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Investment of trust property
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- Standard of care
- Abrogation of common law rules: anti-netting rules
- Delegation of authority with respect to investment
- Interpretation of trust instrument in relation to sections 15.1 to 15.5
- Corporate trustee not to invest trust money in own securities
Investment of trust property15.1 (1) A trustee may invest property in any form of property or security in which a prudent investor might invest, including a security issued by an investment fund as defined in theSecurities Act. (2) Subsection (1) does not authorize a trustee to invest in a manner that is inconsistent with the trust. (3) Without limiting subsection (1), a trustee may invest trust property in a common trust fund managed by a trust company, whether or not the trust company is a co-trustee.
Standard of care15.2 In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments. Trustee not liable if overall investment strategy is prudent15.3 A trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor would adopt under comparable circumstances. Abrogation of common law rules: anti-netting rules15.4 (1) The rule of general trust law that requires the assessment of the decisions of a trustee on an investment by investment basis if the decisions are called into question is abrogated. (2) The rule for the assessment of damages for breach of trust that prohibits losses from being off set by gains is abrogated except in respect of circumstances in which the breach is associated with dishonesty on the part of the trustee. Delegation of authority with respect to investment15.5 (1) In this section, "agent" means any person to whom a trustee delegates investment responsibility. (2) A trustee may delegate to an agent the degree of authority with respect to the investment of trust property that a prudent investor might delegate in accordance with ordinary business practice. (3) A trustee who delegates authority under subsection (2) must determine the investment objectives for the trust and exercise prudence in (a) selecting an agent, (b) establishing the terms and limits of the authority delegated, (c) acquainting the agent with the investment objectives, and (d) monitoring the performance of the agent to ensure compliance with the terms of the delegation. (4) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation. (5) A trustee who complies with the requirements of subsection (3) is not liable to the beneficiaries or to the trust for the decisions or actions of the agents to whom the function was delegated. (6) This section does not authorize a trustee to delegate authority under circumstances in which the trust requires the trustee to act personally. (7) Investment in an investment fund referred to in section 15.1 (1) or a common trust fund referred to in section 15.1 (3) is not a delegation of authority with respect to the investment of trust property.
Interpretation of trust instrument in relation to sections 15.1 to 15.515.6 For the purposes of sections 15.1 to 15.5 and any investment made after the coming into force of this section, if the terms of the instrument that created a trust express the powers of the trustee as powers to invest property of the trust in the investments permitted under section 15 as that section read at any time before its repeal, the instrument is to be interpreted as authorizing the investments permitted under sections 15.1 to 15.5, unless a particular investment would be expressly authorized or expressly prohibited by the terms of the instrument. Corporate trustee not to invest trust money in own securities17.1 Except as provided in section 15.1 (3), a corporation that is a trustee must not invest trust money in its own securities. Learoyd v Whiteley Facts: The widow Whiteley sued the executors of her husbands will for losing the money in her estate. They invested according to the will in real estate properties, both of which had mortgages that went belly up. The trustees had received investment reports which advised that these were good investments but the report turned out to be junk as well. Issue: What is the standard a trustee must adhere to while investing in order to avoid liability? Ratio: A trustee must exercise the ordinary prudence of a normal businessman with appropriate interest given to both the life and remainder interests. As trustee, the trustee must make such investments that are ordinary and prudent on behalf of the beneficiaries, in essence, avoiding overly risk or speculative investments that even an ordinary prudent businessman might take up. Analysis: While the courts found that proper due diligence was done in regards to the 4 freehold houses, the money advanced for the purchase of the brickhouse was far more than what the land was actually worth. Even though the report said it was a good investment, the courts found that not even a prudent business person would have acted so as to invest the 3k so invested. The HoL made sure to confirm that the standard was an ordinary standard and that the trustees should not be acting as a kind of insurance policy against bad decisions. Lastly, the trustees relied too heavily on the report and did not turn their mind at all to independent analysis of the risks. While there is always an element of risk, a trustee cannot simply delegate the entire choice to a report Holding: 3K suit. Critchley v Critchley Facts: Harriet Critchley applied to remove her brother John and step-mother Beryl as executors of her fathers estate. She wanted a bankruptcy trustee to take their place. She alleged that they failed to act as prudent investors would by reason of high risk investments and lack of diversification. In addition, they purchased trust property without her consent, dishonesty failed to provide accounting, tax returns and invested property without her consent as trustee. Both Harriett and John were insanely smart and well accomplished. John Sr. wanted investments made in Canadian Common and Preferred stock with residue to the wife and capital thereafter to the kids. A bunch of stuff happened with taxes, proportional ownership of a house, blah blah blah. John liquidated the stocks and invested heavily in high growth stocks but suffered tremendous losses. Issue: Should John be removed for his imprudent investing? What is the standard for an investor? Ratio: A trustee must invest trust poperty in the manner in which a prudent investor might invest. This is a higher standard than the reasonably prudent businessman. Analysis: An expert witness pointed out that “chasing performance” by “maximizing exposure to the hot sector of the market was not an appropriate strategy” as the investment was to be done on the behalf of beneficiaries, not John himself. Diversification, he said, was a necessity and not just one model strategy to choose from. While John Jr claimed he relied on a number of different investors and documents, he clearly made some boo-boos along the way. The judge found that he was capable of making prudent investments if given sound advice and did not remove him as a trustee, especially given the expert witness said that his overall success was “not bad”. He knew the family situation better than the proposed trustee and was uniquely well suited to maintain his role. Ultimately, the trustee must always follow the instructions of the trust document, but if those will lead to deterioration of the estate, the trustee should seek alteration from the courts. The trustees duty ultimately is to maintain the trust first and honour the settlors wishes second. Here, John was just a bit too haphazard in who he relied on and when he should have relied on him, as well as his investing had no real goals along with a too high risk level. Holding: Not removed Cowan v Scargill Facts: The national coal board had a huge pension fund which was controlled by 10 trustees. Five were from the Mineworkers Union and 5 were from the Coal Board itself. The Union wanted the pension fund to cease new overseas investment, gradually withdraw existing overseas investments and with dreaw investments from industries that competed with coal. The management demurred, pointing out that theyr job was to act in the best interest of beneficiaries (ie: pecuniary interest) and not to pass moral judgment Issue: When upholding the best interests of the beneficiaries, should any weight be given to non-pecuniary considerations? Ratio: Trustees must, except in rare cases, set aside their personal views and act in the financial best interests of the beneficiaries at all times. Only in rare circumstances wherein the group is tightly constrained may it be the case that the trustees will take moral or social views into account when representing the best interests of the beneficiaries Analysis: Considering this was a pension fund, it is important to note that financial interests are especially elevated in this case. Not only did a large group of mine workers not give a care about this kind of investing, but the pensioners who had already retired probably couldn’t care less. The court posited that there was an extremely high burden for the trustee to meet if they wanted to prove that the financial trade off was worth more than the moral one. Considering here that the benefits were incredibly speculative and remote in addition to effectively denying the trustees a large portion of the market and the ability to diversify, the courts weren’t interested in allowing them to mess around like this. Note: Ethical considerations can surely be taken into account, and may even be demanded by the beneficiaries. If it were the case that suitable investments were available that met the ethical standard, a trustee may not be breaching their duty in pursuing such investments Note Trustees may even have to act dishonourably (but not illegally) in pursuing the goals of their beneficiaries. Holding: Declaration of law with trustees to act accordingly, don’t want to overly curtail union investing activity, especially as trustees hadn’t been completely misbehaved up until this point. Harries v Church Commissioners of England Facts: The Church Commissioners managed assets worth approximately 2.6B. Their investment policy was such that financial return was key but they also kept proper social, ethical and environmental issues at heart such that they did not invest in firearms, gambling, alcohol, tobacco or newspapers (things the church usually isn’t big on). The Bishop of Oxford (Harries) sought a declaration that the trustees were obliged to promote the Christian faith in their investments and not to act in a manner incompatible with the faith. The bishop essentially wanted restrictions in place that would force the trustees to act “Christian”. Issues: How must trustees accommodate the ethical or social concerns of their beneficiaries? Ratio: Trustees may, if they wish, accommodate the views so long as it would not be in conflict with the objects of the charity and so long as in doing so there would not be a significant financial detriment. Analysis: Considering the trustees are holding the money in order to make money, the prima facie concern of the trust should be in generating capital (as will almost always be the case). The trustees actually implemented their ethical investment policy by avoiding South African countries and investments abhorrent to the Christian faith while still maintaining good results for the trust. Furthermore, the trustees had actually avoided economic loss by ignoring recommendations to not invest in companies that derive profits from South African companies, the effect of which would exclude 37% of their held securities as well as effectively shutting them out of the oil and chemical sectors of the UK equity market. To top it all off, the new recommended objects of the charity were stated with such generality as to be impracticable by the trustees. To actually acquiesce would be to “depart from their legal obligations”. Holding: Declarations refused Duty of Impartiality Howe v Lord Dartmouth Where a testator gives his or her residuary personal estate in trust for persons in succession without imposing a sale of the assets of the trust and the trust propery is comprised of wasting, unproductive, future or contingent property or unauthorized investments, the rule requires that those assets must be converted into authorized investments unless the testator intended that the assets were to remain unsold; and (Earl of Chesterfield Rule) Where such investments as should have been sold are not sold, the investments are treated as if they had been sold – that is, the life tenant is entitled to a fair equivalent of the income that he or she would have attained had the investments been sold The trust for the sale via conversion arises by implication should the criteria be met in a testamentary trust. Re Earl of Chesterfields Trust When an unauthorized property within the trust is converted at a later date, money received must be apportioned between income and capital as per the rules in this case You make a principal amount which if multiplied at 4% per annum would have yielded the sale price of the item the capital that goes to the remainderman with the balance going to the life estate If there is discretion to convert (a postponement provision), the life interest must gain some of the capital right away in order to make up for the commensurate loss of income By making them wait, they are losing the time value of the income. Failure to divest capital would in effect serve as an interest free loan. Note: Prolongued postponement will lead to a greater sum going to the life tenant Ex: sold for 200, capital at 50, 150 to life tenant if sold within commensurate year rates via 4% compounding interest. Lottman v Stanford Facts: The testator left a will which called for all of his estate to be converted but held a postponement clause for such time as prudent. The income went to his wife with capital encroachment available for medical issues. The remaindermen were his 4 children with a remainder right in equal shares. Most of the estate was made up of real property. The real property wasn’t sold and the widow wasn’t getting enough cash flow. Issue: Does the Howe v Lord Dartmouth rule compel the conversion of real estate? Ratio: No, it does not. Analysis: The Rule in Howe v Lord Dartmouth only compels conversion in the interest of being even-handed towards all relevant interests; there is no duty to convert at common law, only via trust instrument. As the rules originate in equity, the overarching concern beyond the testators desire is to see that equity is done between the parties. Here, the rule in H v LD viz personal property was one in long standing and the courts were loathe to enter into judicial legislation given the importance such a ruling would make for a number of current wills. Furthermore, the application was not borne under wills variations legislation, an avenue that allows the court to do justice between the parties. For whatever reasons, the courts did not find it inequitable to hold onto the property, partially because it wasn’t wasting and unproductive perhaps. Holding: Rule doesn’t apply to real estate Joseph v Joseph Estate Facts: Prior to his death, the testator and his investors group acquired a third mortgage on vacant land. At the time of his death it was in default. The estate valued the property at $0. A number of years later, the property was sold with the estate sharing proceeds of ~1.5M. The trustee allotted the new funds strictly to capital. The life beneficiary wanted funds but was denied and appealed. Issue: When the trustees acquired title to part of the land prior to selling it, did that count as the acquisition of a new asset that would be subject to the rule in H v LD? Ratio: (ONCA confirmed dissent of ONSC) – When a new asset is acquired, trustees have an obligation to treat all parties fairly. Analysis: When the trustees acquired the good title to the land for 50k worth of consideration, the effectively secured an asset that eventually generated a large value. Hetty was effectively denied the income that she should have received from the property for years and years and was entitled to the rule in H v LD as the property acquired was a chose in action (the mortgage back for the sale of the land) as well as the cash (~320k), not any real property. By allotting the sale proceeds directly into capital, it was also going against the will of the testator to provide for his wife (She did have provision but it was 2.5% of the net asset generation). The failure to ever convert (although done in a discretionary fashion) was rectified during the exchange, and Hetty was entitled to her portion that she had been waiting for all along. Holding: Hetty be ballin – 1.2M damn son. Miles v Vince Facts: The beneficiary of the trust was suing, claiming the trust property had been improvidently invested. She wanted the trustee removed due to the conflict of interest situation she was in. Vince Sr left two trusts to be administered by his sister. The original trust had shares in 3 companies (which owned properties at their company name) and the other trust had a 2M life insurance policy. Both trusts were discretionary with a wide breadth including capital encroachment. The sister trustee wanted to uphold her dads vision to develop property and used the life insurance fund 2M and invested it in the properties in the family trust. The result was that the widow was basically getting no income. Eventually, the family trust was indebted to the insurance trust for over the original 2M. Issue: When a trustee has broad discretion to invest, what duty of care is owed? What kinds of investments are prudent in instances such as these? Ratio: The trustee has to act as a prudent advisor regardless of what level of discretion they have. They must achieve a balance between the income and capital interests of the trusts. Analysis: Overriding a number of concerns here was the obvious fact that the life insurance policy and the trust established with its capital was explicitly designed to take care of the widow and was not doing its job. This was a breach of the duty in the most basic sense. As it pertains to investing, investing everything in a single, illiquid assets, regardless of the fact that it was eventually valued as such that it might make a profit is extremely imprudent especially given the need to generate income for the life interest. The trustee put herself in a position where she essentially took an interest free loan from her mom and was unable to call in the loan on her moms behalf at the risk of bankrupting the family trust which contained a number of overleveraged and under performing mortgages. Here it was necessary to remove the daughter from the insurance trust in favour of a new trustee who will probably call in the loan and bankrupt the project. Quote: By investing all of the trust property in the Loan, she put the trust property at risk, put herself in a conflict of interest and failed to act with an even hand among the beneficiaries. Her continuation as trustee jeopardizes the proper and efficient administration of the [insurance] trust. Holding: rekt and erect Re Carley Estate When considering a request to encroach on capital, the trustee must consider: The reasonableness of the request; Are there extenuating circumstances? The magnitude of the trust; and How much trust capital is there? What percentage is being removed? The intention of the settlor Did they make provision for pain/suffering/other capital outlays, would they have wanted to? Holding: Request would strip away too much capital. The effect would not be impartial nor would it create an equal balance between interests Re Floyd Fact: The testatory left his wife an annuity and gave his trustee the power to encroach on capital in their absolute discretion “in the case of illness, … nursing and medical expenses and for other expense of a similarly emergent nature”. The widow had asthma and asked for outlay to pay for rent in a Florida accommodation. The remaindermen didn’t claim mala fides but were clearly not happy with the capital outlay. Issue: When the trustees have large amounts of discretion, when can the court interfere with their decisions? Ratio: Courts can interfere when the trustee has improperly or unfairly ignored the rights of certain classes of beneficiaries or where the trustee has a power but refuses to exercise it. Analysis: On the facts, the widows health was clearly not optimal and the trustees did their due diligence in confirming this with both personal and professional evidence. The remaindermen complained that the rent paid was exhorbitant (which is rich considering they are bringing court actions), but given the large estate she had, it was fair for the widow to “live on a scale appropriate to her station in life”. If she is living it up on their dime, tough luck (these guys are so sympathetic). As this was an expense of a “similar emergent nature” and was well within the reasonable discretion of the trustee, the capital encroachment stood Holding: Rejected application. Waters v Toronto General Trusts Corp Facts: A company received authorization to issue 500k new preference shares by virtue of the ITA which allowed the company to distribute a large surplus. Approximately 240k were issued. Issue: Are the remaining shares or the proceeds of those shares redeemed to be regarded as capital or income in thands of the trustees (holding on behalf of Stella Waters). Ratio: Where legislation considers a distribution in a particular fashion, a trust may approach this distribution in the same way. Analysis: Corporate and Tax legislation deemed the bonus shares to be treated as capital as they were directly reducing the capital of the company by virtue of taking their surplus and transforming it into shares deliverable to the shareholders. Rather than looking like an income, the surplus was more capital-esque and could have generated revenue but was divested accordingly. Here, the earnings that formed the surplus were “capitalized” and ceased to be earnings, transforming at that time into part of the capital assets. Holding: Treat as capital, appeal dismissed Re Welsh Facts: Testator gave residue to second wife with life interest and power to encroach, remainder to three kids from first marriage. The testators estate was the ownership of his company which was sold and, as per the company rules, the interest was paid out as dividends from an undistributed capital surplus. Money retained was paid to the second wife and an application was brought to see if the capital surplus and income therein was to paid to the second wifes family. Issue: How does the court reason with Waters re capital distributions? Should the funds go to the second widows next of kin? Ratio: The court must focus on the substance of the transaction in addition to the interest of the testator in determining how to treat funds viz capital or interest Analysis: Here, if the funds were treated as income, it would result in a huge windfall for the second wife as well as a windfall for her next of kin (as they would be the huge beneficiary of whatever was left over from her estate). The court found that it could not have possibly been the case that such a distribution was to be paid as income given that it would leave no funds available for the remaindermen. The judge here found that the clear intention of the settlor established a particular relationship to income and capital that are artificially bound or created by other legislation or case law. She also distinguished from a complete liquidation of a company as well as relating to a one time surplus pay out. The fact that it was paid out in cash also distracted from the fact that if it were paid out in redeemable shares immediately redeemed it would undoubtedly be capital. The payout was determined strictly for tax purposes and wasn’t determinative for the sake of the case. Holding: Treated as capital Re Zive Facts: The estate was to be converted from real estate into cash in order to provide income to the life interest. The trustees elected to postpone. During the postponement, the income beneficiaries were not drawing their full income from the estate, so the trustees allocated the capital cost allowance to them to avoid paying income tax. Unfrotunately, there would be a recapture of the deduction claimed when the property was sold. Issue: Were the trustees allowed to allocate CCA to the income beneficiary? Ratio: No they weren’t. Trustees must act with an even hand in all things, including tax matters Analysis: The CCA deductions should have stayed in the reserve for the benefit of the remaindermen as this would help to offset their costs. Once the sale is made, the effect of allocating CCA to the income interest is that they double dip by virtue of getting the benefit of the deduction as well as forcing the cost of the recapture on the capital interest. Obviously it is partially predicated on a sale, but funds should be held in that event to account for the contingency. The trustees must maintain an even hand, but in this case it sure would have helped if they had some tax professional advice or something like that. Consideration: The testator told them to liquidate instead of being cocks and holding onto the property. Nowadays you can’t reallocate CCA’s for property against your other income (you can only leverage it against the property incurring the cost), but if you need to do crazy tax planning, you may have lost the plot altogether Holding: Not allowed to give CCA to income beneficiary Duty to Provide Information Directory: wp-content -> uploads -> gravity forms -> 1-7d6c8355b7f07846e8789d85deabdb60 -> 2016 gravity forms -> Earl E. Klein Jr gravity forms -> Narrative of how the entry meets the award criteria – July 28, 2016 gravity forms -> Revonda M. Baldwin gravity forms -> Air Atlanta Icelandic November 2006 – Current 2016 -> Ip master Guide 1-7d6c8355b7f07846e8789d85deabdb60 -> Insurance Law can Download 0.79 Mb. Share with your friends:
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