TRUSTEE DISCRETION AND CAPITAL ENCROACHMENTS - PART II
The Scope and Extent of the Power to Encroach
Once it is determined that a Will grants a power to encroach on capital, the next step is to determine the scope and extent of this power. As can be seen from the example set out in yesterday's blog of a typical capital encroachment provision, a trustee is usually granted "uncontrolled discretion" in exercising such power. However, the scope and extent of a trustee's discretion is subject to certain limits. One such limit is a trustee's fiduciary duty to act impartially as between beneficiaries, known as the even-hand principle.
The Even-Hand Principle
In Water's Law of Trusts in Canada (3rd ed.) the even-hand principle is described as follows (at pp.966-67)
It is a primary duty upon trustees that in all their dealings with trust affairs they act in such a way that, if there are two or more beneficiaries, each beneficiary receives exactly what the terms of the trust confer upon him and otherwise receives no advantage and suffers no burden which other beneficiaries do not share. In this way the trustees act impartially; they hold an even hand. The settlor or testator may choose to give disproportionate interests to various beneficiaries, and he very often does so in practice, but that is his privilege. It is still the duty of the trustees to carry out the terms of the trust as they find them, and to ensure that in the administration of the trsut they do not give advantage or impose burden when that advantage or burden is not to be found in the terms of the trust.In the context of a trust with both income and capital beneficiaries, Waters describes the importance of applying an even-hand approach as follows ( at p. 968):
It is the distinction between income and capital that is so important in the context of this rule; here are two classes of beneficiaries, for income and capital beneficiaries are interested in different things. With regard to the trust fund the income beneficiary is looking for the best yield obtainable, while traditionally the capital beneficiary is concerned with the safety of the fund. It is the duty of the trustees so to manage the fund that they do the best possible for both, and this means holding an even balance between yield and risk.A trustee's fiduciary position requires her to maintain an even hand between beneficiaires when exercising a discretionary power, unless the trust provisions specifically authorize the trustee to ignore the even-hand principle and act otherwise. A power to encroach upon capital for the benefit of the life tenant or income beneficiary is usually interpreted as authorizing partiality.
Have a wonderful day!
--Bianca
