STEP Canada. Law of Trusts Tutorial #1: Ch 1-10

Transcription

1 STEP Canada Law of Trusts Tutorial #1: Ch Introduction: Kathleen Cunningham, B.Comm., LL.B., MTI, TEP 20 years in the trust industry Experience as a Trust Officer Leader of national team of lawyers supporting trust management and staff and providing estate and trust education to staff Former member of Trust Institute (now CSI) Curriculum committee on STI and MTI Past Chair STEP Canada Education Committee Past Chair STEP Vancouver 1

2 Outline Housekeeping Review key concepts Questions/Discussion Follow up 2 Have identified some key concepts from 1 st 10 chapters This is not a full review of material. Rather, it is a brief review of some of the most important and/or difficult concepts. Purpose of tutorial: To ensure students have started to study. All students should have at least completed the first 10 chapters by now. To allow you to ask questions for which you have not been able to find answers To hear other s questions Tutorial slides are offered to reinforce concepts and provide a trigger for questions

3 Preparation for Exam Open book Application, not memorization Review rules Materials to study: Binder Review Questions for comprehension (online) Supplementary Materials to practice application (online) CRITICAL TO PREPARATION! A word on sample exam questions 3 This is your first course. The exam is open book. Therefore it asks you to apply the knowledge. Sample questions give you examples of how this is done. For example, rather than asking students to Briefly explain the rule in Saunders v Vautier and provide an example students would be given a scenario and the question might be: Can this trust be terminated? Why or why not? Your answer would need to take a position, set out the basic rule, and then walk through the facts that lead you to the conclusion. Materials: Examinable content is found in the binder you received. See Student Resources for the following: Examinable Content lists the sections of each chapter that are examinable. Review Questions these are to assist you in your study. Close your materials and answer without referring back. This helps you assess your recall. Supplementary Questions these have two purposes: a) offer a way to see examples of the rules being applied b) provides an opportunity to practice the analytical approach required on the exam. Sample Exam is found here. Post tutorial notes from prior sessions Access the site as follows: bl b / / d / l / d

4 Course Chapters 1: Introduction 2: Classification 3: Creation: 3 Certainties 4: Creation: Constitution 5: Creation: Formalities 6: Creation: Legal & Public Policy Constraints 4

5 Course Chapters 7: Termination and Variation 8: Using the Express Trust 9: Non-Charitable Purpose Trusts 10: Charitable Purpose Trusts 5

6 Today s Topics Three Certainties (c 3) Legal Constraints Perpetuities Rule and Accumulations (c 6) Questions submitted Secret Trusts; Perpetuities Variation of Trusts & Termination (c 7) Charitable purposes (or not) and the court s cy-pres power (c 9 and 10) 6 These are the topics I ve selected Only one student submitted questions. They pertained to c 6. Will address these here. General comment: The first 10 chapters are primarily concerned with creating a valid trust. Chapter 7 deals variation and termination. Chapter 8 reviews how trust s are used. Some of the discussion refers back to these rules. The trust professional needs to be ever vigilant when drafting or administering a trust. If any of the rules discussed today applies (or is not complied with), there may be no trust. The trustee who administers a trust that is not valid will be distributing assets to the wrong people and significant liability can arise. Some examples: trusts that put off distribution dates or direct the trustee to hold the income until a far off time these can violate the perpetuities rules, or accumulation rules. including conditions to avoid the possibility of early termination under Saunders v Vautier. not paying sufficient attention to the three certainties creating a purpose trust that is not a charitable purpose trust This issue is revisited in c 18 on Drafting trusts

7 Three Certainties Intention Objects Subject matter 7 The materials set out 5 requirements to create a trust: Capacity of settlor 3 certainties Constitution Formalities Avoiding legal and public policy constraints These are the 3 certainties. Without one, there is no trust.

8 How is intention conveyed? What words do courts look for? Other considerations? 8 Trusts can be created through actions and words. For purposes of most TEP practices, we are dealing with express trusts Students should be able to recognize trusts that arise that are not in writing. Will cover more in next set of chapters Intention: Ideally the words in trust or on trust are used. BUT, words are not enough. The settlor must have true intent to create a trust which means there is a transfer to a trustee who holds and manages the property (subject matter) for the beneficiary(ies) (objects). Words such as it is my wish that, or it is my hope are precatory and are not sufficient to establish a trust. The importance of having true intent, and not just using the right words, is well illustrated in the 2010 decision of the Federal Court of Appeal has made it clear that even if a document says in trust, the court can look at surrounding circumstances. (Antle v Canada 2010 DTC 5172 FCA) (see also Jan 2011 STEP Inside). In that case there settlor had no intention of relinquishing control, documents were not executed in a timely matter and there were issues about the timing of the transfer of the assets (subject matter). Note: The case is not yet in student materials.

9 Remainder of the test What is an object? What is subject matter? 9 Objects are the beneficiaries or purposes for which the trust has been created. If objects cannot be identified, then the trust will fail. Subject matter is the property that the trustee is to hold. Again, there must be property in order to create the trust. That is why some trusts are settled with a gold coin or $10 or $100. The trust document can authorize the trustee to accept assets in the future, but if there is nothing transferred, there will not be a trust.

10 What are the consequences? If the 3 certainties are not met you DO NOT HAVE A TRUST! So then what? 10 The trust never existed, so everything goes back to the settlor (or the estate)

11 Secret & Semi Secret Trusts Materials are in context of Wills. General rules: The settlor/donor communicates terms of trust to trustee/donee Donee accepts the trust obligation The communication of the terms must be timely Secret Trust (only the donee knows): communicate any time before donor s death Semi-secret Trust (donor indicates donee holds on trust but terms unknown) Communicate before or at time of making the will 11 Skipping: c 4 Constitution Trustee must have title and transfer it c 5 Formalities Settlor must comply with formalities But, Question was received about secret trusts. Quick review: Note this is in context of making a will Because the secret or semi secret trust does not meet formalities of making a will (or incorporating by reference a document), some rules have evolved Communication and acceptance are critical components Timing of it depends on the type of trust

12 Secret & Semi Secret Trusts Question from student: Rules on preceding slide seem inconsistent with statement on page th last line in 2 nd last paragraph. Response: p 71 must be an error. Please note edit in notes below 12 I do not have access to the case online. The materials suggest the court found that the gift was to Hnidan, and therefore, it seems the words on p 71 should say: the terms could be communicated to Hnidan until the death of Mrs Pellek. See discussion in ch 8 at page 115 and see also Waters Law of Trusts in Canada 3 rd ed at p 274 Communication of the terms of the secret trust must be before death. This is because there must be both communication and acceptance. This makes sense since it is up to the testator to communicate the terms before death. If this is done, but the donee does not accept the terms, the will can be revoked, or a codicil done to identify another donee. The text goes on to discuss semi secret trusts. In those cases, it must be before making the will, or at the time of making the will. This makes sense because the will indicates a gift is made to a donee on trust, The testator needs to know the donee has accepted the terms. Jankowski v. Pelek Estate Source:Manitoba Court of AppealDate: Docket:AI Availability in reports This decision is not available on CanLII yet. It is available in the following reports: Dominion Law Reports:131 D.L.R. (4th) 717Western Weekly Reports:[1996] 2 W.W.R. 457Manitoba Reports:107 Man. R. (2d) 167

13 Legal Constraints (c 6) Public Policy & Uncertain Conditions Conditions contrary to Public Policy Consequences: Beneficiary takes as if there is no condition Beneficiary does not take Review beneficial interests Vested (beneficiary is entitled now, or in future Vested subject to divestment (beneficiary is entitled now, or in future, but if/when a condition occurs, may lose entitlement) Contingent (beneficiary is entitled only if a condition occurs) Condition precedent (condition must be satisfied for gift to be made/trust to arise) Condition subsequent (if/when the condition occurs, a trust ends or other instruction applies); Nature of interest, type of condition, and public policy rule at issue will affect whether a beneficiary takes the gift 13 See discussion and footnotes about conditions precedent and conditions subsequent on p 75 and C 1 C III 1 (page 9) P 76 briefly reviews consequences it depends on the legal analysis. Students should be aware of the different scenarios reviewed and be able to recognize the types of conditions, and come to a conclusion on similar types of facts. P 81 provides a similar analysis for uncertain conditions

14 Legal Constraints cont d (c 6) Trusts that defraud creditors Fraudulent Preferences & Conveyances (prov) Bankruptcy Act Note your professional obligations 14 See discussion and footnotes about conditions precedent and conditions subsequent on p 75 and C 1 C III 1 (beginning page 9)

15 Legal Constraints Rule against perpetuities. Why so difficult? Must think about what might happen And ignore probabilities and likelihood Can require complex contortions Know your province s saving rule if there is one 15

16 Perpetuities The Rule Only applies to contingent interests Do not apply vested interests that are only delayed Common law rule (NS, NB, PEI, Nfld) At the outset, it must be clear whether a contingent interest MUST vest within the perpetuity period As stated in text p 84: An interest is valid if it must vest, if it is going to vest at all, within [the period] The period is: lives in being at date instrument takes effect + 21 years Or Statutory modification 16 Note: Saskatchewan s new Trustee Act that came into force in 2010 repeals rules against perpetuities (s. 58). Manitoba also repealed the rule. Statutory modifications: Ont, BC, AB, Territories Keep the rule, but do not make determination at the beginning. Wait and see. Sample language: Ontario Perpetuities Act has a number of provisions to help avoid the rule applying. The general wait and see language found in Alberta and BC is found below: (see c p9/latest/rso 1990 c p9.html ) Presumption of validity and Wait and See 4.(1)Every contingent interest in property that is capable of vesting within or beyond the perpetuity period is presumptively valid until actual events establish, (a) that the interest is incapable of vesting within the perpetuity period, in which case the interest, unless validated by the application of section 8 or 9, shall be treated as void or declared to be void; or (b) that the interest is incapable of vesting beyond the perpetuity period, in which case the interest shall be treated as valid or declared to be valid. BC adds an 80 year alternative test, and has other provisions to help avoid the rule (see c 358/latest/rsbc 1996 c 358.html) AB also has a number of provisions. (see c p 5/latest/rsa 2000 c p 5.html) NOTE: See also Student Resources area Jul follow up notes.

17 Example: Johan s will Think out of the box Johan s will provides: Residue on trust for my daughter Maria. Pay income or capital for her benefit until her death (fully discretionary) On Maria s death, pay residue to her children when the youngest reaches age 30. If any of Maria s children die before attaining 30, pay that child s share to the child s issue per stirpes Johan dies. At the time of death Maria has one child, Tom, age 2 At the time of Johan s death, it is possible that: Maria will have another child (example: she may have a daughter in 2 years. Call her Anna) It is also possible, that one year after Anna is born, Maria and Tom could die in a car accident when Anna is only 2 years old. (or each could die for different reasons, but before Anna is 28) Apply the rule: At the time Johan died, the lives in being were Maria and Tom. Therefore, if the possible scenario above unfolded, Anna s gift must vest before she turn 23. This is not possible, so the gift fails under the rule. In Manitoba and Saskatchewan this is no longer a problem. In BC, Alberta, Ontario, the determination is not made until the lives in being are deceased. At that time, determine whether there are any contingent interests, and if so, will they vest within 21 years? Also consider the many other options for avoiding the rule. In most cases, people live full lives, and this trust would not have a problem. 17 Comments: Note: class gifts are one way that perpetuity rules can arise. This scenario involved a gift to Maria s children. A simple example of a possibility was created. But the class could be much larger and then the analysis can become more challenging. It is complicated by the class closing rules. While outside the scope of this course, students should be aware that there are a series of rules that say when the class closes. E.g. for Johan s will, are grandchildren determined at his date of death or at Maria s date of death? Do all children alive when the youngest turns 30 take, or do they still have to be alive when the youngest turns 30? As you can see, far more complicated scenarios can arise and there can be other dates that might apply. These rules could become relevant in a perpetuities analysis. The point for this course is that assumptions should not be made. Question at session: Original text did not include a gift over. It is not an easy set of facts to walk through. As originally worded, the gift appears to be vested, or vested subject to divestment. In that case, the gift isn t contingent, so the perpetuities rule wouldn t apply. And, trying to invoke Saunders v Vautier into the analysis (outside of Alberta and Manitoba) is not relevant to the analysis. But see termination of trust for Saunders v Vautier generally.

18 Accumulations The general concern: There are rules in legislation which limit the accumulation of income in a trust. Only Manitoba &, since Jan 2010, Sask have abolished the rules Review materials for your provincial rules When a rule applies: Income can be accumulated for a period, but after that it MUST be distributed If the trust does not provide for the distribution after the accumulation period expires, then the income has no object or beneficiary, the gift fails and it results back to the settlor or estate 18 Each province has its own rules. Materials provide overview. Key point to watch when drafting or administering a trust: when income is being accumulated on direction of the trust document, determine whether or not and when the rules apply, and when they apply, determine where the income earned going forward should be paid. General note: If any part of a trust fails (e.g. where the income is to be paid or who is receive capital), the failed gift results back to the settlor for an inter vivos trust (or the settlor s estate if deceased), and to the estate if it is a testamentary estate. Usually testamentary trusts are trusts of residue. When a gift of residue fails, the gift must be distributed as if there was an intestacy. However, if the trust was created from assets set aside to create a trust fund, and before the residue is dealt with, the failure of the gift means the gift falls back into residue and the relevant provisions of the will govern. While failure of gifts is a subject for the third TEP Diploma course, it is useful for students to be aware that there are rules which will apply when part or all of a trust fails to provide for certain situations.

19 Termination: Termination & Variation Common law: Saunders v Vautier Manitoba/Alberta Saunders v Vautier Requirements: ALL beneficial interests must consent Alberta/Manitoba restrictions Variation: legislation Requirements 19 Typo to correct: p 99 Copies out Ontario legislation. Item (d) should end before the end of the 3 rd line. It should say: (d) failed or determined, any arrangement by whomever. Termination of a trust can occur by: terms of the trust (on the happening of an event; at trustee discretion; etc) revocation by settlor (if right of revocation was retained) invoking the common law rule known as the rule in Saunders v Vautier not available in Alberta or Manitoba (see Variation) Saunders v Vautier (S v. V) a) All beneficiaries, vested and contingent, must agree b) All beneficiaries must be legally capable (age and mental capacity) c) then they can call on trustee to wind up trust and distribute Trustee concerns: a) are beneficiaries correct in their determination of all the beneficial interests b) tax consequences (likely more of a concern for beneficiaries, but the instructions could trigger certain tax results on final T3 return. Variation of a trust may occur by: trust may allow certain terms to be varied trustee or beneficiaries may apply to court to vary, or if Saunders v Vautier does not apply, to wind up court s role: Approve on behalf of those who cannot. Students should know the list

20 Charitable Purposes Definitions Why does it matter? Non-charitable purpose trusts Consequences Exceptions 20 Someone must be able to enforce a trust. This is normally done by the beneficiaries. If the trust is for a purpose, there is no one to enforce it. The law allows charitable purpose trusts. It does not allow non charitable purpose trusts. Case law has identified 3 exceptions: erection of a monument at a gravesite maintenance of a gravesite care of specific animals In addition, Ontario, Alberta, BC, and the territories have provisions in their perpetuities legislation addressing the validity of non charitable purpose trusts. Generally: If a purpose is not charitable, see c 10, an exception must apply or the trust is not valid.

21 Charitable Purposes Charitable Purpose Trust requires: Exclusivededication for charitable purposes that provides public benefit Charitable Purposes: 4 categories ( heads of Charity) Cy-Pres (saving provision) Gifts to charities, charitable purpose trusts Sometimes classified as a way to vary a trust 21 First: There must be an exclusive dedication to charitable purposes that provides a public benefit (p 147) public cannot be restricted (p 148) 4 heads or categories of charitable purposes (see material for examples) 1. relief of poverty 2. advancement of religion 3. advancement of education 4. other purposes beneficial to the community Note: political purposes are not permitted Warning: #4 is not as broad as some might think. See examples and limits p Exclusivity requires review of settlor/testator charitable intent Court scheme making power: Were there is charitable intent, but clarification is needed Cy pres power a) Court must decide (not the trustee/executor) b) Is not a way to improve the terms. Changing terms is a variation. c) Where charitable purpose trust fails because impossible or impractical to carry out i) establish charitable intent (if failed/impractical before trust was constituted) ii) then court can substitute a charity or purpose

22 Questions? Send follow up questions until Monday 22 Quick and/or clarifications will be answered within a week. Others will be addressed at next session.

23 Reminders: Next Tutorial Review supplementary materials Review exam rules Send in questions Do not underestimate the exam! Prepare for next tutorial 23 The remaining chapters deal with trust administration issues. Understanding administration issues is important to help ensure drafting anticipates those issues relevant to a client. It also puts the trustee s legal obligations and practical challenges into perspective. Note: Joint accounts are a controversial subject for many reasons. Please pay particular attention to chapter 16 on resulting trusts. Send your questions before the session. TEPs have an important role to play in ensuring the proper use of joint accounts.