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Equity - Henson Trusts

. Walters v. Walters

In Walters v. Walters (Ont CA, 2021) the Court of Appeal reviewed law on interpreting the intent of a testator, here in an absolute trust context:
[37] A testator’s intention is ascertained from a consideration of the will and the surrounding circumstances. The court puts itself in the position of the testator at the time the will was made: Trezzi v. Trezzi, 2019 ONCA 978, 150 O.R. (3d) 663, at para. 13, and Ross v. Canada Trust Company, 2021 ONCA 161, 458 D.L.R. (4th) 3, at paras. 35-41. This is known as the armchair principle.

[38] This appeal involves a discretionary trust. Such a trust arises “when property is vested in trustees and a class of beneficiaries or named persons appear as trust objects, but the trustees have complete discretion as to the payment of the income, or the capital, or both.”: D.W.M Waters, Mark R. Gillen & Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012), at p. 650.

[39] As emphasized in the jurisprudence and academic commentary, it is not for a court to simply substitute its discretion for that of a trustee clothed with a discretionary power. Put differently, the court may not intervene simply because it would not have come to the same decision itself: Re Gulbenkian's Settlement, (1968), [1970] A.C. 508, [1968] 3 All E.R. 785 (U.K.H.L.); McPhail v. Doulton (1970), [1971] A.C. 424, [1970] 2 All E.R. 228 (U.K.H.L.); Waters, at p. 989. However, as I will explain, the presence of a discretionary power does not mean that a court has no role to play.

[40] Although dealing with an executor, in Cowper-Smith v. Morgan, 2017 SCC 61, [2017] 2 S.C.R. 754, at para. 41, McLachlin C.J. stated that courts may interfere with an executor’s discretion where there is a breach of its fiduciary duty. Like executors, trustees are fiduciaries. That said, the question of the degree of control which the court can and should exercise over a trustee who holds an absolute discretion is filled with difficulty: Fox v. Fox Estate (1996), 1996 CanLII 779 (ON CA), 28 O.R. (3d) 496 (C.A.), leave to appeal refused, [1996] S.C.C.A. No. 241, at para. 11. Professor Donovan Waters described the dilemma in his treatise, Waters’ Law of Trusts in Canada, at pp. 985-87:
The settlor or testator may create a power which by its nature is discretionary, or he may add that it is to be exercised at the discretion or at the absolute and uncontrolled discretion of the trustees. In the latter situation, he is attempting to underline that he wishes no interference with the trustees, and, since the beneficiaries have no such power to intervene in any event, his meaning can only refer to the courts. Indeed, all trustee discretions involve the question of how far the courts are thereby excluded …. The creator of the trust … does not intend the court to make the discretionary decisions.

...

On the other hand, the principle of law is that no settlor or testator can take away from the courts their ultimate jurisdiction. There has to be a limit to the extent to which the court can be excluded.

...

[T]he courts are in a difficult position. The rule of behaviour required of trustees in the discharge of their duties is good faith and the care of the reasonable business person. Yet, as we have suggested, the conferment of discretion appears to make the trustees their own judges of what is reasonable. In attempting to uphold the court’s necessary jurisdiction on the one hand, and the trust creator’s intention on the other, different courts have described the extent of the court’s power of intervention in different ways.
[41] The traditional formulation of the law was anchored in the good faith requirement referenced by Professor Waters; a court would not interfere with the exercise of a trustee’s absolute discretion unless the trustee exercised that discretion with mala fides. This principle dates back to the House of Lords decision in Gisborne v. Gisborne (1877), 2 App. Cas. 300 (U.K.H.L.). This was the formulation used by this court in Fox in 1996.

[42] In Fox, Galligan J.A. reasoned that intervention based on mala fides had not always been limited to fraud but could extend to circumstances where the trustee’s decision was influenced by extraneous matters. At para. 12, he quoted with approval from Hunter Estate v. Holton (1992), 1992 CanLII 7735 (ON SC), 7 O.R. (3d) 372 (Gen. Div.), at p. 379:
Trustees must act in good faith and be fair as between beneficiaries in the exercise of their powers. There is no allegation of bad faith in the present case. A court should be reluctant to interfere with the exercise of the power of discretion by a trustee. I adopt the following criteria in [Re Hastings-Bass, [1975] 1 Ch. 25 (U.K.H.L.), at p. 41], as being applicable to the court’s review of the exercise of such power:
To sum up the preceding observations, in our judgment, where by the terms of a trust (as under section 32) a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended, unless (1) what he has achieved is unauthorized by the power conferred upon him, or (2) it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account, or (b) had he not failed to take into account considerations which he ought to have taken into account.
[43] The court in Fox decided that the trustee’s exercise of her discretionary power had been motivated, at least in part, by a factor that she ought not to have considered: her disapproval of the religion of the woman her son proposed to marry. This was considered to be an extraneous matter that justified the court’s intervention on the basis of mala fides, and accordingly, the trustee’s exercise of the power was set aside.

[44] In Edell v. Sitzer (2001), 2001 CanLII 27989 (ON SC), 55 O.R. (3d) 198 (S.C.), aff’d 2004 CanLII 654 (ON CA), 9 E.T.R. (3d) 1 (Ont. C.A.), leave to appeal refused, [2004] S.C.C.A. No. 372, at para. 159, noting that non-interference is still the general rule, Cullity J. said this about mala fides:
The grounds on which the court will strike down an attempt by a trustee to exercise discretionary powers – even where, as here, the discretion is intended [to] be as unfettered as possible – have been described in different terms over the years. The old approach that limited the court’s intervention to cases of "mala fides" has been reformulated in the more recent cases in terms of a concept of abuse of discretion .…[2]
[45] He also described this approach more fully in Banton v. Banton, (1998) 1998 CanLII 14926 (ON SC), 164 D.L.R. (4th) 176 (Ont. Gen. Div.), at p. 234.
It is established in this jurisdiction that, in the exercise of their powers, trustees must give careful consideration to the scope of the power and the purpose for which it has been conferred. The terms, and the purpose, of the power indicate the facts that are relevant to its exercise. If the trustees ignore relevant factors or give significant weight to irrelevant considerations, they will have abused their discretion and the purported exercise of the power will be set aside by the Court .… These principles flow from their fiduciary status as trustees and apply even where the power is expressed to be absolute or uncontrolled.[3]
[46] In that case, the trustees were provided with a discretionary power to encroach on capital for the maintenance and support of a beneficiary. They exercised their discretion and gave part of the trust capital to the beneficiary for two reasons: the beneficiary had expressed a desire for it, and in any event, the trustees considered that the capital belonged to him. Cullity J. intervened. He determined that the two reasons relied upon by the trustees constituted extraneous matters; instead, the trustees should have been considering whether the beneficiary required the capital for maintenance or support.

[47] The court’s approach in Canada to intervention with the exercise of a trustee’s discretionary power is described in Waters’ Law of Trusts in Canada at p. 989: “The court will intervene, however, if (1) the decision is so unreasonable that no honest or fair-dealing trustee could have come to that decision; (2) the trustees have taken into account considerations which are irrelevant to the discretionary decision they had to make; or (3) the trustees, in having done nothing, cannot show that they gave proper consideration to whether they ought to exercise the discretion.” See also Ghag v. Ghag, 2021 BCCA 106, 46 B.C.L.R. (6th) 351; and Corina S. Weigl, “Keeping Fiduciaries Fit: The Exercise of Discretion,” Canadian Bar Association of Ontario, Institute of Continuing Legal Education, The Outer Limits: Exploring Issues and Opportunities in Agency, Attorney and Trusteeship, January 28, 1999.[4]

[48] To sum up, court intervention into the exercise or failure to exercise a discretionary power flows from a trustee’s fiduciary status. The court may intervene even where the testator has conferred an absolute discretion on the trustee. Mala fides and improper consideration of extraneous matters are encompassed by this analytical framework. Applying this framework to this appeal, the focus of the appeal was the application judge’s intervention on the basis of the Trustees’ consideration of extraneous or irrelevant matters.
. S.A. v. Metro Vancouver Housing Corp.

In S.A. v. Metro Vancouver Housing Corp. (SCC, 2019) the Supreme Court of Canada heard a case that will be familiar to those on ODSP, extending across Canada something that Ontarians already have in the form of a 'Henson Trust'. Where a trust does not allow the beneficiary to access the trust funds unilaterally, then the trust is not an 'asset' as that term is generally used:
[2] .... The central feature of the Henson trust is that the trustee is given ultimate discretion with respect to payments out of the trust to the person with disabilities for whom the trust was settled, the effect being that the latter (a) cannot compel the former to make payments to him or her, and (b) is prevented from unilaterally collapsing the trust under the rule in Saunders v. Vautier (1841), Cr. & Ph. 240, 41 E.R. 482. Because the person with disabilities has no enforceable right to receive any property from the trustee of a Henson trust unless and until the trustee exercises his or her discretion in that person’s favour, the interest he or she has therein is not generally treated as an “asset” for the purposes of means-tested social assistance programs (D. W. M. Waters, M. R. Gillen and L. D. Smith, eds., Waters’ Law of Trusts in Canada (4th ed. 2012), at pp. 572-73). The Henson trust therefore makes it possible to set aside money or other valuable property for the benefit of a person with disabilities in a manner that jeopardizes that person’s entitlement to receive social benefits as little as possible.

....

(1) What is the Nature of S.A.’s Interest in the Trust?

[35] The Trust at issue in this case has the essential features of a Henson trust. The terms of the Trust do not confer any fixed entitlements on S.A., and instead provide the Trustees with ultimate discretion over any distributions that might be made out of the Trust’s income or capital for S.A.’s care, maintenance, education or benefit (art. 1(a)(iv)(A)). Importantly, they specifically provide that the Trustees, in exercising their discretion, can decide not to make any distributions to S.A. at all: art. 1(a)(iv)(B) requires that “any income not paid in any year” be added to the capital of the trust fund, and arts. 1(a)(iv)(C) and (D) — which specify how any amount that remains in the trust fund upon S.A.’s death is to be distributed — contemplate the possibility that S.A might not receive all, or even any, of the trust property.

[36] It is thus clear that, although the Trustees have an obligation to consider whether to make distributions out of the Trust for S.A.’s care and maintenance, they are not actually required to distribute any of the Trust’s assets either to her or for her benefit. Unlike the beneficiary of a fixed trust (i.e. a trust where the trustee has no discretion as to distributions to the beneficiaries), S.A. therefore does not have an enforceable right to receive anything unless and until the Trustees decide to exercise their discretion in her favour.

[37] I would pause at this point to note that S.A.’s status as co-trustee is irrelevant to the determination of the nature of her interest in the Trust. In this capacity, she is required to reach decisions unanimously with her co-trustee, and must exercise her discretion independently, in accordance with the terms of the Trust and in compliance with her fiduciary obligations.[1] Moreover, the terms of the Trust provide S.A. with the power to name a new co-trustee in the event that her sister is unwilling or unable to act in that capacity (which is distinct from her sister’s being unwilling to actually make distributions to S.A.) — and therefore make clear that this office cannot remain vacant: there must always be two trustees who exercise their discretion independently of one another (art. 1(a)(ii)). These limitations effectively prevent S.A. from unilaterally ordering payments out of the Trust to herself as she may please. Therefore, S.A. has no greater access to the Trust’s assets than does any person with an interest in a Henson trust who is not simultaneously a trustee thereof. For this reason, I would not attach any significance to S.A.’s status as a co-trustee (see: Chambers Judge’s Reasons, at paras. 47-48).

[38] Another key aspect of the Trust is that it is structured so that it cannot be unilaterally collapsed by S.A. under the rule in Saunders v. Vautier, according to which a beneficiary of a trust (or multiple beneficiaries acting jointly) can terminate the trust and demand that the trustee convey legal title over the corpus of the trust to him or her — but only if the beneficiary has capacity and is absolutely entitled to all the rights of beneficial ownership in the trust property (see: Buschau v. Rogers Communications Inc., 2006 SCC 28 (CanLII), [2006] 1 S.C.R. 973, at para. 21; Waters, Gillen and Smith, at pp. 1235-1236; A. H. Oosterhoff, R. Chambers and M. McInnes, Oosterhoff on Trusts: Text, Commentary and Materials (8th ed. 2014), at pp. 334-335). Analyzing this rule in the context of the present appeal, it is important to observe that under the terms of the Trust, any remainder of the trust fund must pass to some third party upon S.A.’s death: art. 1(a)(iv)(C) and art. 1(a)(iv)(D) specifically prohibit her from appointing either herself or her creditors as remainder beneficiaries. The effect of this “gift over” is that S.A.’s interest in the Trust is not absolute, and therefore prevents her from terminating the Trust on her own in accordance with the rule in Saunders v. Vautier (see: Stoor v. Stoor Estate, 2014 ONSC 5684 (CanLII), 5 E.T.R. (4th) 207, at paras. 7 and 51-52).

[39] The foregoing analysis makes two things clear. First, the terms of the Trust provide the Trustees with exclusive discretion as to whether payments should be made to S.A. While the Trustees must periodically consider whether distributions should be made, they are not obliged to exercise this discretion in any particular manner. Second, the structure of the Trust prevents S.A. from terminating the Trust on her own under the rule in Saunders v. Vautier. As a result, S.A. has no enforceable right to receive any of the Trust’s income or capital: unless and until the Trustees exercise their discretion in her favour, S.A.’s interest in the Trust is akin to a mere hope that some or all of its property will be distributed to her at some point in the future.

....

[54] With respect, I am of the view that the Chambers Judge’s understanding of S.A.’s interest in the Trust represents an error of law. As explained above, S.A.’s status as a co-trustee does not change the fact that under the terms of the Trust, she has no fixed entitlement to the assets settled therein, and is precluded from unilaterally collapsing the Trust for her benefit (see para. 39 of these reasons). Given that the Trust only provides her with what is essentially akin to a mere hope of receiving some or all of the property at some point in the future, the Chambers Judge’s conclusion that S.A.’s interest in the Trust is “more than a mere possibility” — such that it falls within the meaning of the word “assets” as used in the Assistance Application — cannot stand.


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