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tax & estate
Dealing with an overly broad (or narrow) encroachment clause
Exercising discretion with estate assets in trusts
b y J a m e s D o l a n wouldn’t expect a typical executor to
consult past decisions).
“If the encroachment clause says ‘benefit’
and ‘comfort,’ those have been interpreted as being very broad — almost anything the income beneficiary would ask for,” Blades says.
“‘Maintenance’ and ‘support’ are much narrower. Basically, the income beneficiary might need to establish they need money to pay the mortgage or the rent. So the words really matter.”
Whether or not the executor decides to permit an encroachment, the request should never involve haggling or bargaining with a beneficiary.
“It’s absolutely not a negotiation,” Blades says, and the executor’s job is to follow the will — not to accommodate the beneficiary. “If we don’t follow the terms, that would be a breach of trust.”AE
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The purpose of an encroachment clause is to provide clarity about when an income beneficiary may access trust capital before the will says they’re entitled to it.
But what if the encroachment clause isn’t clear? How should an executor deal with an encroachment clause that’s too broad or too narrow?
Passing the buck?
David Morgan Smith, partner at Hull & Hull LLP in Toronto, says a clause that’s too broad “may be a disservice to an orderly estate administra- tion” — and a potential source of conflict.
Legal wording such as “benefit,” “ongoing well-being” and “support” give the executor broad discretion over encroachments. In some cases, such power may be what the testator wants. In others, it could indicate a boilerplate will or a lack of forethought.
“In a way, it’s passing the buck. The testator’s not going to be there to have to worry about the situation,” Smith says. “It’s saddling the executor with a situation that’s going to [anger] some people.”
One solution for testators is to create a schedule outlining the circumstances under which an income beneficiary may encroach on capital. Such a narrow encroachment makes it easier for the executor to decide whether an encroachment clause fits within the terms of the will, but there are drawbacks.
“Once you go down the path of delineating the parameters of encroachment, it increases the prospect of litigation,” Smith says.
Capital beneficiaries could point to even the slightest departure from the narrowly
defined parameters as evidence of favouring the income beneficiaries.
“In some ways, the fewer words you use, the more you reduce the prospect of litigation. That’s why people go for a very simple, general clause, and leave it to the executor to exercise the discretion appropri- ately,” he says.
Words matter
Elaine Blades, senior manager at RBC Royal Trust in Toronto, says it’s common practice at trust companies to consult peers and colleagues when considering an unclear encroachment clause.
Case law can provide insight on how courts have interpreted the language of an encroachment clause, which an executor can use as guidance (though Blades says she
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Dealing with an encroachment request: how professional trustees do it
peers or colleagues
to consider different interpretations and points of view.
Consider the “reasonableness” of the request: Any request to encroach on capital needs to be “reasonable” given the size of the trust, the terms of the will and the lifestyle of the income beneficiary.
Create a document trail:
Start a record the day the request comes in to show that you considered it properly before making a decision.
Review the will’s terms:
Often it’s easy to determine whether the will grants
the beneficiary the right to encroach on capital for a particular purpose.
Look at case law:
If the will gives broad discretion to the execu- tor, case law can clarify how a given jurisdiction interprets requests for “maintenance,” “ongoing well-being” or “support.”
Consult the experts:
Professional trust companies often convene