give trustproperty to the appointees.

Constitution of Trusts

CONSTITUTION is the conveyance of the legal estate to the trusteewith the certainties. The property no longer belongs to the settlor.

A trust must have trust property. The trust can be constituted inthree ways: the settlor can transfer the trust property to the trustees,a third party can transfer the property to the trustees, the settlor canhold the property in trust as trustee for the beneficiaries. There can


26/96


27/96

intends it to take effect. Delivery of deeds includes physicaldelivery and the intent to deliver.

Issues: Who has title to the property?Holding: The deceaseds estate has title and the proposed

grantees have nothing.

Reasoning: The only way to give property effectively at death isto use a trust or a will.

Justice Schroeder explained that the grantees cannot claim thedeeds were a gift, because the deceased never delivered thedeeds. Nor, were the deeds held in escrow for the grantees.20

Secondly, Schroeder did not find a trust, because the deceasednever intended that the solicitor hold the deeds in trust for thegrantees, as the deceased ignored his solicitors warning to makesuch an arrangement. Schroeder applied the rule from Milroy v.Lordto state that a court will not perfect an imperfect gift by usingthe trust mechanism. The deceased did not declare himself to betrustee.

Rationale: The court will not find a trust if the facts do notestablish intention to create a trust and when the facts showintention to create a gift instead.

Transfer of Property to the Trustees

Sometimes, the transfer of shares in a company requires thedirectors approval to amend the shareholder register. Thetransferee does not become the shareholder until the companyamends the register. During these two steps, we have a gap.

This case is an exception to the principle that the court will notperfect imperfect gifts.

Re Rose (1952) Court of Appeal - by the settlorFacts: The deceased transferred 10 000 shares in a company tothe companys secretary and his wife as trustees for the benefit ofhis wife, Mrs. Rose (and her some). The transfer forms weredelivered in March 1943, but approval and registration on the

20 Holding something in escrow will mean that a third party holds property ona condition subsequent, usually for the future payment of money.


28/96

companys books occurred in June 1943.21 The transfer wassubject to a duty if it was made within a certain period before thedeceaseds death.

Issues: Did the transfer take place in March, or in June when the

transfer was approved?Holding: March (no duty had to be paid).

Reasoning: Per Evershed MR, the settlor used the proper forms toeffect the transfer. Mrs. Rose accepted the shares subject to acovenant that she would oblige by the conditions imposed upon herby other shareholders and corporate regulations.

Had the deceased just declared himself trustee in March, therewould have been no problem. Mrs. Rose argued that the courtshould imply a trust because Mr. Rose had done everything totransfer the shares away.

The Crown argued that dispose of the property in March, becauseMrs. Rose did not take the property that day. Evershed rejects thisargument, because although the disposition was meant to operateas an immediate transfer of rights, it could not possibly do so,because the company had to approve the transfer. A trust may existwhen it is not possible for the transfer to occur right away.22

This decision is compatible with Milroy v. Lord, because thedeceased did everything in his power to dispose of the property.After registration in June, the transfer was complete and the gift was

perfected. Until registration, the deceased was the trustee of thelegal estate, until his wife could possess the property as trustee andreceive income as beneficiary.

Rationale: During a delay period before a transfer is

21 The time when the transferees become the legal shareholders.

22 This is a similar situation to when a person sells his house, and the seller

retains the legal title until payment and closing. The seller holds the legaltitle in trust for the buyer. Except that unlike in Re Rose, the seller hasan obligation to sell the house and that is why we can call this atrust.

In Re Rose the deceased had no obligation to give the property toMrs. Rose and he could not do so if the directors did not approve thetransfer.

Be careful with tax cases.


29/96

approved/registered, if the transferor does everything in hispower to divest himself of the property, the court may imply atrust.

The giver cannot really change his mind anyway and so it may

not be incompatible with Milroy v. Lord.

What if the company had refused situation? We have already saidthat trusts arise out of obligations in respect of the property.

There cannot be an express trust, because he did not intend tocreate a trust. Perhaps this is a constructive trust yet there are noobligations, because he had already intended to give away the

property. In addition, if a dividend were to be paid, who wouldreceive it? Perhaps we should read this case down.

The following case, Re Ralli, describes accidental constitution.

Re Rallis Will Trusts (1964) Chancery Division - by a third partyFacts: The testator gave a life estate to his widow, remainder to histwo daughters, Irene and Helen. Helens marriage settlement (trust)stated: if Helen becomes possessed of property, she will vest it intrustees. Helen never transferred he share of her fathers estate tothe trustees of the marriage settlement. She died in 1956 and thewidow died in 1961.

The plaintiff, Irenes husband John, is the sole surviving trustee ofHelens estate and the testators estate. The plaintiff asked the

court to determine where the money goes.Issues: Does Helens interest in the residue of her fathers estatego to Helens estate, or to the beneficiaries of the marriagesettlement?Holding: The interest was held in trust for the beneficiaries of themarriage settlement.

Reasoning:

Trust property can be an interest under another trust.

Justice Buckley interpreted clause 8 of the settlement to state thatHelen held the interest as a trustee, on trust, for the trustees of themarriage settlement, who held it for the beneficiaries of the marriagesettlement (who are Helens nieces and nephews).


30/96

Justice Buckley continues his judgment which leads to the sameresult, but this depends upon the facts of the case.

By coincidence, the plaintiff is trustee of both trusts. The plaintiffwas not given the property by the settlor, Helen, but he had it by

virtue of his role as the testators trustees.

Rationale: The beneficiary of one trust can hold property ontrust for the benefit of others, even if that property is notvested in possession of the beneficiary.

Declaration of Self as Trustee

In this circumstance, no transfer is necessary; however, problems ofproof arise. The subsequent case is really about intent to create atrust. The trust property was in the bank account; however, it didnot become trust property until the settlor showed the intention to

benefit his girlfriend.

The settlor does not have to know of the declaration.

Remember, however, the intention must be the creation of a trustand not a gift (Milroy v. Lord).

Paul v. Constance (1977) Court of Appeal

Facts: The deceased received 950 as damages for injuries hesustained. He opened a bank account in his name only anddeposited the money. The plaintiff, his girlfriend, was with him. Thedeceased told the plaintiff that the plaintiff could draw on theaccount and that the money was as much his as it was hers.

When the deceased died, the wife, who had not lived with the


31/96

plaintiff for the past nine years took out letters of administration andclosed the account.Issues: Did the deceased hold the money in trust for the girlfriendand himself jointly?Holding: Yes.

Reasoning: According to Snells Principles of Equity, a plaintiffneed not use the word trust to create a trust. The defendantargued that the plaintiff had no evidence that the deceased didanything to create the trust.

Lord Scarman rejected the defendants argument that this was animperfect gift, since the plaintiff never claimed that it was a gift. The

deceaseds intention was to create a trust in which both he and theplaintiff were interested. Scarman warns, however, that this is aborderline case, since he cannot indicate the precise moment whenthe trust was created. The deceased stated, as much his as it washers on several occasions, which was sufficient to establish intent.

Rationale: A settlor can constitute a trust, with himself astrustee, by taking property and saying repeatedly that theproperty will benefit another party.

Additional Notes:

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________


32/96

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

_____________________________________________________


33/96

THE TRUSTEE

The bulk of the law of trustees applies to intentionally created orexpress trusts. In cases of implied trusts (trusts created by law), thecourts will usually find a trust to hand over the property which is a

bare trust.

We can abstract the office of trusteeship from the person whoperforms that office. Once the terms of the trust are set, and thetrustee dies or disappears, without the power of revocation, thesettlor will be stuck with the new trustee. The trust is an institutionthat extends over time and the office transcends the individualholder.

Appointment, Retirement, and Removal of Trustees

The settlor normally appoints trustees by using the trust instrument.The settlor may reserve the power of further appointment by thatinstrument only. If the trust instrument does not contain suchprovision, in all common law provinces (save PEI and NB), thetrustees may appoint new trustees themselves.

The trustees can also replace/substitute a trustee that: dies,remains out of province for a year, wants to be discharged,refuses to act, is unfit, is convicted of an indictable offence, oris bankrupt/insolvent.

If there are no surviving or continuing trustees, the personalrepresentative of the last surviving or continuing trustee has thepower to administer the trust.

Note: The trustees must act jointly and uniformly, unless thetrust instrument says otherwise. Section 60 of the OntarioTrustee Actallows trustees to apply to the court for an opinion, butthe court will not compel the trustees to act.

Re Brockbank (1948) Chancery DivisionFacts: The testator left the residue of his estate in trust for hiswidow for life, and on her death to her two children. One of the twotrustees wanted to retire, and he and the beneficiaries wantedLloyds Bank to be appointed as trustee. The defendant refused.Issues: Can the beneficiaries compel a trustee to retire and thenselect his successor?


34/96

Holding: No.

Reasoning: The beneficiaries have a choice: they can by mutualagreement choose to end the trust, or they can continue to bebeneficiaries of the trust. No doubt that the trustees may choose to

exercise their power of appointment in accord with the wishes of thebeneficiaries; however, they have a duty to consider theconsequences and to act in the best interests of the beneficiarieseven if it is against the express wishes of the beneficiaries.

The rule in Saunders v. Vautierallows the trustees to collapsethe trust, but they cannot dictate the terms.

Rationale: The beneficiaries cannot compel a trustee or arepresentative to appoint a person of their choosing.

Note: the executor of an estate is not necessarily a trustee eventhough it is common practice to call the executor so. The executorowes an obligation to discharge the will, but the recipients of theproperty of the will do not necessarily have beneficial ownershipabsolutely, because the executor must liquidate the debts of thedeceased before paying out the estate.

The courts inherent jurisdiction of appointment is codified in theTrustee Act and similar statutes. Courts can appoint substitute andadditional trustees. The appointment is guided by three principles,as articulated by Lord Turner in Re Tempest:

1. The court must consider the wishes of the settlor. It ought toexamine the trust instrument to attempt to appreciate thatintention.

2. The court must strive not to appoint a trustee that somebeneficiaries would oppose.

3. The court should appoint a trustee that will better the trust.

InRe Moorhouse (1946), the plaintiff, Mary, and a trust companyare co-trustees. Mary asked to resign as a trustee, but to have hersolicitor replace her. The Ontario Supreme Court did not permitMary to appoint her solicitor in her place (per sub-section 3(1) of theTrustee Act). The other trustee must consent.


35/96

No upper limit exists as to how many trustees may hold theproperty. However, in cases where the only one trustee held theproperty originally, two must replace him (or a trust corporation, seeper para. 6c).

In order to retire without going to court to ask for removal, the othertrustees must consent to the retirement (per sub-section 2(1)). Aperson who holds office as both trustee and executor may retirefrom the trust, but continue to hold the office as executor.

Re McLean (1982) Ontario Supreme CourtFacts: Bennett, one of the original trustees under the will, resigned(with consent) as a trustee. The estate brought an application for

his removal.Issues: Can a person be an executor, without being a trustee, ifthat person held both positions at one time?Holding: Yes.

Reasoning: It is not uncommon for a person to be both trustee andexecutor, since after a person dies, the executor holds thedeceaseds property in trust, until that property is administered.23

The executor will pay the deceaseds debts and funeral expenses this is a winding-up function, as opposed to a preservation andgrowth function.

Justice Osborne considers Foxwell v. Kennedybut he determinedthat the case did not apply. The ruling in that case stipulated thatfailure to act as an executor was considered as evidence of

23 These are very similar positions. Both an executor and a trustee holdproperty on behalf of another. Both have a fiduciary obligation. Manyprovisions of the Trustee Act apply to executor. The case is about thedifferences between the two. A trustee is allowed to resign, but an executorneeds the courts permission to step down (as the executor is appointed forlife).


36/96

disclaimer of the trust. In this case, Bennett fulfilled hisresponsibilities.

Rationale: The common law considers the position of trusteeand executor as different functions, and therefore, a person

may retire from being a trustee and continue to be an executor.

Oosterhoff raises some important questions: Who bears the legal costs of the trustees retirement? Must a trustee give reasons to retire? Can a sole trustee retire (given that co-trustees must consent)?

A court may remove a trustee from office due to: misconduct, badfaith, inability/unwillingness to carry out the duties, personalbenefit from the trust, acting in the detriment of thebeneficiaries, other reasons that show unfitness.

Conroy v. Stokes (1952) British Columbia Court of AppealFacts: Two of five beneficiaries applied to the court for removal ofthe trustees.

Issues: Should the court accept this application?Holding: No.

Reasoning: The majority of the beneficiaries did not expressdissatisfaction with the trustees. The judge did not find misconduct,although the judge did find friction between the applicants and thetrustees. A court will intervene, not for every a mistake or neglect ofduty, but if the trustee has endangered the trust property. The

court will strive to act in the interests of the beneficiaries [see LordTurner in Re Tempestabove].

Rationale: The beneficiaries cannot force out a trustee merelybecause of friction.

Powers and Rights of Trustees

Recall, there are two types of powers.24

24 The Trustee Act provides basic powers to trustees: power to insure theproperty, to issue receipts, to renew leases, etc.


37/96

1. Administrative powers to sell, mortgage, insure,25 or investthe property (about preserving property),26

2. Dispositive powers to pay or transfer income or capital, toencroach on the capital i.e. for maintenance or for

advancement, or power of appointment (about distributingproperty).

The trustees can enlarge their powers in one of two ways. Theycan apply to the court for an increase in powers, but this is limited toemergencies generally. They can also apply via the Variation ofTrusts Act with the consent ofall of the beneficiaries.

In the following case, Re McIntyre, the court used its inherentsupervisory power to give maintenance allowance to the childrenbeneficiaries.

Re McIntyre (1905) Ont. Supreme CourtFacts: The testator died leaving no express provision formaintenance for his two minor sons. He left them a considerable

legacy at $4000 each. The plaintiff wants the maintenance to comefrom the residue, while the defendant wants the maintenance tocome from the childrens legacies.Issues: How is the maintenance to be generated?Holding: Maintenance can be generated by both the residue andthe interest on the legacies.

Reasoning: Chief Justice Moss cited Binkley v. Binkleyto hold

that a child is entitled to maintenance, but that it must come fromthe interest of its legacy, if there is no other source. However, inthis case, the testator left a residue and an income to his wife, whichcan provide maintenance.

The infant will not receive the capital until the age of majority; it isentitled to the income, however.

25 Today, it might be a breach of duty not to buy insurance. It is alsorecommended that the settlor grant the trustee the power to insure abovethe limit recognized by statute.

26 The trustee may alienate parts of the property, but with the goal ofpreserving the property. We can consider a court application as an exampleof an administrative power.


38/96

Rationale: The court likely will not interfere with the capital of alegacy, but it may draw upon the interest of the legacy andupon the residue of the testators estate for maintenance.

The power of advancement allows the trustee to draw upon the

capital to allow a minor to take advantage of an opportunity. A courtwill order an advancement only if the beneficiary would be entitledto the capital, but it has failed to meet the age requirement.

The power of encroachment allows a trustee to distribute capital toan income beneficiary. The court will intervene on application by abeneficiary to determine whether a trustee has exercised itsdiscretion beyond the scope of the power given to it or in bad

faith.

Now, modern trusts generally give lots of dispositive power totrustees. This, however, can lead to complaints about thedisposition. A person can challenge the exercise of a power in twoways:

1. By alleging that the trustee exceeded its power, 27 or2. By alleging a breach of the duty of loyalty. Every trustee

owes a duty of loyalty, as do many non-trustees.

The duty of loyalty means the duty to act in the beneficiariesinterests rather than your own. The common law describes thisduty in terms of actions trustees must not do: no-conflict and no-profit rules. The trustee may be on both sides of the same

transaction and therefore, the trustee must approach thetransaction cautiously.

These are characteristic features of the common law on trusts,because they are so strict. The duty of loyalty, Professor Smithdescribes, comprises a duty to act with the right motive. This doesnot concern the outcome, but about the process: was thedecision made with loyalty?28

This issue concerns how the trustee should act, not whether thetrustee should act [see standard of care, below].

27 Recall, a power to dispose to children does not allow disposition to anephew. Otherwise, it would be a breach of trust.


39/96

Consider to X in trust for A for life, then to B absolutely. A is theincome beneficiary and the object of the power of encroachment ofthe capital. The trustee has authorization to treat A and Bunequally. The trustee is supposed to be motivated by the purposeof the power.

The court, for example, examines motive in Fox[even if there wasno conflict in this case]. This is an example of judicial review of anadministrative action. The court will not concede that the decisionwas wrong because this decision does not belong to the judge; thejudge can whether the mother exceeded her jurisdiction bymaking her decision in the wrong way.

This case is unusual, because the courts are deferential to theappointor. The process of decision-making in this case was poor.

Fox v. Fox Estate (1996) OCAFacts: The testator left his wife as trustee of his estate, with thepower of encroachment on the capital. The testators son marriedto a gentile and his mother exercised the power in favour of hergrandchildren.Issues: Did the trustee exercise her discretion beyond the scope ofthe power given to her or in bad faith?Holding: The exercise was in bad faith.

Reasoning: Justice Galligan determined that concern for thewelfare of [the trustees] grandchildren would be a propermotive toencroach on their behalf. However, Galligan found that this was

not the motive.

The court will not intervene unless it is clear that [the trustee] wouldnot have acted as he did had he not taken into accountconsiderations which he should have not taken into account [and

28


40/96

vice-versa].

Disapproval of her sons re-marriage was an extraneousconsideration to the motive of advancing her grandchilds interest.Disapproval of a marriage outside of ones religious belief cannot

justify the exercise of a trustees discretion.

Admittedly, the testator could have barred his son from taking alegacy. He did not.

Rationale: A court may interfere with the exercise of a trusteesdiscretion, when that exercise is based upon considerationsthat are completely extraneous to the trustees duties.

Duties of Trustees

Trustees have some principal duties: the duty of loyalty, to actimpartially among the beneficiaries, to account and provideinformation, to avoid conflicts of interest, to preserve the safety ofthe trust property, and to enhance its value.

Upon appointment the trustees must: Ascertain the terms of the trust, Acquaint themselves with the state of the trust property, Invest in accordance with the trust instrument and empowering

statutes, Ensure proper custody of the trust property, Ensure that there were no breaches of trust prior.

Trustees may also delegate certain responsibilities if:

It is expressly authorized by statute,

The trustee is not required to act personally, It is necessary, and It is common business practice.

Duty of Care

The trustee owes three duties to the beneficiary:a) Duty of Loyalty (fiduciary duty) duty to act with the right

motive and to avoid conflicts of interestb) Duty to Follow the Terms of the Trust strict liabilityc) Duty of Care, Skill, and Diligence reasonableness


41/96

A court can excuse a trustee who acted honestly and reasonably,by looking at the totality of the circumstances.

If a trustee is not sure how to act, the trustee can consult a lawyer,an accountant, or a court (to answer questions of law).

If the trustee chooses to delegate, the trustee is still responsible asthe principal. The trustee must choose a delegate by taking thesame care (as discussed below in Wright).

The court must consider a two-part test:

1. Was the trustee allowed to make the investment (strict

liability standard)?2. Did the trustee breach the standard of care when it made

the investment?

Traditionally, the courts did not allow investments that wererisky/hazardous. Legislatures then scheduled statutory lists, whichallowed for safe shareholding.

During the 1970s, many people considered this to be too restrictive.Perhaps we should not judge investments in abstracto. We mustjudge the risk against the rewards as well as the goals that peoplehave set.

Now, under the prudent man standard, any property is subject toinvestment via a trust. The standard of care also is phrased in thestandard of the prudent man. The trustee must consider thereasonableness of the risk and the possibility of a return.

The court must now consider the whole portfolio to considerwhether the trustee has breached the standard of care.

Re Wright (1976) Ont. HCJFacts: The testator died leaving a large estate. Some of the shares

had not performed well and the trust company wanted to sell. Noneof the income beneficiaries wanted to sell at the offered price. Thedeed read: my Trustees shall have regard for the security of thecapital and shall make investment with such security in mind ratherthan with the object of securing larger interest at risk of lesssecurity.Issues: Should the court advise the trustees not to sell?


42/96

Holding: No.

Reasoning: Justice Craig determined that the trustees were givenequal power [discretion] to sell and to retain. Therefore, thetrustees can decide what is in the best interest of the beneficiaries,

and the deed does not state a preference: only that they do notassume too much risk.

This is where powers and duties make an important distinction.If the trustee as the duty to sell, but the power to keep, thetrustee should sell if there is no good reason to keep (and vice-versa).

In Re Fulford, the court held that the trustees will not be liable ifthey honestly and with due care exercise the discretion vested inthem. In this case, the trustees acted prudently and in the bestinterests of the beneficiaries.

Rationale: Even if the beneficiaries do not concur with thetrustees decision, the trustee is free of liability if it actsotherwise, but in the best interests of the beneficiaries.

Fales v. Canadian Permanent Trust Co. (1977) SCC29

Facts: The testator left shares of a drilling company to his wife, theplaintiff, (in life interest) and children (in absolute interest) in aprofitable company. The plaintiff and CPT were trustees. Theplaintiff and other shareholders were approached by Inspiration Ltd.,which proposed an exchange of shares in the drilling company forpreferred shares in Inspiration. Inspiration did not have a good

profit/loss record. The plaintiff accepted. Inspiration went intobankruptcy and the shares became worthless. CPT made twosuggestions to the plaintiff to sell.

Issues: Did CPT fail to meet the standard of care?Holding: Yes.

Reasoning: Justice Dickson stated that the standard of care is that

of a man of ordinary prudence in managing his own affairs[regardless of whether the trustee is a professional or not]. A

29 Note: breach of trust may involve negligent misrepresentation as well.


43/96

trustee must be alert to changes in the value of the trust property. Itdoes not mean that the trustee must act hastily to sell, but rather, itmust act prudently and consider the options.

Dickson explained that the trust officers in charge of this estate

never attempted to market the shares, or consult others about thedecline in value. CPT never felt a sense of urgency, even thoughthe shares represented 60 percent of the estate. The firm neveranalysed the trends, nor did it make suitable recommendations tothe beneficiaries.

Rationale: Failure to pay attention to the seriousness of adecline in value of a large portion of the trust property may

constitute a breach of trust.Speight v. Gaunt (1883) House of LordsFacts: The testator left a large estate to his friend as trustee in trustfor the testators widow and children. The trustee had no specialinvestment knowledge. The trustee gave 15 000 to a stockbroker,who never bought the stocks and took the money.Issues: Is the trustee liable for breach of trust?Holding: No.

Reasoning: Lord Blackburn stated that a trustee is entitled todelegate to stockbroker and advance the capital to him, since it isthe usual course of business. The trustee took appropriate care,and he could not be blamed because the stockbroker wasdishonest. There was nothing to signal that there was a risk that themoney would be stolen.

Rationale: If a trustee takes appropriate care in delegating aresponsibility, the trustee will not be liable if the delegate isdishonest.Learoyd v. Whiteley (1887) House of LordsFacts: The testator directed his trustees to invest 5000 in realsecurities. The trustees employed local appraisers to advise themof an investment in a mortgage for the development of a brickyard.

The business failed and the trust suffered a loss.Issues: Are the trustees liable for the loss?Holding: Yes.


44/96

Reasoning: Lord Watson explained that the trustees must staywithin the terms of the trust. Although a trustee often will employthe advice of a third party/professional, it is up to the trustee toassume responsibility for the decision.

Although the trustees asked their solicitor to inquire into therespectability of the company, the trustees received no information.The trustees who chose to invest must accept the risk that theirdecision was imprudent because they failed to exercise ordinarycare by inquiring into the business.

Rationale: A trustee cannot blindly rely upon the advice of a

third party professional, without exercising ordinary care bymaking appropriate inquiries into the risk of the investment.

The investment in Learoydwas a safe investment; however, thetrustees did not meet the standard of care by not asking enoughquestions into the operation of the enterprise that used the land.

Re Smith (1971) Ont. HCJFacts: The settlor created a trust, which left shares in Imperial Oil tohis son, subject to a condition that he pay a quarter of the annualincome to his mother (the settlors wife). When the son reached theage of majority, he transferred a quarter of the shares to the trusteeand directed that the income be paid to her. The income, however,was inadequate for the mother, and she wanted to sell the shares.The son did not.

Issues: Should the trustees sell the shares?Holding: Yes. The court found that the trustees had not beenimpartial (they favoured the son) and the court replaced them.

Reasoning: Justice Keith stated that the income from the sharesdid not represent a good return given that other safe investments inthe market were giving a higher yield. The only reason why thetrustees appeared to have retained the shares is that the son

wanted to keep them (presumably because he would get the shareswhen his mother died).

Rationale: The trustee must consider the interests of all of thebeneficiaries including the life and absolute beneficiaries to


45/96

determine how to invest the funds [hold an even hand].

The shares in this case paid a very low dividend and it wasinadequate for the income beneficiary. This creates a tensionbetween beneficiaries, because their interests are opposed.

Trustees must keep accounts and be ready to present thoseaccounts.30

Additional Notes:

Consider the following example of a PERCENTAGE TRUST.Every year A gets 5% of the value of the capital. Now, the

beneficiaries will not care how the fund is invested. The incomebeneficiary benefits even if the capital rises. Even if the investmentgenerates a lot of income, the income beneficiary gets 5% only.The Income Tax Act, however, does not allow trustees todistinguish between capital and income.

Duty to AccountTrustee beneficiaries can demand the documentation that pertain tothe administration of the trust. In principle, the trustees are entitledto this information, because the information belongs to them.However, the trustees are allowed to make decisions regarding theadministration, without giving reasons as to why unless the courtorders the disclosure of that decision.31

The information issue poses a problem with discretionary trusts,since no one trustee has any certain interest. For objects of powersof appointment, they have no proprietary interest in the trustproperty. Now we say that a proprietary interest in the trust isneither necessary nor sufficient.

Schmidt v. Rosewood Trusts Limited (2003) HLFacts: Schmidt claimed that the trustees had frustrated his efforts

to find out information about the trust investment.Issues: Does a beneficiary have a proprietary interest in theinformation?

30 This is not the same of accounting for profit which is a remedy thatrequires a defendant to give up its gain.31 If a beneficiary sues a trustee, they may be entitled to information (thatwould otherwise be confidential) by discovery.


46/96

Holding: No; however, the trustee may get certain information byway of the court.

Reasoning: Lord Walker held that trustees can make theirallocations in confidence for discretionary trusts. Disclosure may

have to be limited. The court holds a supervisory function, such thatit can balance the largess of the interest with the informationrequested by the trustee.

Rationale: A beneficiary can apply to the court for disclosure ofinformation in a trust.

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________


47/96

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________

______________________________________________________


48/96

ALTERATIONANDTERMINATIONOFTRUSTS

Termination by the Terms

Once the trustee pays all of the trust property, the trust expires (i.e.

once all of the capital clauses have be activated).

Termination by the Settlor (Dispositive Power of Revocation)

Generally, the settlor cannot revoke a trust unless he maintains thepower of revocation. This can pose problems, namely negative taximplications and evidentiary difficulties to show that intention wascertain.

Note: the power of revocation applies only to trusts during the life ofthe settlor. To determine whether the trust is an inter vivos trust,the court will consider the intention of the trustee and the time atwhich trust property vests in the trustee. Recall, that a trust isconstituted when the three certainties are present, with capacity,and with constitution of the trust.

Termination by the Beneficiaries

1. The rule in Saunders v. Vautierstipulates that thebeneficiaries who are sui juris and whose interests are vestedcan terminate the trust and distribute the property.32 Thebeneficiaries, collectively, can terminate the trust even if it iscontrary to the wishes of the settlor.

2. The beneficiaries must all be ascertained and together, theirinterests account for all the interests in the trust property. Thisincludes gift overs. The court cannot consent on the behalf ofbeneficiaries that are not sui juris.33

32Sui juris means that the beneficiaries are of majority and of full mentalcapacity.

33 A contingency (condition subsequent or determining event) will notnecessarily postpone the implementation of the rule. The drafter caninclude the word and his issue to limit the possibility of a Saunderstermination.


49/96

3. Objects of power have to agree as well. 34

4. Application to the court is not required.

5. Beneficiaries cannot vary the trust (see Brockbank).

The trustees can decide for themselves as to how they want todivide the property. This can conflict with the purpose ofcreating the trust; however, historically, trusts were created tohold property for the benefit of male heirs before they reached21 to avoid payment of relief to mesne lord.

Why is this so? The beneficiaries are the equitable owners and theproperty belongs to them, even if there is a condition precedent.Once a person is capacitated, the court will leave the property forthem to administer for itself.

Note: even if there is a gift over, if the beneficiary has a power ofappointment, it can appoint himself and then apply the rule inSaunders v. Vautier.35

We can equate the right of sui juris beneficiaries withownership; however, this type of ownership is under thediscretionary supervision of the court and the administrationof another.

Consider the following example: A has the power to appoint thecapital during As lifetime to anyone. B takes in default of the

exercise (gift over). A can terminate alone, because A can appointthe capital to itself (Barford v. Street). We do not consider A asthe beneficiary alone, but as the donee of a power.

34 Powers held in a fiduciary capacity cannot be released unless expresslyauthorized. Therefore, if they cannot release those powers (i.e. to appoint),the settlor may avoid Saunders. These people may not get anything, butmust still consent to the termination. A settlor can insert a gift over, withbeneficiaries that are minors or unascertained.

35 In Re McCrossan, the settlor made a voluntary settlement in favour ofher and her husband for life, and then in favour of herself for life with thepower of appointment via will. After her husbands death, she applied toterminate the trust. She had not exercised the power; she released it andthus could claim. Justice Verchere considered whether any other potentialbeneficiaries would have a claim to the trust property. There is no gift overand the settlor is alive to exercise the rule.


50/96

Consider this example: A has the power to appoint the capital bywill; B takes in default. A might direct the capital into As estate. Agenerally cannot encroach on the capital, because unlike Barford,A cannot exercise the power in the immediate.

Variation of the Trust

A trust instrument may grant discretionary power to trustees thepower to vary the trust subject to public order rules (see Fox v.Fox Estate above).

UnderSaunders, the beneficiaries have the power to vary it;

however, the trustees must consent to the variation. This results ina new trust.

The courts ability to vary a trust is limited to certain situations byvirtue of the common law: When the applicant asks the court to convert realty into

personalty for a minors benefit, When a dispute requires settlement, Emergencies that threaten the existence of the trust, and Maintenance (by taking capital to convert to income for

beneficiaries who need it, but are not yet entitled).

However, statutes have expanded the powers of the courts to allowvariations of management or administration [for example, if thetrustee wants more time before it has to sell property].

The Alberta Trustee Act has even abolished the rule inSaunders v. Vautier, since the court must approve variations orterminations of trusts unless the trust instrument saysotherwise.

The statutes give the power to the courts to consent to anarrangement to vary the trust on behalf of non-sui juris

beneficiaries. The authors of the Blue Book add that all sui jurisbeneficiaries must still consent and that the court will not consent ontheir behalf.

The trustees will present the arrangement (or the variation) withaffidavit evidence. The court will supply the consent for the non sui


51/96

juris beneficiaries, only if it is for their benefit. The Public Guardianand Trustee will act on behalf of minor and unborn beneficiaries.

The following case, Re Irving, illustrates that the court will considerwhole arrangements and will approve or disapprove accordingly.

Re Irving (1975) Ont. HCJFacts:

At the time of the litigation, Edith was 59, and her children were 27and 28. Each of Ediths children had an infant child. The trust gavethe trustees no power of variation. The affected classes are as

follows:

a) Those who are alive and who may ultimately take,b) Those who are unborn and who may ultimately take,c) Persons who are unascertained and who may take, andd) Persons subject to Ediths discretionary power.

Justice Pennel determined that all of those groups wererepresented at the hearing.

Issues: Should the court accept one of the two arrangements putforth by the trustees to vary the trust?Holding: No.

Reasoning: Section 2(2) of the Trustee Act requires that the court

maintain the status quo unless the trustees can show increasedbenefit for the beneficiaries. Changes, Pennel says, work againstthe intention of the

Documents

305 Unknown Equity and Trusts 0