Variation of Trusts

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Certain obligations can trump testamentory freedom

June 1, 2012 by Charles Wagner

As regular readers of this column undoubtedly know there is a seminar set for June 5, 2012. For this column, I want to focus on one aspect of the seminar, organized by B’nai Brith Canada’s Estates and Trusts, Lawyers Division, that deals with the moral obligation of parents in their testamentary planning to include children as beneficiaries.

At common law the proposition that a testator has testamentary freedom is foundational. Yet over time, Ontario’s courts and legislature have recognized that a testator has certain obligations that may trump that freedom. For example, the courts have used legal mechanisms like constructive trusts to protect disinherited spouses. The legislature has also passed laws that provide disinherited spouses with a division of net family property, as well as dependants, like children and common law spouses, with rights to receive support if they were not adequately provided for in the will. A question this seminar is raising is where to draw that line on the restriction of testamentary freedom. Will an Ontario court vary a will when a parent disinherits an adult child? The courts in British Columbia have.

In Tataryn, a British Columbia case, the court stated that a parent has a moral duty to act like a judicious parent and give a proper share of the estate to his or her spouse and children. In the court’s view, this obligation is based on the prevailing societal, legal and moral norms. The court noted that the moral claims of adult children are not as strong as dependants, but if the estate is large enough, the court can vary the will and provide for the disinherited adult child who is not a dependant. The Ontario Court of Appeal, in the Cummings decision, indicated that statutes in British Columbia and Ontario are similar enough that the principles of Tataryn apply to  Ontario. So let’s review the facts of the case in our seminar and see how an Ontario court might rule.

In the fictional scenario before the Moot Court, the elder Mr. Shapiro had two children. In his will, he divided his estate equally between them, but to inherit, each child was required to marry a Jewish spouse. In the Moot Court, the executor and the daughter are arguing that Mr. Shapiro’s will is valid and should not be changed. The son, who chose to marry outside the faith, is arguing the opposite.

Kimberly Whaley, counsel for the disinherited son, will be arguing that the principles of Tataryn have been accepted by Ontario’s Court of Appeal and accordingly the Moot Court should vary Mr. Shapiro’s will and give the disinherited son his half of the estate. She will point to the Ontario case of Perilli v. Foley Estate, where the judge said that in determining how much to award a dependant who was disinherited, the court should not just look to need, but also consider the deceased’s moral duty to the dependant. Clearly the decisions in  British Columbia are having some impact. Whaley will be arguing that, given that Ontario’s Court of Appeal has adopted the principles of Tataryn, the court should vary a will where a parent has not complied with his moral duty to act like a judicious parent and disinherited a son who conducted himself in a way that is acceptable to the majority of Canadians.

Kelly Charlebois will be arguing that Ontario law is different from that of British Columbia. As counsel for the executor and daughter, she will be pointing out that to date no Ontario court has understood Cummings to mean that the moral claim of a disinherited adult non-dependent child is legally enforceable. Ontario cherishes the principle of testamentary freedom, as it has for centuries, and that is why both the statute and the court decisions in this province have never adopted the law of British Columbia.

The seminar will take place on June 5, 2012, at Shaarei Shomayim Synagogue, 470 Glencairn Ave., Toronto, ON M5N 1V8. Registration is at 7:30 a.m. and the Moot Court will begin at 8 a.m. The event is open to lawyers and accountants. Those lawyers and/or accountants interested in attending should contact Anita Bromberg, B’nai Brith Canada, at (416) 633-6224 ext. 130 or at abromberg@bnaibrith.ca.

Will an Ontario court vary a will when a parent disinherits an adult child?

May 22, 2012 by Charles Wagner

As regular readers of this blog undoubtedly know there is an upcoming seminar on June 5, 2012.  For this column, I want to focus on one aspect of the seminar that deals with the moral obligation of parents in their testamentary planning to include children as beneficiaries.

At common law the proposition that a testator has testamentary freedom is foundational. Yet over time, Ontario’s courts and legislature have recognized that a testator has certain obligations that may trump that freedom.  For example, the courts have used legal mechanisms like constructive trusts to protect disinherited spouses.  The legislature has also passed laws that provide disinherited spouses with a division of net family property, as well as dependants, like children and common law spouses, with rights to receive support if they were not adequately provided for in the will.   A question this seminar is raising is where to draw that line on the restriction of testamentary freedom.  Will an Ontario court vary a will when a parent disinherits an adult child?  The courts in British Columbia have.

In Tataryn v. Tataryn Estate 1994 CanLII 51 (S.C.C.), [1994] 2 S.C.R. 807, a British Columbia case, the court stated that a parent has a moral duty act like a judicious parent and give a proper share of the estate to his or her spouse and children.  In the Court’s view, this obligation is based on the prevailing societal, legal and moral norms.   The court noted that the moral claims of adult children are not as strong as dependants, but if the estate is large enough the court can vary the will and provide for the disinherited adult child who is not a dependant.   The Ontario Court of Appeal, in Cummings 2004 CanLII 9339 (ON C.A.) indicated that statutes in British Columbia and Ontario are similar enough that the principles of Tataryn apply to Ontario.  So let’s review the facts of the case in our seminar and see how an Ontario court might rule.

In the fictional scenario before the Moot Court, the elder Mr. Shapiro had two children.   In his will, he divided his estate equally between them, but in order to inherit, each child was required to marry a Jewish spouse.  In the Moot Court, the executor and the daughter are arguing that Mr. Shapiro’s will is valid and should not be changed. The son, who chose to marry outside the faith, is arguing the opposite.

Kimberly Whaley, counsel for the disinherited son, will be arguing that the principles of Tataryn have been accepted by Ontario’s Court of Appeal and accordingly the Moot Court should vary Mr. Shapiro’s will and give the disinherited son his half of the estate.   She will point to the Ontario case of Perilli v. Foley Estate where the judge said that in determining how much to award a dependant who was disinherited, the court should not just look to need, but  also consider the deceased’s moral duty to the dependant.  Clearly the decisions in British Columbia are having some impact.  Ms. Whaley will be arguing that, given that Ontario’s Court of Appeal has adopted the principles of Tataryn, the court should vary a will where a parent has not complied with his moral duty to act like a judicious parent has and disinherited a son who conducted himself in a way that is acceptable to the majority of Canadians.

Kelly Charlebois will be arguing that Ontario law is different from that of British Columbia.  As counsel for the executor and daughter, she will be pointing out that to date no Ontario court has understood Cummings to mean that the moral claim of a disinherited adult non-dependent child is legally enforceable.   Ontario cherishes the principle of testamentary freedom, as it has for centuries, and that is why both the statute and the court decisions in this Province have never adopted the law of British Columbia.

The event will take place on June 5, 2012, at Shaarei Shomayim Synagogue, 470 Glencairn Ave., Toronto, ON M5N 1V8. Registration is at 7:30 a.m. and the Moot Court will begin at 8:00 a.m. The event is open to lawyers and accountants. Those lawyers and/or accountants interested in attending should contact Anita Bromberg, B’nai Brith Canada, at (416) 633-6224 or at abromberg@bnaibrith.ca.

IS DISINHERITENCE BECAUSE OF SEXUAL ORIENTATION LEGAL?

August 19, 2011 by Charles Wagner

Will a Canadian court vary or set aside a will when a parent disinherits a gay/lesbian child because of his/her sexual orientation?  The law may be different depending on the province.

In Canada, the law balances the idea of testamentary independence against public policy concerns.  While cherishing testamentary freedom, the law intervenes when it finds provisions in the will offensive to public policy and or equity.  In Ontario, this restriction on testamentary freedom has been expressed by laws passed to protect spouses (under Part I of the Family Law Act [FN1]) and dependents (under Parts II and V of the Succession Law Reform Act [FN2]). 

Two true stories from British Columbia:  In both Patterson v. Lauritsen [FN3] and Peden v. Peden Estate [FN4], a parent disinherited or reduced the inheritance of a child because the parent did not approve of the child’s homosexuality.  The Court in each of these cases held that, in today’s society, homosexuality is not a factor that would justify a judicious parent disinheriting or limiting benefits to a child. 

Would the same thing happen in Ontario?  Maybe – maybe not.  In the British Columbia cases, even though the parents had capacity and were not subject to undue influence, their wills were open to challenge on the ground that the parents had disinherited their children without, what the court considered to be, reasonable cause. While the Ontario Court of Appeal has stated that the “moral considerations” underpinning the British Columbia approach apply in Ontario, to my knowledge, there has been no case to date where an Ontario Court has varied a will to benefit a non-dependent disinherited adult child [FN5].  In Ontario, except where a will offends public policy, it is still open to debate whether a capable parent, acting voluntarily, is entitled to disinherit a child - however whimsical, mean-spirited, or controlling such action may seem. 

A comment made by an Ontario judge in 1995 is of interest insofar as it suggests where an Ontario court may draw the line.  In Fox v. Fox Estate [FN6], a decision of the Ontario Court of Appeal, the father named his wife the executrix under his will.  The income was to be used for the grandchildren with the capital for the son.  The will also gave the mother an unfettered discretion to encroach on the capital of the estate for the benefit of her son’s children. She took all the capital, eliminating her son’s inheritance because he was involved with a non-Jew.  The judge commented, “….in response to a query from the bench, counsel in this case were not prepared to argue that any court would today uphold a condition in a will which provides that a beneficiary is to be disinherited if he or she marries outside of a particular religious faith”. The Court viewed the mother’s behaviour as being mala fides and contrary to public policy.

Testators that ignore the changing winds of public policy do so at their own peril.  In M v. H, [FN7] the Supreme Court of Canada compelled Ontario to change the definition of “spouse” as set out in the support provisions of the Family Law Act. Prior to that case, common-law heterosexual couples were included in the definition of spouse, but gay and lesbian couples were not. The Supreme Court of Canada ruled that, for the purposes of support under the Family Law Act, a spouse includes “…either of two persons …”. The court ruled that limiting the definition of “spouse” to heterosexual couples, for the purposes of support, was discriminatory and not justifiable.  In Canada today same-sex marriages are legal.  It is therefore entirely possible that an Ontario court would set aside a provision in a will that disinherited someone because of his/her sexual orientation, on the grounds that such disinheritance offended public policy.

 This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.   The author gratefully acknowledges the assistance of Michelle Kotzer in the preparation of this article.

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FN1.  Family Law Act, R.S.O. 1990, c. F.3

FN 2.  Succession Law Reform Act, R.S.O. 1990, c. S.26

FN3.   Patterson v Lauritsen (1984) CarswellBC 381, 58 BCLOR 182, [1984] 6 WWR 329, 17 ETR 316.  Available on line at Patterson v. Lauritsen, 1984 CanLII 353 (BC SC)

FN4.   Peden v Peden Estate (2006) CarswellBC 2801, 2006 BCSC 1713, [2007] WDFL 1837.  Available on line at Peden v. Peden, Smith et al., 2006 BCSC 1713 (CanLII)

FN5.   See Justice Cullity’s 1998 decision of  Banton v. Banton, 1998 CanLII 14926 (ON SC) and in particular paragraph  36  where he states, “It is hardly necessary to say that the principle of freedom of testamentary disposition is in the background to the issues relating to the validity of the wills of December 21, 1994 and May 4, 1995. If George Banton had capacity and was not subject to undue influence at the time of the execution of one of those wills, its validity and effect are not open to challenge on the ground that he thereby disinherited his children. In this jurisdiction, unlike others in Canada and elsewhere, unless the children are dependants, a capable parent acting voluntarily, is entitled to do this however mean and ungrateful it may seem, or how selfish the motive; hence the focus in this case, as in so many others, on testamentary capacity and undue influence.”

Compare this with the decision of the Court of appeal in Cummings v. Cummings CanLII 9339 (ON CA).  At paragraph 40,  Blair J. A. states, “[40]         In my view these questions have been resolved by the decision of   the Supreme Court of  Canada in Tataryn v. Tataryn Estate 1994 CanLII 51 (S.C.C.), [1994] 2 S.C.R. 807.  There, the Court  held that a deceased’s moral duty towards his or her dependants is a relevant consideration on a dependants’ relief application, and that judges are not limited to conducting a needs-based economic analysis in determining what disposition to make.  In doing so, it rejected the argument that the “judicious father and husband” test should be replaced with a needs-based analysis: see para. 23.  I see no reason why the principles of  Tataryn should not apply equally in Ontario, even though they were enunciated in the context of   the British Columbia Wills Variation Act R.S.B.C. 1979, c. 435, in which the language is somewhat different from that of  the Succession Law Reform Act.

I also recommend  the reader to see  Susan J. Woodley’s paper entitled “The (Almost, Possible, Probable) Right of an Adult Child to Receive Support”, presented at the Ontario Bar Association 2009 Institute of Continuing Legal Education.

FN6.    Fox v. Fox Estate 1996 CanLII 779 (ON C.A.), (1996), 28 O.R. (3d) 496, 10 E.T.R. (2d) 229 (C.A.),

FN7. M. v. H. [1999] 2 S.C.R. 3. I refer the reader to an aritlce written by Mary C. Hurly entitled “Sexual Orientation and Legal Rights”. The article appears on the Parliament of Canada Website and can be found at Sexual Orientation and Legal Rights (PRB 08-49E) . When considering the impact of the decision and how it reflects on public policy in Canada her conclusion speaks to how a court may view the public policy issue. “Judicial and legislative reforms, particularly since the M. v. H. decision in 1999, have effected a significant shift in Canadian society with respect to recognition of the legal status and claims of same-sex conjugal couples. The watershed nature of this shift is illustrated, most notably, by federal legislation sanctioning same-sex marriage.

Opponents of these reforms continue to argue that the extension of same-sex rights in general, and same-sex marriage in particular, undermine the traditional family and family values. At the same time, some gay and lesbian couples (like some heterosexual couples) do not want either the legal obligations or the benefits that flow from spousal status or marriage. As the 2002 report of the former Law Commission of Canada and other indicators suggest, the question of whether the matter of entitlements based on the marital or conjugal nature of a partnership should be re-examined remains open.”

A Trustee Is Not Entitled To Use Trust Property For His Own Benefit

March 29, 2011 by Charles Wagner

 Justice Strathy of the Superior Court of Justice ordered that Mr. Zimmerman repay nearly $500,000 in compensation he took as an attorney for property (FN1).  The judge also ordered that he personally pay the legal costs of the other side amounting to $284,362.19 (FN2).    What happened?

 Let me first introduce you to Robert and Signe McMichael.  During their lives they collected Canadian art from artists like Tom Thomson and the Group of Seven members. In 1964 they donated their art collection to the province of Ontario and by 1981 the Collection had grown to include more than 2,000 artworks. This Collection is truly a Canadian national treasure. (FN3).

In 2001 Robert and Signe McMichael made mirror wills (FN4).  Both husband and wife left everything to each other.  Signe’s Will, (like her husband’s) said that if her spouse predeceased her, then when she died, Signe’s assets would be donated to the Collection.   Mr. McMichael died in 2003 and his assets were inherited by his wife. 

 After her husband’s death, Mrs. McMichael signed a power of attorney appointing Mr. Zimmerman as her sole attorney for property.   In early 2004 Mr. Zimmerman’s lawyers prepared a trust document appointing Mr. Zimmerman as the trustee.  Mr. Zimmerman then transferred virtually all of Mrs. McMichael’s assets including the art collection into the trust so that there was virtually nothing left in her estate. 

 Under this new trust, Mr. Zimmerman had sole and unfettered discretion to decide which art related organization would receive Signe’s assets years after her death.  Effectively, the new trust rendered the Will meaningless. Instead of inheriting everything immediately after Signe’s death, the Collection would get nothing.  If the new trust went unchallenged it was totally up to Mr. Zimmerman to decide whether the Collection would receive any of Signe’s assets.

 When Mrs. McMichael died in 2007 her niece and husband, the executors under the Will, commenced a legal proceeding.  They asked the court to declare that the Power of Attorney and the Trust were void on the ground that Signe lacked capacity.   They also wanted Mr. Zimmerman to pass his accounts in a separate proceeding. 

 The only issue before Justice Strathy was Mr. Zimmerman’s passing of accounts.  To pass his accounts Mr. Zimmerman had to show what assets of Signe’s he received and how the money under his control was spent.  As an attorney for property it was Mr. Zimmerman’s statutory and common law duty to keep proper accounting records and proof/vouchers to demonstrate that the money spent was for the benefit of Mrs. McMichael.  This duty is imposed on trustees because it is a basic fundamental principle of trust law that Mr. Zimmerman, as a trustee, was not entitled to use the trust property for his own personal benefit.  If Mr. Zimmerman did use Signe’s assets for his own personal benefit or if he could not account or explain to the court how he spent the money then he would be liable to return it.

 When Mr. Zimmerman tried to pass his accounts the fireworks started.

 Whatever accounting that was provided was incomplete.  Mr. Zimmerman could not or would not provide proper explanations about how he spent the money.  The court found that Mr. Zimmerman breached his fiduciary duties and failed to exercise his powers and duties diligently, with honesty and integrity and in good faith, for the incapable person’s benefit.  Mr. Zimmerman did not comply with his obligation to keep proper accounts and was not in a position to prove that he administered the trust prudently and honestly. He did not have the accounts ready and was not able to give full information when required. 

 Mr. Zimmerman infuriated the court because he failed to respond to appropriate objections to his accounts.   The judge drew an adverse inference that by failing to respond properly to the questions raised by the Collection and the estate trustees Mr. Zimmerman was guilty of taking the money for himself and would be required to reimburse the estate for those disbursements and expenses (FN5).

 This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

 Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.

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FN1.  Please see Zimmerman v. McMichael Estate  2010 CarswellOnt 3481, 2010 ONSC 2947, 57 E.T.R. (3d) 101, 103 O.R. (3d) 25 and in particular paragraphs  29 and 88 and 90 for the proposition that a fiduciary may not profit from his role, paragraph 30 for the fiduciary’s duty to account, and paragraphs 35,43 45, 49 and 89. 

 

FN2.  Please see the second Zimmerman decision.  The first was decided on May 20, 2010 and cited in FN1.  The second was decided on October 4, 2010  and can be found as Zimmerman v. Fenwick 2010 CarswellOnt 8372, 2010 ONSC 5452.

FN3.  Robert and Signe McMichael  founded  the Collection,. Some of the history of the Collection, is described in the judgment of the Court of Appeal in McMichael v. Ontario (1997), 36 O.R. (3d) 163, [1997] O.J. No. 4661 (Ont. C.A.), leave to appeal refused, (S.C.C.)..  Their website can be found at http://www.mcmichael.com/

FN4.  It is important not to confuse the terms “Mirror Wills” and Mutual Wills.   Mirror Wills are identical to one another.  Mutual Wills creates an agreement which equity enforces that the wills will not be changed.   I refer you to the explanation of Histrop, Estate Planning Precedents which excerpts from Canadian Forms of Wills, 4th ed. BY Terence Sheard and the late Rodney Hall,  “  Although a will is by its nature revocable, a testator may, by agreement, create equities in his assets that will be enforceable against those who derive title from him (Dufour v. Pereira (1769), 1 Dick. 419; Stone v. Hoskins, [1905] P. 194; 39 Hals., 3rd ed., p. 851; see also Re Hagger, [1930] 2 Ch. 190). The commonest manner in which such equities are created is through the making of joint or mutual wills  but the mere fact that two wills are made in identical terms does not of necessity imply any agreement to constitute equitable interests so as to, in effect, make the will of the survivor irrevocable” .

FN5.  The finding of an adverse interest is very important with respect to accounting.  Under the common law section 32(6) and 42 of the Substitute Decisions Act, 1992, S.O. 1992, c. 30  and under the regulations Accounts and Records of Attorneys and Guardians, O. Reg. 100/96 the attorney for property has a absolute strict duty to in accordance with the regulations, keep accounts of all transactions involving the property of the grantor of the Power of attorney.  Justice Strathy, in his judgment, addresses what happens when the attorney fails to keep proper records: 

Duty to Account:  trustee has an obligation to keep proper accounts. A trustee must keep a complete record of his/her activities and be in a position at all times to prove that he/she administered the trust prudently and honestly. He/she must have the accounts ready and give full information whenever required. (see para 30)

Adverse Inference:  An attorney who fails to retain receipts supporting substantial cash withdrawals or expenses charged against the incapable person’s property has not adequately carried out his/her duties and will be held personally liable for the unsubstantiated withdrawals (para 35)  It is a basic principle of trust law that a trustee is not entitled to use the trust property for his or her own personal benefit.  Trustee has onus to prove disbursements were legitimate.   If a trustee cannot account for or explain disbursements or expenses charged against a trust he/she is personally liable to the trust for those disbursements (paragraphs 43 45, 49 and 89).

Are Adult Children Legally Entitled To Inheritance?

January 6, 2011 by Charles Wagner

While their father loved both Samantha and Reuben equally, in his will, and in accordance with his culture, all the assets of the father were left to the male heir.  Is this legal?

The legality of father’s will may depend on which province’s law applies.  If the law of British Columbia governed there is a very good chance that Samantha would succeed and the Court would order the estate be split equally.  If Ontario law applied and there were no other legal issues raised concerning the validity of the will then Samantha would have a less likely chance to win.  Why the uncertainty?  Let’s look at three cases to explain, Tataryn v Tataryn (FN1), Cummings v. Cummings (FN2) and Johnson v. Huchkewich(FN3).

Tataryn was a case in British Columbia.  It was ultimately decided by the Supreme Court of Canada.  In summary, the deceased’s will favoured one son and disinherited the other son and gave less money to the deceased’s wife.  The court varied the will based on the deceased’s moral obligation to his wife and disinherited adult son.  In British Columbia, unless there is some debt or the favoured child is a dependent, or there is a valid reason for disinheriting a person, each child has a moral and legally enforceable claim against the estate.

The importance of “moral claims” as set out in the Tataryn case was adopted by the Ontario Court of Appeal in 2004 in Cummings v Cummings.  In this unfortunate case a second wife was litigating against dependent adult children of a first marriage.  The son, Paul, suffered from a progressively debilitating incurable neuromuscular disease known as Becker’s muscular dystrophy.  Paul, was arguably entitled to the all of the small estate.  Citing Tataryn, Justice Cullity explained, “The issue of the weight to be given to moral considerations is relevant in this case: it is posed quite directly by the [second wife’s] concession that she is not in need of support. On a strictly needs-based approach, I might well be justified in ordering that the entirety of the net testamentary estate be transferred to the support of Paul…I do not think that this would be the correct disposition of the case. I believe that, apart from any residual value that is to be attributed to freedom of testamentary disposition….moral considerations continue to play a part in the analysis.”

So has Ontario followed British Columbia’s lead?  Maybe, maybe not. 

I have reviewed many related Ontario cases post Cummings.  To the best of my knowledge no Ontario court has understood Cummings to mean that the moral claim of a disinherited adult non dependent child was legally enforceable.  As you recall both the adult children in Cummings were dependants which means that the father was providing support or was under a legal obligation to provide support immediately before his death.  It may be that the courts apply the moral obligation only for dependents.  For example, in a recent Ontario case, Johnson v. Huchkewich, one disinherited daughter challenged her mother’s will.  The judge did not even address whether a child’s moral claim constitutes a legal claim.  The only relevance of “moral claims” was how it reflected on capacity.  The daughter argued that her mother lacked the ability to assess and appreciate the moral claims of her children and therefore did not have capacity.  The judge did not accept that argument.

So will the winds of non dependent adult children’s moral claims from British Columbia blow through Ontario?  It still remains to be seen.  However, there are a number of lawyers who believe it’s coming.  In her article on this topic, prepared for the Law Society of Upper Canada’s continuing legal education program, Susan Woodley (a very well respected member of the bar in Ontario) answered the question this way,  “almost, possibly, probably”.

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.
 
Charles B. Wagner is the managing partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.

FN1  Tataryn v Tataryn 3 E.T.R. (2d) 229 S.C.C.

FN2  Cummings v. Cummings ( (2004), 5 E.T.R. (3d) (81) (Ont. S.C) (Cullity, J.); see Cummings v.Cummings (2004) 5 ETR (3rd) 97 (Ont. C.A.)

FN3  Johnson v. Huchkewich, 2010 ONSC 6002

May An Executor Buy Estate Assets?

June 10, 2010 by Charles Wagner | 4 comments

Executors often want to buy assets belonging to an estate. Beneficiaries often suspect the executors of wrong doing. So I often am asked whether it’s legal for an executor to buy an asset from the estate. The short answer is maybe, possibly, but not usually.

To demonstrate the problem let’s imagine that Ben just died. He and his brother Harry owned an apartment building. These brothers loved and trusted one another their whole lives. Ben never married and treated Harry’s wife like his own sister and Harry’s kids like his own children. Ben was appointed as the executor and estate trustee for his late brother’s estate. The beneficiaries of the estate are the deceased’s wife and two children. The only asset of the estate is 50% of the apartment building.

Ben gets two independent appraisals valuing the apartment building at $2 million. He offers the estate $1.5 million dollars for its ½ of the apartment building. Each of the beneficiaries gets independent legal advice approving the sale. So what do you think? Under these circumstances can Ben buy the estate asset eventhough he is the executor and estate trustee? Would you change your opinion if immediately thereafter Ben gets a call and someone offers to buy the apartment building for $4 million?

The general rule of thumb, as articulated by Professor Waters in his book Waters Law of trusts is that “It is a fundamental principle of every developed legal system that one who undertakes a task on behalf of another must act exclusively for the benefit of the other, putting his own interests completely aside. In the common law system this duty may be enforceable by way of an action by the principal upon the contract of agency, but the modes in which the rule can be breached are myriad, many of them in situations other than contract and therefore beyond the control of the law of contract. It was, in part, to meet such situations that Equity fashioned the rule that no one may allow his duty to conflict with his interest”.

Estate Trustees/Executors are considered fiduciaries. The common law is very clear that as fiduciaries have an exclusive duty of loyalty to the beneficiaries. If so, a court will wonder how could Ben negotiate a deal fairly when he represents the buyer (himself) and the seller (the estate)? That is why at common law, the fiduciary is absolutely forbidden from dealing with estate property for his own benefit regardless of how honest or fair the purchase may be. Nonetheless, despite that general rule of thumb, the courts have not always been consistent in how they apply this rule. While there is a consensus that the executor must act in a way that is in the best interests of the estate the courts differ on how strictly to apply the rule.

Some court decisions suggest that Ben could not buy the estate’s interest in the apartment building because even if he was being honest and even if he meant well he cannot possibly give the exclusive loyalty to the beneficiaries when he himself stands to make a profit. Those cases would suggest any such purchase is a breach of fiduciary duty and the deal can later be set aside even if the purchase was reasonable and the beneficiaries were not harmed. For a review of those cases I refer you to CED Trusts VI.4.(c).(ii) and WatersTrusts 18.II.

Other courts have considered the Fiduciary’s duty of loyalty as being intended to prevent actual harm to the beneficiaries. If there is no harm then these cases suggest there may be some flexibility that would permit the purchase. If Ben could show that the sale caused no harm to the beneficiaries and that his actions were reasonable his purchase may be allowed. For example, Ben might argue that he paid over market value because the apartment was worth more to him because he already owned ½ . Ben might say that the beneficiaries would not have gotten a price as high from anyone else. However, a disgruntled beneficiary might suggest that Ben did not disclose that he had an offer for $4 million dollars for the apartment.

While at common law, the fiduciary is absolutely forbidden from dealing with estate property for his own benefit regardless of his honesty and fairness of the purchase, there are infrequent circumstances that courts have allowed fiduciaries to buy trust property. Examples include Re Nathanson (1971), 18 D.L.R. (3de) 495 (N.S.T.D.) and Mochan v. Omega Oil & Gas Ltd, [1988] 1 S.C.R. 348 (S.C.C.). In these cases the courts approved of sales to a fiduciary. In one instance the trustee showed he unsuccessfully tried to find a buyer and the sale was in the best interests of the estate. In the other it was clear the price was fair and those to whom the fiduciary duty was owed consented to the sale with full knowledge.

Fiduciaries who wish to purchase trust property are well advised to make 100% full disclosure to beneficiaries and obtain their consent to the sale of trust property to the trustee. As well, it would be prudent to for all the beneficiaries to obtain independent legal advice. Furthermore, the purchase price should be somewhat more then fair market value. With all these arrows in his/her quiver the trustee might be well advised to seek preapproval of the sale from the court by bringing an application for the opinion, advice and direction of the court under Rule 14.05(3)(d), and under section 60 of the Trustee Act, R.S.O. 1990, c. T.23. It may happen that a judge will decline to hear the application because they might believe that preapproval of a sale is not the advice or opinion contemplated by the legislation. A judge might point out that if this offer to purchase came from a arms length third party no application for directions would have been made. One senior counsel suggested to me that there are other legal paths which might be a better option. But that – is for another time and another blog. The bottom line is that anyone faced with this issue, whether he/she be a trustee or a beneficiary, should not treat this blog as legal advice and is best advised to seek out a competent experienced lawyer to guide them.