Disclaimer: This set of notes does not claim to be either authoritative, correct, or even satisfactory. You should, at all times, exercise your own judgment and disagree with what I’ve written when appropriate. There may errors, omissions, or outright fabrications that should be ignored and ridiculed at all times. I make no warranty or condition as to the veracity of my notes and only a fool would think otherwise. Please forgive any colourful language. Good luck, I sincerely hope you don’t need it.
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Trust Master Key
Purpose of Trusts What is a Trust A trust is a relationship which arises between the trustee who is compelled in equity to hold property for the benefit of the beneficiaries in such a way that the real benefit of the property accrues not to the trustees but to the beneficiaries.
This often involves separating the legal and/or equitable title (which vests in the trustee) from the beneficial ownership (which is for the enjoyment of the beneficiary)
The relationship is a “fiduciary relationship”. This is the highest standard in law wherein the trustee essentially must act solely in the best interests of the beneficiary
Benefits of a Trust
The property held in trust is immune to seizure by creditors
Rector, Wardens and Vestry of the Parish of Christ Church v Canada Permanent Trust Co
The property has special tax treatment
The property can be used in certain ways that otherwise might be difficult
Such as placing restrictions on spendthrifts in order to prevent them from damaging or destroying the estate
Re Leach; Re Williams
Other examples include pension plans, Buschau v Rogers Communications Inc; Promotion of Charitable Causes, Corporate Transactions and more
Types of Trusts Express Trusts: Are trusts explicitly created for persons or purposes wherein someone intends a trust to be created and for the property to be subject to the terms of the trusts.
Express Trust for Persons: Example – A scholarship for people from X Town
Express Trust for Purposes: Example – Charitable purposes such as relief of poverty
Trusts by Operation of Law: Are trusts that happen as a result of a legal principle irrespective of the settlors intent, either explicit or implied, to create such a trust.
Constructive Trusts: Example – where someone contributes value to a joint venture but is being denied their fair share of the proceeds
Resulting Trusts: Example – Someone transfers property for free but the land is actually being held on their behalf in order to avoid injustice (see: advancement presumption)
Statutory Trusts: Are trusts that are enabled by way of legislation. These trusts are often given special rules and favourable treatment, such as those allowed in the Income Tax Act
Settlor: Person who creates an express trust and conveys the trust property to the trustee. Once property out of your hands, you lose it forever.
This may be done by way of inter vivos trusts or through a will
Note also that the settlor might self-declare themselves as trustees of the property, or may by operation of law find themselves to be the trustees of their own estate
Re Helliwell’s Trust
Trustee: Person who holds legal title to the trust property and administers it for the beneficiaries. Have a number of legal obligations
These obligations include the duty of good faith, even handed treatment, investment, etc
Beneficiary: Person who benefits from the trust (eg – receives income or capital from the trust)
Key distinctions are often drawn between beneficiaries who are to receive income from the capital of the trust and beneficiaries who will receive simply the capital itself (often upon the death of the life interest)
Trust Property (Trust res, trust corpus): The property that is held in the trust for the benefit of the beneficiary. May be a question of evidence as to what is included in the trust (especially if not specific – trust may fail as a result)
Certainty as to the contents of the trust is one of the three criteria that must be met, otherwise the trust will be invalidated
Trust Instrument (deed of trust, declaration of trust): Document setting out terms of the trust. Must set it up at time of trust completion, can’t do it later. Can withhold revocation powers, set out numbers of conditions
The trust instrument often has a power akin to a mini-constitution such that it will displace legislative provisions should a contrary intent to the legislation be evinced
In the event that the trust instrument is defective or provides impracticable or impossible instructions, trustees may apply to the courts for variation
Bare Trust: Trustee has no duties other than conveying the property to the beneficiary. No real substance to legal care obligations
Discretionary Trust: Trustee has discretion in terms of the amounts received by the beneficiaries and which beneficiaries will share. Trustee has more wide-sweeping trusts depending on terms.
With discretion comes the obligation to use it wisely, turn your mind to the breadth and scope of the ability to use ones discretion or powers, and the obligation to make decisions
Fixed trust: Trustee has no discretion, all beneficial interests determined as fixed amounts of fixed proportion of the total.
Testamentary Trust: A trust created by a will upon a persons death, comes into existence upon the death of the testator. Not a trust until death. If trust fails, property will become residue of estate, may divest to different people than originally anticipated
Inter Vivos Trust:Trust created by the settlor during their lifetime.
Key Source of Trust Law Rules
The Trust Instrument
This ranks highest in priority other than when it is subject to legislative requirements
Equity – The common law as developed by the courts
Trusts are supervised and managed under the inherent jurisdiction of the courts of chancery
Statute – Any applicable acts such as the Trustee Act, WESA, ITA, etc
History of the Trust General Guideline
Equity as a body of rules and principles formerly administered by the courts of equity as distinct from the common law courts
Provides a corrective to the harshness of the common law
Very strict, unfair rules, could only plead in certain ways
Example, debt document not being destroyed could lead to debt being paid twice. King provided injunction.
Common law would not hear parties testimony, chancery would
Originates in the kind personally dispensing justice, function later delegated to the chancellor who set up the courts of chancery
People who were upset could petition the King personally. He elected the chancellor to dispense his justice. He set up a court system to hear these concerns, created two parallel legal systems.
1225: Franciscan friars, land held to their benefit as they weren’t allowed to hold property
Common law courts did not recognize the use or any other interest, only the legal owner of the land
Popular for avoiding creditors and taxes, shelter income from the state
Could transfer land to a friend, still enjoy the value of the land with no title, leads to equitable/legal interest distinction
Death Tax: Before death, give it to a group of friends, they have title, tax never levied.
Equitable courts enforced the “use” as a personal obligation and attached these obligations against the trustee and his heirs
If you accept the obligation, it would go against conscience to not force you to live out your obligations
Obligation would apply to the next person whether they agree or not
If trustee sold land, new purchaser would only be held if they had no idea of a use.
Consideration: The development of the trust led invariably to the monarchy losing boat loads of money from nebulous and unwitnessed trust agreements. The evidentiary standard utilized by the chancery courts was insufficiently robust compared to the common law courts which further facilitated this loss.
Statute of Uses 1531: Linked legal and equitable title with person who has the use
When a use was created it was “executed” by the statute to unite legal and beneficial ownership in the beneficiary, thereby vesting both ownership forms (A B)
Statute only applied once after which it was exhausted
Any subsequent uses of the property weren’t collapsed. Clever conveyances got around it by adding three orders.
Land to A to the use of B in trust for C
B would hold everything after the first collapse, but the new beneficiary C is separated.
Common law courts began to wane in popularity as Chancery provided more outlets for the peasantry, less formalistic and more equitable
The resulting schism led to the famous jurist Edward Cook refusing to execute a direct injunction from the chancellor
He felt it was a subversion of the common law and did not appreciate the fact that more organized and reasoned common law principles were being substituted for justice that was “the length of the chancellors foot”
The resulting popularity led to more organization, including case reporting
Trusts were applicable to corporations, investments, etc
The chancery court adopted the use of the jury
1873 Judicature Act
Effectuated the merging of common law and equity into one court
England still has chancery judges even though they utilize the same process and procedures as common law court judges
Equity in Canada Follows the pattern of settlement
Atlantic Canada (minus NFLD) – governor exercised equitable jurisdiction as holder of the Great Seal
Equitable courts later established but eventually their jurisdiction was merged with common law courts
Quebec – Equity obsolete due to adoption of French civil code
Ontario – Governor didn’t sit as chancellor-esque person. Book claimed equity was anathema to creditors so he didn’t sit to maintain their interests
West/North – Had 1873 Judicature Act, never a separate system.
Theories of Fusion Procedural Fusion: Separate in one court
Waters flow into the same stream but never mingle
Canada had this until recently, had to make sure you had access to either equitable or common law remedies.
Substantive Fusion: Both merge to form one law
Don’t need to get into technicalities regarding origin of action
Consideration: In Canson Enterprises Ltd v Boughton & Co, the majority aimed towards the concept of overlap without merger with the result being that remoteness, causation and other principles when examined in an equitable lens were applicable but not appropriate in the current case. McLachlin posited that all necessary acts could be done in equity and no analogy between disciplines was necessary
Consideration: If a total merger occurs, does the equitable and kinder jurisdiction cease to exist? Unlikely given the common law is much softer both substantively and procedurally currently than it was historically. The charter also operates on equitable principles
Considerations in Trust Law Fiduciary Obligations
Comes from trust law – holding for the benefit of the beneficiary
Beneficiary can sue you to make up any shortcomings, can’t take a secret profit, must not delegate duties.
If you are a trustee, automatically applies
Trust always involves property
Have a duty to prudently invest and let property appreciate for the beneficiaries benefit
Trusts have a particular way of being created, may not be the same formalities as non-trust relationships
Now extended to non-trust like relationships (Directors of corporation, agent and principal, solicitor client privilege, partners in a business, parent/child, priest/penitent, doctor/patient, crown/aboriginals.
May not involve property
Fiduciary Relationship Test – Frame v Smith Where the trustee has a large scope of discretionary power;
Where the trustee can unilaterally exercise that power to affect the legal or practical interests of the person or beneficiary; and
Where the Beneficiary is vulnerable to or at the mercy of the trustee
A relationship may arise that gives rise to a fiduciary obligation. Note that the list of people who owe fiduciary relationships is small but not closed. As society changes, certain roles may become so important that fiduciary duties may be necessary or socially acceptable
These people are mere actors in the estate, such as administrators or executors. Their goal is often to gather the assets, discharge debts and dole out assets accordingly
They can be appointed by will or by the court or by the beneficiaries
Note: In BC, PR’s are treated as trustees, forced into higher responsibility roles
Title to the property vests in a PR. As such they have a fiduciary obligation towards people who are entitled to assets from the estate
They cannot take secret profits, cannot delegate their role, cannot act maliciously, etc
Note: Participating in any task that is the responsibility of the trustee may make you the trustee themselves. You would then need to apply for a discharge which would include passing accounts but also spending your own money, not that of the estate, for court fees
Agency Agent and Principal: Agent has delegated authority to enter into legal relations on your behalf. Can do so in tort and contract, leads to vicarious liability.
Agent owes fiduciary duty to principal.
Agent must act within instructions of principal. Under contractual relationship with principal. Not so in a trust relationship. Trustee has unlimited perview, must exercise judgment, especially in the face of recommendations from the settlor or beneficiary.
May not be any property in agent/principal.
Agent entering into contract, principal responsible. Trustee entering, trustee responsible.
Cannot change trust unless explicitly allowed, agency relationship can be changed at any time
Can eliminate a trust only with the beneficiaries allowance
Principal dies, no more agency relationship. Trustee/Settlor dies, someone else can come in and replace them. Will never fail for lack of a trustee (may be instructions in trust instrument as to how to proceed)
Agent Bankrupt, principal has to line up to make a claim for property the agent held (unsecured creditor). Trust – if trustee/settlor/beneficiary bankrupt, property in trust is separate and not included for purpose of giving to creditors
Agency comes from consent, don’t need consent to form a trust or make someone a beneficiary
Contract Trusts: All about obligations, must deal with property in a certain way
Contract need not have title to property, trusts do
Different remedies, limitation periods that apply.
Must be a party to force contractual obligations, in trusts, don’t need to be a party to anything
Debt Debt: Legal Obligation to pay back creditors. If you go bankrupt, debt allows pro-rata claim against assets. Trust gives nothing.
Trust has fiduciary duty, no duty to creditor
Creditor has no proprietary right, only personal rights (trust has both personal and proprietary rights)
Trustee not obligated to make beneficiary whole if property lost or stolen, debtor must pay off completely
Trustee has duties with respect to trust property (be prudent, grow it over time), debtor has no obligations to creditor
Bailment Bailee: Transfer of possession of property – Bailment only applies to personal property. Any property can be put into a trust including choses in action, future contingent interests, etc.
Bailee not a fiduciary
Gift A transfers violin to B on the condition that they pay C $10
Can be viewed as a gift: B Accepting gift on condition
Can be viewed as a personal debt gift
B could be a trustee, pays C as beneficiary – if bankruptcy occurred, $10 is preserved
No evidentiary requirements, could claim to be a beneficiary or a trustee of your own property.
Must examine: what is the intention of the settlor? Is it supposed to be a gift or a trust?
Express Trusts Four Requirements to Create an Express Trust
Three certainties are met (Knight v Knight) Certainty of intention
Someone wants to create a trust
Certainty of subject matter
What is the property that is supposed to go into the trust
Certainty of objects
Who is the trust for, who is the beneficiary?
Trust is constituted by transfer of the property to the trustee
Trust is moved from settlor to trustee, no trust until movement (unless settlor is trustee)
Any applicable formalities are met
Real property – may need to be done in writing, registered
Limits on Trust – Won’t enforce trusts that go against public policy, transfers of property just prior to bankruptcy
Settlor must have legal capacity to create a trust by disposing of their interest in property. Can be a person or a corporation. No special trust law rules, normal property considerations apply
Wills: persons under 16 cannot create a trust in a will as such a will is invalid (S.36 WESA)
Inter Vivos Trusts: same as the law of contract, voidable unless ratified after attaining age of 19: (19(1) and 27 of the Infants Act)
BC minors can hold title, but cannot dispose of it on their own (Wong v Huang 2012 BCSC 975) – (S.2(1) of the Infants Act)
Cannot do if they do not fully appreciate the transaction
Wills: Must have the capacity to make the will in accordance with provincial legislation
Inter Vivos Trusts: Invalid if the settlor cannot understand substantially the nature and effect of the transaction (Royal Trust Co v Diamont)
Bankrupts do not have capacity, someone else must take over for them
Trustees need not have capacity, only concern is that they won’t be able to deal with the property appropriately. Likely to be removed or replaced, but doesn’t mean there is no trust
Beneficiaries need not have capacity. Any legal entity can be the beneficiary.
Certainty of Intention
Must be intention by settlor to create trust
Settlor intends to have a person receive property (trustee) to hold for the benefit of another (beneficiary)
No ability in a trust instrument to give an absolute gift with conditions (Re Walker)
May hold the property themselves as a trustee
How do they find intention? Look at evidence, may be implied from oral evidence, conduct, etc
The intention of a settlor to create a trust may be “collected from a consideration of the whole” (Re Shamas)
Courts are more likely to find a trust where children or strong remainder interests are present. The inherent desire to have a trust will be present in many cases.
Note in Johnson v Farney, the wish was not enough to force wife to completely give husbands and her estate to her family.
Certain formality requirements for land and trusts created in a will to be valid
No magic words needed (no formulaic requirements)
Most people don’t even know what a trust is, would be superfluous
Paul v Constance
Issue: Trust versus gift with “precatory words” (merely a wish or desire)
People say “trust” but they meant a gift, therefore no trust. Must look at totality of evidence
If they are “hope”, “wish”, “desire”, etc, can do whatever they want as a gift.
The courts are happy to give no effect to precatory words as they are not only legally binding, but also do not help in the administration of the estate. Trustees have duties that either must be fulfilled or they have a discretion to exercise, precatory words are neither of these things and are distracting to the trustee in the exercise of their duties.
Johnson v Farney
Consideration: In Johnson v Farney, argument was made that the wills contents were known to the parties. Was it thereby reasonable to rely?
In almost all cases it will not be reasonable to rely. Property does not vest in a will until the testator dies. Until that point or the point of mental incapacity, you have no rights in the property
Public Policy: Creating a system where you can rely on a will would lead to a manifest absurdity in that people would count their eggs before they’ve hatched so to speak. Would give a right to spend the money of the estate in advance
Note: Consider also that courts want sufficient clarity and precision such that a judge could step in an administer the trust if necessary. Having non-clear cut duties obfuscates this.