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“When you have a discretion in a trust and it’s not properly described, that can lead to lawsuits and family members ghting each other,” says Butler.
In one of her client cases, a wealthy mother used a trust to leave money to her son while giving her daughter money outright, with no strings attached. “People equate that with parents’ feelings, so being treated differently than a sibling is emotional,” says Butler who adds the unequal treatment ruined the relationship between the brother and sister.
That’s why the choice of trustees is one of the most important decisions clients can make. Ian Hull, a Toronto-based trust and estate lawyer with Hull & Hull LLP, says “it should entirely be a business decision. You need someone quali ed who’s going to be around—someone who is able to stand up to heavy pressure from bene ciaries and make tough decisions.”
Hull also says clients should choose more
than one—ideally two or three. And it has to be someone they trust implicitly to make the right decisions. He advises clients go with a professional trust company, or professional lawyers who act as trustees. These experienced outside parties are better able to be impartial.
Creating a trust
Not all examples of badly structured trusts are as dramatic as the Disney case. More often, the chal- lenge is simply the changing needs and lives of the bene ciaries. For instance, a trust could’ve been set up to pay for post-secondary education, but then the bene ciary chooses not to take that path.
How can advisors help clients ensure a trust is set up to do what it’s intended to do? By asking potentially awkward questions.
Butler recalls a client who wanted to set up
a trust for his ve daughters to ensure each one got a $10,000 wedding gift. He didn’t like it when Butler asked him what would happen if it was a second or third marriage, but she knew she had to bring that up.
In another case, Hull was helping a local entrepreneur who put his company in a trust with his wife and kids as the bene ciaries. All good— until the client’s marriage broke down. He needed Hull’s help to x the problem. Hull recommended that, since the terms of the trust were exible, his
client could split the trust between all the bene- ciaries, and buy out his wife’s share.
He adds, “I run into scenarios all the time where the spouse hasn’t organized an exit plan should the marriage end.” An exit plan should be part of a prenuptial agreement or marriage con- tract, which outlines what should happen in the event of a divorce.
Fixing a bad trust
A trust should clearly express the wishes of the people who set them up, but that doesn’t always happen. So what can you do if your client ends up with an ill-written trust?
Start with the trust document itself. Fiona Hunter, a partner with Horne Coupar in Victoria, B.C., says to look closely to see if it contains a power to amend. If not, see if there is a power to advance, which lets the trustee advance capital for the bene t of the bene ciary. “You may be able
to use that power to resettle funds in a new trust or sub-trust, so that you
include more exibility in
that new trust or sub-trust,”
she advises. It’s important to
seek tax advice before doing
so, she adds, because it’s pos-
sible to inadvertently trigger
a disposition of the trust
property when resettling.
If there was an error in
the trust document—for instance, there was a power that was supposed to be included, but it wasn’t—an heir can seek recti cation through
the courts. The bene ciary will try to prove the trust doesn’t accurately re ect the intention of the person who set it up.
Hunter says this means looking for informa- tion about how the deceased wanted the trustee to exercise discretion. Usually, this is found in a statement of wishes or additional information from the lawyer who drafted the will or trust. That can be challenging, since the lawyer will have a duty of loyalty to the client and may not share that information.
Heirs can also ask the courts to vary (make changes to) a trust, but “those statutory provi- sions are different in each province, and generally speaking, are somewhat restricted,” 28
THE CHOICE OF TRUSTEE IS ONE OF THE MOST IMPORTANT DECISIONS CLIENTS CAN MAKE.
“IT SHOULD ENTIRELY BE A BUSINESS DECISION.”
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