Law of Trusts Online Course Content Applying the Concepts

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1 Law of Trusts Online Course Content Applying the Concepts Table of Contents Chapter 1 - An Introduction to the Law of Trusts 2 Chapter 2 - Classification of Trusts..5 Chapter 3 - The Creation of an Express Trust: Capacity and the Three Certainties.8 Chapter 4 - Creation of an Express Trust: Constitution..11 Chapter 5 - Creation of an Express Trust: Formalities...13 Chapter 6 - Creation of an Express Trust: Legal and Public Policy Constraints 17 Chapter 7 -Termination and Variation of the Trust 22 Chapter 8 - Using the Express Trust: Some Common Examples...28 Chapter 9 - Non-Charitable Purpose Trusts 34 Chapter 10 - Charitable Purpose Trusts..37 Chapter 11 - Duties of Trustees.. 41 Chapter 12 - Powers of Trustees.49 Chapter 13 - Appointment, Retirement, Death, Removal...60 Chapter 14 - Breach of Trust.. 65 Chapter 15 -Powers of Attorney Compared to Trust..69 Chapter 16 - Resulting Trusts..73 Chapter 17 - Constructive Trusts and Constructive Trustees.77 Chapter 18 - Drafting and Interpreting Trusts 79 Chapter 19 - A Note on the Trust in Quebec..81 Law of Trusts Online Course Content ` Page 1 of 82

2 Back to the Top Chapter 1 - An Introduction to the Law of Trusts Trust Concepts and Terminology: Provide a definition and example of an express trust Provide definitions and examples of resulting trusts and constructive trusts Explain key trust terms CHAPTER 1: AN INTRODUCTION TO THE LAW OF TRUSTS Examinable Content: This is an introductory chapter. Examinable content includes the trust concept (Part II) and definitions of common terms (Part III A-K). Part I is dealt with in more detail in subsequent chapters. You are expected to be able to identify the types of trusts in a given fact pattern and the terms explained from a fact pattern. The Part III J definition of grantor is provided to alert you to the fact that this word has many definitions and should therefore be used with care. Scenario: Consider the definitions provided in this chapter. Review the following scenario and identify the applicable concepts you have studied. If there is a trust, consider what type of trust it is and what interest the different parties may have in it. Hector has transferred his investment account at ABC Investment Dealers into his brother s name (Calvin). He then explained to Calvin what he had done by writing the following: Calvin, I have transferred my ABC Investment Dealer account into your name. Please invest the money wisely for my daughter Julianna. While she is growing up, you may use the income from the account to help pay for her schooling and medical needs as you determine is appropriate. When she turns age of majority, pay her the income. You may also use the capital to pay for post secondary tuition and other school expenses. When she turns 25, transfer the remainder of the account to her. If she does not reach the age of 25, please divide the fund in half and pay one half to the Canadian Cancer Society. Continue to hold the second half and apply the annual income to fund post-secondary scholarships to worthy students in the sciences. Law of Trusts Online Course Content ` Page 2 of 82

3 Signed: July 15, 2009 Hector Lam Questions: 1. Is this a trust? Why or why not? 2. Assuming this is a trust: a. What is Hector? b. What is Calvin? c. What is Julianna? d. What kind of interest does Julianna have? e. What is the Canadian Cancer Society? f. What kind of interest does the Canadian Cancer Society have? g. What kind of trust is it? h. Who has legal title? i. Who has beneficial title? 3. If Calvin ends up holding the assets to fund scholarships, is it a valid trust? Why or why not? Discussion: 1. Yes, this is a trust. See the definition of a trust in Part II. Generally, a trust relationship has been established where Hector has instructed Calvin to hold personal property (the subject matter) being the investments, for Julianna s benefit. Calvin has legal title but is under an equitable obligation to deal with this property, separate from his own, for Julianna s benefit. Julianna does not own the property, but can enforce the obligation. The trust instrument is the letter to Calvin. It is informal in words and format, but it clearly establishes an intention that Calvin is to hold the assets on trust, even though the specific words hold on trust are not used. On its face it appears to be an express trust. 2. See the definitions in Chapter 1, Part III. In this scenario: a. Hector is the settlor. b. Calvin is the trustee c. Julianna is the beneficiary, or object of the trust (or cestui que trust). Law of Trusts Online Course Content ` Page 3 of 82

4 d. Julianna s interest is vested. She is entitled to enjoyment of the property now, subject to the discretion that Calvin has over how much and when she will receive funds. One might also say her interest is vested subject to divestment because the entire fund will be hers, but only if she survives to the age of 25. e. The Canadian Cancer Society is also a beneficiary. Its interest is contingent since it will only take if Julianna doesn t survive to age 25 and at the time of her death funds remain in trust. f. This is an inter vivos trust because it was settled by Hector during his lifetime. Note: it is also a discretionary trust because Calvin has the power to decide if funds should be paid to or for Julianna and how much. Once she turns age of majority, Julianna has a fixed interest in the income earned. But she only has a discretionary interest in the capital until she turns 25. g. Calvin has the legal title to the assets, but Julianna has the equitable title. Calvin is not able to use the assets for himself but Julianna cannot control how they are dealt with. She can only take action to have the courts enforce the trust obligations against Calvin. 3. If Calvin ends up holding the assets to fund scholarships, on its face, it is a valid trust. Although there are no defined persons or companies as beneficiaries or objects, there is a defined purpose. Chapters 9 and 10 look at trusts for purposes. In order to be valid, subject to a few exceptions, a trust for purposes must be for charitable purposes. Law of Trusts Online Course Content ` Page 4 of 82

5 Back to the Top Chapter 2 - Classification of Trusts Trust Classification: Identify methods to classify trusts Describe & distinguish trusts within different classification systems CHAPTER 2: CLASSIFICATION OF TRUSTS Examinable Content: This is another introductory chapter. The concepts set out in Part II are fundamental to understanding and discussing the law of trusts. An awareness of the other classification schemes and the vocabulary is important. For exam purposes, you are responsible for Part II, and in particular the definitions provided. You are also expected to be able to classify trusts presented in a given fact pattern and to compare or distinguish the concepts at each level of the classification scheme set out in Part II. Scenario: Consider the example in Chapter 1 as modified below. Using the classification scheme set out in Chapter 2, Part II identify the types of trust(s) Hector has now created. Calvin, I have transferred my ABC Investment Dealer account into your name. Please invest the money wisely for my daughters Julianna and Mary as follows: 1. Maintain two funds one for Mary and one for Julianna. 2. Pay the income from Mary s fund to Mary for her life. On Mary s death, hold the fund and apply the annual income to fund post secondary scholarships to worthy students in the arts. 3. While Julianna is growing up, you may use the income from the account to help pay for her schooling and medical needs as you determine is appropriate. When she turns age of majority, pay her the income. You may also use the capital to pay for post secondary tuition and other school expenses. When she turns 25, transfer the remainder of the account to her. If she does not reach the age of 25, please divide the fund in half. Hold the first half and apply the annual income to help support the annual antique car show in my hometown. Signed: July 15, 2009 Hector Lam Law of Trusts Online Course Content ` Page 5 of 82

6 Questions: 1. What kinds of trusts has Hector created if you classify them based on how they are created? 2. What kinds of trusts has Hector created if you classify them based on the object of the trust? 3. What kinds of trusts has Hector created if you classify them based on Hector s status? 4. What kinds of trusts has Hector created if you classify them based on Calvin s discretion? 5. What kinds of trusts Hector created if you classify them based on the trust purpose? Can you divide the purposes? 6. Are there any trusts arising by operation of law? 7. Consider the classification schemes in Part III and the terms in Part IV. Do any of these concepts apply? Discussion: 1. Based on the method of creation, Hector has created a number of express trusts in one document. Although the language does not use the word in trust, Hector s intention, as noted in Chapter 1, is clear. Calvin will have legal title, but there are obligations imposed on him to look after the assets for others. 2. Based on the objects of each trust, Hector has created trusts for persons (Julianna and Mary) and trusts for purposes (funding scholarships and supporting the annual antique car show). 3. Hector is living so these trusts are inter vivos trusts (sometimes called living trusts ). Hector could have included similar provisions in his will and then the trusts would have been testamentary trusts. 4. If one classifies the trusts based on the powers given to Calvin as trustee, there is a fixed interest trust for Mary and a discretionary trust for Julianna. Note: Another common trust arrangement might be to create one trust for Mary and Julianna and give Calvin discretion on how much income to pay to Mary and Julianna, and to give Calvin power to pay out capital for one or both for broad Law of Trusts Online Course Content ` Page 6 of 82

7 purposes or limited purposes. This would have been a fully discretionary trust because neither has any fixed entitlement. 5. If classified by purpose, the trusts for Mary and Julianna are trusts for persons. The other two trusts are trusts for purposes. On their face, the trust for scholarships is a charitable purpose trust and the trust for the antique car show is a non-charitable purpose. 6. Hector s document fails to tell Calvin what to do with the second half of Julianna s trust if she is not alive to take the remaining assets. Because it is an inter vivos trust and Hector has failed to deal with it, the assets in this one half would result back to Hector. If he has passed away, they would go to his estate. Calvin would hold the assets until returned to Hector or his legal representative, on a resulting trust, a trust arising by operation of law. 7. Finally, the trusts for Mary and Julianna could be classified as private trusts. The trusts for the scholarships and the antique car show might be considered public trusts. Note on spendthrift and protective trusts, and discretionary trusts: Without further information it is not appropriate to consider the trusts for Mary or Julianna as protective or spendthrift trusts. Neither trust contains specific provisions to address potential bankruptcies. However, some consider discretionary trusts to be a form of spendthrift trust since the trustee is not compelled to make payments. Law of Trusts Online Course Content ` Page 7 of 82

8 Back to the Top Chapter 3 - The Creation of an Express Trust: Capacity and the Three Certainties Creation of an Express Trust Explain the elements required to create a valid express trust Identify legal and statutory constraints when creating express trusts Analyze a scenario to determine if a trust has been created CHAPTERS 3-6: CREATION OF AN EXPRESS TRUST C 3: CAPACITY & 3 CERTAINTIES C 4: CONSTITUTION C 5: FORMALITIES C 6: LEGAL & PUBLIC POLICY CONSTRAINTS Examinable Content: This chapter is fundamental. You are expected to appreciate the nature of the relevant factors and identify and explain potential problems regarding the validity of a trust but are not expected to be able to make legal determinations as to validity. The Online Course Content will guide you as to the knowledge expectations for exam purposes. Scenario: Consider the example in Chapter 2 once again and as amended below. Note also that Mary has been physically and intellectually disabled since birth. Consider the five requirements for a valid express trust. Have they been met? Explain your answer. Calvin, I have transferred my ABC Investment Dealer account into your name. Please invest the money wisely for my daughters Julianna and Mary as follows: 1. Maintain two funds, one for Mary and one for Julianna. 2. Pay the income from Mary s fund to Mary for her life. On Mary s death, hold the fund. 3. While Julianna is growing up, you may use the income from the account to help pay for her schooling and medical needs as you determine is appropriate. When she turns age of majority, pay her the income. You may also use the capital to pay for post secondary tuition and other school expenses. When she turns 25, transfer the remainder of the account to her. If she does not reach the age of 25, hold the funds and apply the annual Law of Trusts Online Course Content ` Page 8 of 82

9 income to antique car shows. Signed: July 15, 2009 Hector Lam Discussion: The five requirements for a valid express trust are: 1. Settlor capacity: On its face, there is no suggestion that Hector lacks capacity to understand what he is doing or transfer the assets to Calvin. A comment on capacity: Had there been a suggestion that Hector had diminished capacity (e.g. was in early stages of dementia) one would need to investigate further to confirm he did have legal capacity to establish the trust. Allegations that someone lacks capacity can occur for example, when parents establish trusts rather than writing a will that leaves funds and assets outright to the children. The trust might be inter vivos or testamentary (in the will). The children may even question the motivation of the professional advisors to their parent. The lawyer responsible for drafting the trust has a professional responsibility to ensure that their client has capacity to establish a trust or write a will. The client must fully appreciate the nature and effect of what is being done. When there is any doubt, or family members may oppose the creation of a trust when they learn of its existence, extra care should be taken to document the circumstances in order to prevent a future challenge. Charitable remainder trusts (see Chapter 10) are an example of inter vivos trusts that are vulnerable to such concerns. 2. The Three Certainties : a. Certainty of intention: Although Hector did not indicate that Calvin was to be the trustee, or that he would hold the assets in the account on trust, the words of the document clearly impose obligations on Calvin. No precatory words (expressions of wishes or desires ) about Calvin s actions have been included. b. Certainty of subject matter: One can assume for purposes of this example that the ABC Investment Dealer account is a real account with assets in it. Therefore, the subject matter of the trust is certain. If however, the information suggests that the account did not exist or had another name, there could be confusion as to whether or not Hector had actually identified the assets that Calvin was responsible for. It is also clear what interest the beneficiaries have. E.g. Mary is entitled to the income from her trust. Julianna is entitled to income after age of majority but income and capital can be used at Calvin s discretion for different purposes depending on her age. Law of Trusts Online Course Content ` Page 9 of 82

10 c. Certainty of objects: Hector has established a number of trusts and the objects include persons (Mary and Julianna) and if Julianna doesn t survive, there is a trust for a purpose. Two problems arise at this stage however: Mary s trust: Hector has simply instructed Calvin to hold the fund on Mary s death. Therefore, this trust will fail at this point, and will result back to Hector if he is alive. If he has passed away, the assets will fall back to his estate. Julianna s trust: If Julianna doesn t survive, Hector has instructed Calvin to apply the annual income to antique car shows. This appears to be for a purpose, and on its face, it may be invalid. Before determining whether or not the purpose is charitable or not, one must determine whether or not this purpose is conceptually certain. [See chapter 9 for more information on this point.] Comment: This example is offered to remind you that one cannot and should not make assumptions about facts placed before them. Rather, it is important to recognize the potential for uncertainty and appreciate the need for clarity of intention. For purposes of the question, you are asked to recognize the legal principles that may govern the situation. 3. Constitution: It is not clear from the information provided whether or not Hector has actually taken the necessary steps to transfer the account to Calvin. If there are any underlying share certificates in Hector s name, further steps might be required. You may wish to revisit this question upon completion of Chapter Formalities: This is an inter vivos transfer. No land is involved. No further formalities are required. You may wish to revisit this question upon completion of Chapter 5. Practical issues: Hector appears to want two separate funds or trusts. Calvin may need to divide the assets into two separate accounts. Note that it is possible for one trust instrument to establish more than one trust for legal and tax purposes. This becomes relevant when the trustee accounts to the beneficiaries (Chapter 11) and for tax purposes, a subject that is beyond the scope of this course. 5. Public Policy: On its face, there is no purpose that appears to be contrary to public policy. You may wish to revisit this question upon completion of Chapter 6. Law of Trusts Online Course Content ` Page 10 of 82

11 Back to the Top Chapter 4 - Creation of an Express Trust: Constitution Creation of an Express Trust Explain the elements required to create a valid express trust Identify legal and statutory constraints when creating express trusts Analyze a scenario to determine if a trust has been created CHAPTERS 3-6: CREATION OF AN EXPRESS TRUST C 3: CAPACITY & 3 CERTAINTIES C 4: CONSTITUTION C 5: FORMALITIES C 6: LEGAL & PUBLIC POLICY CONSTRAINTS Examinable Content: The concepts in this chapter are important to appreciate. For exam purposes, content is limited to Part I, III A, III B, V, VI. You are expected to be able to apply these concepts to a given fact pattern and comment on whether or not the trust has been constituted. Scenario: Consider further the example in Chapter 3. Has Hector constituted the trust(s)? What evidence would you need to answer the question? What questions might you ask? Discussion: Critical to constituting a trust is the settlor s title to the assets that are intended to form the subject matter of the trust. Therefore, one must establish that Hector was the legal owner of the investment account at ABC Investment Dealers and had legal authority to transfer it. Facts that could complicate whether or not Hector had legal authority to transfer the account, and which would require further investigation are: 1. Was he a joint owner of the account? 2. Was it a margin account and was there an outstanding loan from the investment dealer secured against the assets? 3. Whether Hector has granted any other charges or encumbrances over the account which might have limited his ability to deal freely with the assets? Law of Trusts Online Course Content ` Page 11 of 82

12 Calvin will also need to be able to gain control over the assets so that he can manage them. Typically, this is not a problem with an investment account. The investment dealer will require evidence of Calvin s authority (the trust document) and identification. Calvin would normally be able to assume control of the management of the account and the payments out of it. A comment on trust instruments: It is at this point that one might begin to question whether or not a third party will accept the document that Hector has prepared. While it may be valid at law, third parties such as financial institutions will be hesitant to rely on it if there is any question about its validity as an express trust. Practical considerations: In order for Hector to transfer legal title to Calvin, he will need to follow the legal requirements to effectively transfer ownership of the account to Calvin. ABC Investment Dealer will have its own procedures and requirements in order to complete that transfer for its purposes. It will be a relatively straightforward process if the assets are held in a nominee name on a book based system. However, if the account holds any assets in certificate form, further steps will be required to reregister the investments into Calvin s name. Calvin may have to also divide the assets equally between two accounts in order to manage the two separate trusts with different terms and beneficiaries. Further considerations: Had Hector tried to establish the trusts by declaring himself a trustee of the funds, additional steps might be required to avoid any question of his intention to establish each trust. In addition to preparing a written document or declaration of trust, he might change the name of the account. As noted, there are two trusts, so one might be called Mary s Trust and the other Julianna s Trust. His subsequent actions should also reflect the terms of the trust. For example, payments can only be to or for the beneficiary. If Hector failed to transfer the account to Calvin, or died before providing instructions to ABC Investment Dealers, the trust would not be constituted. It is not likely that Calvin, and/or the beneficiaries, would be able to require Hector, or his executor, to complete the trust. Law of Trusts Online Course Content ` Page 12 of 82

13 Back to the Top Chapter 5 - Creation of an Express Trust: Formalities Creation of an Express Trust Explain the elements required to create a valid express trust Identify legal and statutory constraints when creating express trusts Analyze a scenario to determine if a trust has been created CHAPTERS 3-6: CREATION OF AN EXPRESS TRUST C 3: CAPACITY & 3 CERTAINTIES C 4: CONSTITUTION C 5: FORMALITIES C 6: LEGAL & PUBLIC POLICY CONSTRAINTS Examinable Content: While you need to appreciate the background provided in Part I, the examinable content for this chapter is limited to Part II A, B and C. You are responsible for the applicable rules for making a valid will in your province and for knowing whether or not a holograph will is valid in your province and the necessary requirements. See your applicable provincial Wills Act (Succession Law Reform Act in Ontario; Probate Act in PEI). (The legislation and applicable provisions are footnoted in the course text and Online Course Content.) You are also responsible for being able to recognize factors that indicate that a secret and semi-secret trust might exist (Part II D and Part III) and to identify potential questions to be addressed. As with Chapter 4, you are expected to be able to apply these concepts to a given fact pattern and comment on whether or not the trust has been constituted. Scenarios: Two scenarios are provided below for consideration. Refer to the text for further examples. You should become familiar with the flowchart at the end of the chapter as it provides a framework for analyzing whether the formalities for creating a trust have been met. You should also review the appendices for examples of secret and semi-secret trusts. A word on valid testamentary trusts, i.e. the requirements for creating a valid will under provincial legislation: BC, PEI and Nova Scotia do not recognize holograph wills. Nova Scotia s legislation recognizing holograph wills made in that province came into force in August BC, PEI Law of Trusts Online Course Content ` Page 13 of 82

14 and Nova Scotia (until August 2008) will recognize a holograph will that deals with personal property in certain circumstances (see next paragraph), but a will that purports to deal with land in these provinces must be prepared in compliance with applicable provincial legislation. In BC and PEI, holograph wills are generally accepted to deal with personal property if the testator was domiciled in a jurisdiction that recognizes holograph wills, or at the time of making the will, the testator was resident in that jurisdiction, or the will is made in that jurisdiction. This is an area of the law that is undergoing some reform so be cautious whenever dealing with holograph wills. For example, reforms have been proposed in some jurisdictions which, if passed, would make it possible to apply to have wills declared to be valid even if the will was not executed in accordance with the statutory formalities. This subject is dealt with in more detail in the Wills, Administration of Trusts & Estates course. Scenario #1: Consider the following scenario and comment on whether or not Marcus has established a valid testamentary trust. The document is typed. He has signed it. (For purposes of the question you can assume that the two organizations are valid charitable organizations in Canada.) Marcus lives alone. His wife has passed away and he has two sons who he rarely sees. He owns the house he lives in worth approximately $300,000 and he has $200,000 in investments. He makes the following will: I, Marcus Franklin, declare this to be my last will and testament. I appoint my neighbour Melissa Jamieson to be my executrix. I direct my executrix to collect and sell my assets. I further direct her to pay my debts and then pay the following legacies: a) $100,000 to each of my sons b) $200,000 to Melissa Jamieson for being my executrix and a good neighbour, and c) Hold the balance on trust for the Vancouver Foundation and Sick Children s Hospital in Toronto and pay the annual income equally to them. Signed this 10 th day of January Marcus Franklin Witness: Jimmie Lee Law of Trusts Online Course Content ` Page 14 of 82

15 Discussion Scenario #1: The will only has one witness. Therefore it does not comply with provincial legislation and is invalid, so the formalities for creation of the trust have not been met. See Chapter 5, Part II A, B, C. In provinces that recognize holograph wills, one must look at the rules for a valid holograph will. Since the will is typed, it is not in Marcus handwriting so it is still unlikely to be valid. Scenario #2: Nicco is registered as the holder of the legal title to certain lands in your province or territory. He entered into a contract with Adam under which Adam agreed to make a payment to Nicco in exchange for Nicco holding his legal title to the land in trust for Adam s son Corry. Questions - Scenario #2: 1. Is some written document required for the creation of the trust pursuant to the contract? 2. Does the contract itself have to be in writing? Discussion Scenario #2: 1. The answer is similar for all the common law provinces except Manitoba where the Statute of Frauds has been repealed. In order to enforce the contract, and therefore enforce Nicco s promise under the contract to create a trust, either a. the contract itself must be in writing signed either by the person against whom the contract is being enforced or by that person s agent; or b. there must be some memorandum or note in writing that identifies the contract and it is signed by the person against whom the contract is being enforced or by that person s agent. In British Columbia, although the Statute of Frauds has been repealed, section 59 of the Law and Equity Act still requires that contracts involving dispositions of an interest in land meet a writing requirement consistent with that set out above. Law of Trusts Online Course Content ` Page 15 of 82

16 2. The contract itself does not have to be in writing. Instead, as noted in 1. above, it is sufficient that there be some memorandum or note in writing that identifies the contract and it is signed by the person against whom the contract is being enforced or by that person s agent. See Chapter 5, Part I. Law of Trusts Online Course Content ` Page 16 of 82

17 Back to the Top Chapter 6 - Creation of an Express Trust: Legal and Public Policy Constraints Creation of an Express Trust Explain the elements required to create a valid express trust Identify legal and statutory constraints when creating express trusts Analyze a scenario to determine if a trust has been created CHAPTERS 3-6: CREATION OF AN EXPRESS TRUST C 3: CAPACITY & 3 CERTAINTIES C 4: CONSTITUTION C 5: FORMALITIES C 6: LEGAL & PUBLIC POLICY CONSTRAINTS Examinable Content: You are responsible for the concepts set out in this chapter and should be able to identify facts in a scenario that suggest a trust is contrary to public policy or is for non-charitable purposes. You should also be able to recognize that a perpetuity or accumulation problem may exist. You should be able to briefly explain the rule as it applies to a specific scenario and explain the consequences if one of the rules applies. You are encouraged to identify the applicable perpetuity and accumulation rules in your province but the details are not specifically examinable. Scenarios: A series of scenarios is set out below. Consider the trust provisions described in each. Identify and briefly explain why a legal or public policy constraint may cause the contemplated trust to fail. Scenario #1: Jake established a trust for his granddaughter. The terms are to hold the funds on trust and pay the income to his granddaughter Anna for her life. If she marries John Smith, then pay the capital of the trust to the Canadian Red Cross. Law of Trusts Online Course Content ` Page 17 of 82

18 Discussion - Scenario #1: This trust establishes a condition subsequent. Anna receives income but if she marries John Smith, her entitlement ends. It may be a provision that restrains Anna s ability to marry and if so, it may be contrary to public policy. Because is it a condition subsequent, the court would ignore the condition and her entitlement to the income could be enforced. See Chapter 6, Part II A, B, C, D 1. Scenario #2: Natasha established a testamentary trust in her will. She died two months ago. The executor and trustee is directed to hold a rental property, an apartment building owned by Natasha, on trust. If Natasha s daughter Bianca divorces Paolo, the trustee is to pay Bianca the net income for life. On Bianca s death, the trustee is to distribute the remainder of the trust fund to Bianca s children. If Bianca has no children, the capital is to be paid to the Canadian Cancer Foundation. Discussion - Scenario #2: Bianca s interest is subject to a condition precedent. However, the condition interferes with marital relations so it is likely to be contrary to public policy. Because the trust involves real property, the court may rule that the trust fails and Bianca will not be entitled to the income. See Chapter 6, Part II A, B, C, D 2. Scenario #3: Annie runs a successful marketing business as an unincorporated business. She owns the home that she and her husband Stefan purchased 2 years ago and a vacation property she inherited 15 years ago. She has also accumulated a $2 million investment portfolio. At Annie s encouragement, Stefan left his management position within the government to return to school to become a teacher, something he has always wanted to do. They have been married for 20 years. Stefan has his own portfolio worth about $1million. Annie s business has accumulated some large debts after some customers refused to pay recent invoices. If business does not pick up, she will not have the necessary cash flow to pay the line of credit at the bank. She is also concerned that the marriage is on shaky ground. She transfers the vacation property and her investment portfolio into a trust. The trustee is located in another province, the same province where the vacation property is located. She appointed a corporate trustee. Law of Trusts Online Course Content ` Page 18 of 82

19 Discussion - Scenario #3: If Annie is unable to pay the bank, the trust assets will not be protected if it can be proved that the assets were transferred to the trust with the intent to defraud Annie s creditors. If the marriage does fail, assuming that Stefan is entitled to a share of the assets acquired and accumulated during the marriage, he will also have a claim against assets in the trust. See Chapter 6, Part IV A. Scenario #4: David, age 50, died last month in a tragic car accident. He was recently divorced and had two children, Sam (age 22) and Jenny (age 25). His will provided for each child to receive $100,000 and for the remainder to be held on trust for his grandchildren. The trustee is directed to accumulate the income. The will provided that as each grandchild turns 25 the trustee is to set aside $100,000 in a separate trust for the grandchild if they are living a healthy lifestyle. The income is to be paid to that grandchild. When the grandchild turns 50 the trustee is to pay them $50,000. On the death of the grandchild, the trustee is to pay the capital remaining equally to those of David s great grandchildren then alive. At the time of death, David had no grandchildren. Discussion Scenario #4: This trust has three potential problems. 1. The condition that trust is to be established for a grandchild at age 25 if they are living a healthy lifestyle may require further interpretation. If a court cannot find evidence to define this requirement with any certainty, the condition is void. Because the condition is one to be satisfied before the trust can be established, the trust would likely fail. See Chapter 6, Part III A. 2. More facts are needed, but on its face, it is possible that the trust may violate the rule against perpetuities. Since no grandchildren are alive, it is possible that Sam and/or Jenny could have children, but die shortly thereafter. Since the first payment would not vest for more than 21 years after the death of the lives in being (Sam and Jenny), the common law rule against perpetuities applies unless saved by legislation in those provinces with wait and see legislation. In those provinces, the critical fact will be whether or not the grandchildren take their interests within 21 years of the last to die of Sam and Jenny. See Chapter 6, Part V. [Students in Manitoba should refer to their provincial rules.] 3. The trust requires that income be accumulated. The testator has not said what to do with income that accumulates longer than the perpetuity period. Therefore, all Law of Trusts Online Course Content ` Page 19 of 82

20 income that accumulates after the perpetuity period will fail. Because it is income from the residue of a trust, it will result back to the testator s estate. See Chapter 6, Part V D. Note: Since the will does not deal with this income, it would be distributed as if David died intestate. Based on the facts, Sam and Jenny, or their estates would share equally. You are not responsible for application of the intestacy rules to this scenario but the example is offered to illustrate the potential effects of a poorly drafted trust. Intestacy rules are covered in the course Wills, Trust & Estate Administration. Scenario #5: Each member of a group of ten adults with no apparent mental incapacity has given $100,000 to another person to be held in trust. The person who is to hold the funds in trust is instructed to pass the entire of the funds, together with accrued interest, to the member of the group who makes the most in his or her cockfighting and dogfighting operation in the one-year period specified in the trust instrument. Discussion - Scenario #5: The trust would not be valid. It encourages the ten persons who contributed funds to the trust to commit illegal betting and animal cruelty offences. These are criminal offences. The trust would thus be for an illegal purpose and would not be valid even though the ten members of the group appear to have legal capacity to transfer funds to the intended trustee, the three certainties appear to be met, the intended trust would be constituted (by the delivery of funds) and the trust need not meet formalities under the Statute of Frauds (since it does not involve an interest in land and is not an assignment of an equitable interest) or wills legislation (since the trust is inter vivos). See Chapter 6, Part I. Scenario #6: Gregory is a doctor. Gregory is concerned about liability that may arise from a potential malpractice suit that may not be fully covered by his insurance. He wants to put many of his assets in trust. He would be the primary beneficiary of the trust. However, his beneficial interest would come to an end if ever there was a medical malpractice judgment awarding damages against him that exceeded his insurance coverage. If that occurred the trustee would hold the assets on a discretionary trust in favour of members of Gregory s family. If Gregory proceeds with this plan is there any risk that the transfer of property to the trustee trust might later be found void? Explain why or why not. Law of Trusts Online Course Content ` Page 20 of 82

21 Discussion - Scenario #6: The proposed transfer of assets may later be found to be void under provincial or territorial fraudulent conveyances legislation or under the federal Bankruptcy and Insolvency Act. Fraudulent conveyances legislation provides that a disposition of property (such as the transfer of assets to a trustee to be held in trust) is void against creditors where it is made to delay, hinder or defraud creditors whose rights are delayed, hindered or defrauded by collusion, guile, malice, or fraudulent devices and practices. Further, under the federal Bankruptcy and Insolvency Act the transfer will be void as against the trustee in bankruptcy if Gregory becomes a bankrupt within one year of the transfer. See Chapter 6, Part IV. Law of Trusts Online Course Content ` Page 21 of 82

22 Back to the Top Chapter 7 -Termination and Variation of the Trust Termination & Variation of Trusts Identify the laws and rules that govern whether a trust can be terminated or varied Recognize when a trust can be terminated and the steps required to do so CHAPTER 7: TERMINATION & VARIATION OF Examinable Content: When one or more parties are not happy with the trust, questions about variation and termination may arise. The trust may not be meeting the objectives of the settlor, it may have tax problems, or beneficiaries may not like the trust provisions. It is important to appreciate if, and how, changes can be made. The legal and tax consequences, while beyond the scope of this course, are also important. The entire chapter is examinable. You are responsible for knowing whether or not Saunders v. Vautier applies in your province and the court s role in a variation of trust application under the relevant provincial legislation. You are also responsible for knowing the relevant sections of the Canadian Income Tax Act that may apply when the settlor retains a power of revocation and were discussed in the chapter. You are expected to be able to apply these concepts to a given fact pattern. The Online Course Content below will guide you as to the knowledge expectations for exam purposes. Scenarios: The following scenarios look at the subject of trusts from the perspective of a client. They focus on the consequences of establishing a trust but review potential future possibilities which should be explained and which the client can plan for when determining the provisions to include in the trust. These scenarios require you to consider the trust options available to meet the client s needs and identify the risks or considerations that should be addressed before deciding how to proceed. Law of Trusts Online Course Content ` Page 22 of 82

23 Scenario #1: Your client Amir Gupta would like to provide for his children and grandchildren. He has $1 million that he would like to set aside for them. He has heard about trusts but he is hesitant about handing over the control to a trustee. He has been told that he cannot be the trustee so he should select someone he trusts. Amir is only 65 so he wants to know if he can undo things if his situation changes or he doesn t like what the trustee is doing. His general objectives are to: provide for his two children Soraya and Aashish (age 43 and 45) ensure that there is money for his grandchildren. Soraya has 2 children (age 17 and 20) and Aashish has one child (age 22). Neither plans to have more children. Soraya and Aashish are both financially secure but some extra income would help with family holidays, special events and post secondary education. So, Amir wishes for the income to be paid to Soraya and Aashish equally each year. He only wants the capital to be used to provide for special medical needs for Soraya, Aashish and the grandchildren. He also wants to see the capital used to help pay for the post secondary education of his grandchildren. Amir wants the trust wound up when the last grandchild turns 35. He suggests that it will simply be divided equally among his children and grandchildren who are alive at that time. He wants to keep it simple. Discuss Amir s options. Identify two possible ways to set up the trust and identify the relevant considerations that should be reviewed with Amir before proceeding. Discussion Scenario #1: Amir s ideas raise a number of considerations. These include: Amir has indicated that he wants to be able to undo things if he changes his mind and/or things are not going as he wishes. Assuming this trust is established while he is living (an inter vivos trust), the trust instrument could provide that the trust is revocable. However, this has tax consequences for Amir that need to be reviewed. Briefly, all income, gains and losses will attribute back to him. Therefore, to the extent that any income splitting planning is contemplated, this option would be lost. This issue is reviewed in detail in the Taxation course. Amir has identified 5 beneficiaries. He does not want the trust to go on forever. It is possible to establish a trust today (inter vivos) or through his will (testamentary) that satisfies his objectives. However, he has also indicated that he only wants the funds used Law of Trusts Online Course Content ` Page 23 of 82

24 for specific purposes and he has set future dates for larger distributions. Unless Amir is in Alberta or Manitoba (or Quebec), once all of the grandchildren are adults (when the youngest turns 18 or 19 depending on the province), the rule in Saunders v. Vautier applies and the five beneficiaries could call for the trust to be wound up. The rule applies if all of the beneficiaries can agree. If one did not agree, the wind-up would not occur. In the exception provinces, an application to court would be required. Amir needs to decide how important it is to him to avoid the risk of an early wind-up. If he wishes to avoid the risk of this happening, he will need to provide for a gift over to a contingent beneficiary. This can be trickier than it seems at first blush. Amir might suggest a charity. However, the charity could also agree to the termination if the arrangement includes a payment to the charity as well as the other beneficiaries. Generally, the gift over or contingent gift needs to reference a class of people such that the membership in the class cannot be determined in advance of the distribution date. Scenario #2: Eva is 51 years old and of sound mind. She has three children - Daniel, age 17, Nancy, age 19, and Sandra, age 23. Sandra is in her first year of a PhD program. She also recently gave birth to Eva s first grandchild. Eva has been paying for Sandra s post-secondary education. Nancy is in her first year of university and Eva is paying for her post-secondary education. Eva also plans to pay for Daniel s post-secondary education. Daniel, Nancy and Sandra have all done very well at school and are quite capable of managing their own affairs. Eva doesn t want to just give money to her children because she wants them to use it only for their education. She could pay for the educational expenses directly but she is concerned that they won t be paid if she dies or even if she is still alive but has become incapacitated for some reason. The following trust is proposed to provide for the education of Eva s children: Eva would transfer $1,000,000 to her close friend Katja to be held, according to the trust instrument, in trust to use the income to pay for the post-secondary education of the children until Daniel reaches age 30. If Daniel dies before reaching age 30 then the trust would come to an end when Nancy reaches age 30. If both Nancy and Daniel die before reaching age 30 the trust would come to an end when Sandra reaches age 30, or immediately if Sandra is already 30 years old at the time. If all three children die before reaching age 30 then the remaining capital in the trust is to go to Debbie, or Debbie s estate if Debbie is dead. Debbie is a 45 year old accountant who is of sound mind and who is also a close friend of Eva. Katja is a 46 year old financial planner and is also of sound mind. The trust instrument allows the trustee to draw on the income or the capital of the trust fund to pay for the postsecondary education of the children (Daniel, Nancy or Sandra). The trust instrument also permits Katja to accumulate income in years when the income of the fund is more than enough to pay for the post-secondary education of the children. When the last child reaches Law of Trusts Online Course Content ` Page 24 of 82

25 age 30 Katja is instructed to distribute the remaining capital equally between the three children. Questions Scenario #2: 1. Assuming a valid trust is created, and assuming the trustee performs the trust honestly and with due care, what risk is there that the trust will not accomplish its intended purpose of paying for the post-secondary education of the children? Explain why this risk arises. 2. Suggest one way in which the risk you identified above might be avoided. Explain why it would avoid the risk identified. Discussion Scenario #2: 1. The risk is that the trust may be terminated under the rule in Saunders v. Vautier forcing Katja to distribute the funds to the beneficiaries and therefore allowing the children to use the funds for something other than their education. That is a result Eva did not want since she did not want to just give the money to her children she did not want the money used for purposes other than the education of the children. The Law i.e. The Rule in Saunders v. Vautier The rule in Saunders v. Vautier is that: One or more beneficiaries, all of full legal capacity, and who is, or are collectively, entitled to all the beneficial interest in the trust may apply to have the trust terminated and the assets transferred even though the trust instrument calls for final payment to be delayed. The conditions for the operation of the rule are that the beneficiaries seeking to terminate the trust: (i) are all of full legal capacity; and (ii) have all the beneficial interest in the trust. A person has legal capacity if he is not a minor and if he is of sufficiently sound mind to appreciate the nature and effect of the transactions he is entering into. How the Rule Might Apply on These Facts All the Beneficiaries will Have Legal Capacity in two Years Time. The four beneficiaries are Daniel, Nancy, Sandra and Debbie. Daniel, Nancy, Sandra are of ages 17, 19, and 23. Debbie is age 45. Although Daniel is still a minor he will not be so in two years time (or in one year s time in some Canadian common law jurisdictions where the age of majority is 18 years of age). When Daniel reaches the Law of Trusts Online Course Content ` Page 25 of 82

26 age of majority none of the beneficiaries will be minors. The kids have all done well in school and are fully capable of managing their own affairs suggesting that they are of sufficiently sound mind to appreciate the nature and effect of the transaction they would be entering into. Debbie is of sound mind and is an accountant. She is therefore likely to be found of sufficiently sound mind to appreciate the nature and effect of the transactions she enters into. Therefore, once Daniel has reached the age of majority all the beneficiaries will have legal capacity. Daniel, Nancy, Sandra and Debbie have all the Beneficial Interest. Here Daniel, Nancy, Sandra and Debbie are the only beneficiaries since Daniel, Nancy and Sandra get income distributed to them for their education and they share in the capital unless they all die before age 30 in which case Debbie gets the remaining capital. Therefore Conditions for the Operation of the Rule are Satisfied The elements of the rule in Saunders v. Vautier are satisfied and Daniel, Nancy, Sandra and Debbie can wind up the trust. The kids could offer a side payment to Debbie to get her to join with them in winding up the trust. Notes: 1. This is the situation noted in Chapter 7 in which several concurrently interested beneficiaries (in this case Daniel, Nancy, Sandra and Debbie) who are all adult, of sound mind, and between them entitled to the whole beneficial interest may collectively compel transfer. 2. The answer is different for Manitoba and Alberta. It could be a modest difference or a significant difference depending on one s interpretation of the legislation in those provinces. The trustee acts in both those provinces have provisions doing away with the rule in Saunders v. Vautier. One might therefore say it is a big difference because the risk of the trust being terminated under that rule would not arise at all. However, both those statutes allow for an application to court to terminate the trust and indicate that the court can refuse to terminate the trust where the termination is not of justifiable character. The court could thus allow the termination. As a result, the risk might arise even though the rule in Saunders v. Vautier is itself abrogated by those statutes. The risk would not arise on these facts if the court found that a termination of trust that is inconsistent with the settlor s intention is not of justifiable character. That approach to the meaning of justifiable character was not taken in a Manitoba Court of Appeal decision. It said that the fact that a termination was inconsistent with the intention of the settlor was not sufficient to make the termination not of justifiable character. See Chapter 7, Part II A and B. Law of Trusts Online Course Content ` Page 26 of 82