Thursday, March 14, 2013

Ontario court: trustees can't just act in any manner they want

The Ontario Supreme Court of Justice recently handed down an interesting judgment that affects all trustees (which includes executors). It was a case involving a contested passing of accounts on a family trust. The case is Steven Thompson Family Trust v. Thompson.

The trustees wanted to pass their accounts. The beneficiaries objected to several expenditures, including fees paid to the trustees and fees paid to lawyers and accountants. To defend themselves, the trustees relied on two clauses that are very commonly found in wills and trust documents.

The first clause in question was one that allowed the trustees to hire lawyers, accountants and others to help them with the trust administration, and to pay them from the trust. The second clause, known as an exculpatory clause, was one that indemnified the trustees from any liability arising from errors that were made even though the trustees acted in good faith. As I said, these clauses are often included in trust documents to show that the settlor of the trust (or the testator of a will) intend for the trustees not to face legal trouble or financial loss due to errors.

The court looked at these clauses in the context of the facts of the case. The judge said that "an exculpatory clause cannot be a license to a trustee to act in any manner he wants." The judge refused to accept that an exculpatory clause means that no matter what a trustee does, the court can't blame them. As the judge said, for the beneficiaries of a trust, there is usually no way to fix trustees' mistakes without going to court, so it would be very unfair to cut off access to the courts.

Of the 23 disbursements to which the beneficiaries objected, 20 were disallowed by the court. Legal and accounting fees paid out that were considered to be no real benefit to the trust were disallowed, meaning that the trustees could not be reimbursed for them from the trust. This included $14,000 to a lawyer, $31,000 to accountants and an overpayment of $22,000 in trustee fees.

Those are pretty hefty bills to be paid out personally by trustees, but as the judge said, if the actions being taken are not really to the benefit of the trust, they shouldn't be paid out of the trust, even if the trust contains a clause saying that trustees are not to be blamed for mistakes.

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