When implementing an estate plan that involves a life interest, such as a spousal trust, it is typical to grant the Trustee a power to encroach on the capital of the trust for the benefit of the life interest beneficiary. A recent case out of British Columbia provides a reminder that such encroachment powers should be carefully considered and drafted to ensure that the testator’s estate planning goals are achieved.
In (Re:) Toigo Estate, the Trustees of the Estate of Peter Toigo sought the Court’s approval of a resolution allowing for an encroachment of capital in favour of the Testator’s spouse.[1] The Trustees sought the Court’s declaration that their exercise of discretion was lawful.
The Testator created a spousal trust in his Will under which his wife was entitled to receive the net income of the Estate during her lifetime. The Will granted the Trustees uncontrolled discretion to encroach on the capital of the spousal trust in favour of the spouse. Following the spouse’s death, the residue was to be divided into twelve equal shares: one share for each of the couple’s children, and one share for each of the six grandchildren groups (in other words each group of grandchildren siblings received one share to divided equally amongst them).
The Testator’s spouse asked the Trustees to permit her to encroach on the capital of the Estate – in the form of a distribution of 50% of the private corporation shares which were the Estate’s primary asset – so that she could undertake her own estate planning with the goal of providing for a more equal distribution amongst her grandchildren. The sibling groups ranged in numbers from one to five, meaning some grandchildren would receive a significantly larger share of the Estate than others. An encroachment in favour of the Testator’s spouse would mean a reduced overall share of the capital for some of the grandchildren and a larger share for others. Notably, the Toigo children and grandchildren all consented to the Trustees’ exercise of discretion to encroach on the capital of the Estate. The Court found that the Trustees’ exercise of discretion was lawful, was made in good faith, and was reasonable, however the Court was clear that the decision was not an exercise of the Court’s discretion but merely a comment on the lawfulness of the Trustees’ exercise of discretion.
As a general rule, as long as there is no evidence of bad faith on the part of a Trustee, the Courts will be reluctant to interfere with the exercise of an absolute discretion.[2] The Courts may interfere, however, if the Trustee is influenced by extraneous matters.[3] In examining whether a Trustee’s exercise of discretion was legitimate, the questions to be asked by the Court are: (1) does the Trustee have the power under the trust instrument; (2) has the Trustee acted in good faith; (3) is the Trustee’s decision one that a reasonable Trustee could have arrived at; and (4) is there an actual or potential conflict of interest? [4] The Court will opine on whether the decision is legitimate, but it will not make the decision on behalf of the Trustee. As such, absent bad faith, there may be Court oversight of the decision-making process but not the decision itself.
The reluctance of the Courts to interfere with an exercise of discretion by a Trustee is potentially problematic for the residual beneficiaries of a trust or an estate who would be affected by such exercise. If the Toigo grandchildren had objected to the encroachment because their share of the residue would be reduced, it is unlikely on the facts of this case that they would have had any remedy. Provided that the Trustee has the power to make such an encroachment under the trust instrument, and absent any bad faith or conflict of interest, if the decision is reasonable the Courts are unlikely to substitute their judgment for that of the Trustee.
Testators who wish to ensure that the residue of their estate is divided in accordance with their specific wishes should carefully consider the wording of any power of encroachment provided in their Will. In Toigo, we are not given an explanation of why the Testator distributed the residue of his Estate in such a manner, but presumably for most testators such decisions are the result of a great deal of thought and consideration. In granting an absolute power of encroachment, testators should be made aware of the fact that it could, in effect, allow their Trustee to redistribute the residue of their estate. In most cases the Courts will be reluctant to question a Trustee’s exercise of discretion if there is no evidence of bad faith, therefore testators should provide any limitations or oversight that they feel is necessary in the Will itself. In the Toigo decision, we are not provided with the wording of the encroachment clause at issue, but are told that it grants the Trustees uncontrolled discretion to encroach on the capital of the residue of the Estate in favour of the Testator’s spouse during her lifetime. Had the Testator wished to avoid redistribution of the residue of his Estate, he might have chosen to limit the encroachment clause to those encroachments made for the maintenance and support of the spouse, for example, rather than provide the Trustees with an uncontrolled discretion to encroach in favour of the spouse.
The decision in Toigo is a reminder that in drafting estate planning documents even seemingly boilerplate clauses, such as a power of encroachment, cannot be taken for granted and should be carefully considered in light of the testator’s goals and wishes.
[1] Toigo Estate (Re:), 2018 BCSC 936 («Toigo»).
[2] Gisborne v Gisborne (1877), 2 App. Cas. 300 (HL).
[3] Fox v Fox Estate, [1996] OJ no 375, 28 OR (3d) 496.
[4] Toigo Estate (Re:) at 29.
