TRUSTEE DISCRETION AND CAPITAL ENCROACHMENTS - PART V
The Scope and Extent of the Power to Encroach (cont'd) Yesterday, I considered the Fox Estate case and the issue of trustee discretion based on "extraneous" matters. An interesting issue arises in cases where a beneficiary has adequate personal resources of her own.
May a trustee consider the beneficiary's personal resources when exercising discretion to encroach upon capital? If the capital encroachment provision does not require the trustee to consider such personal resources, is such a consideration "extraneous" to the exercise of the trustee's discretion? In the case of Re Luke [1939] O.J. No. 27 (H.C.J.) (Q.L), the testator named his wife as his principal beneficiary and his executrix.
The will provided for the wife to use the income and so much of the capital as she may need for her comfort, maintenance and support during her lifetime. The issue considered by the Court was whether the wife should first exhaust her own financial resources before she could exercise the discretionary power to encroach on the capital. The Court held that the wife did not have to exhaust her own resources before encroaching on the capital, as there was no specific requirement in the Will that she do so:
Had the testator here intended that his widow should first exhaust her own funds before encroaching on the corpus of his estate he could have used appropriate language to express that intention. His failure to do so must surely indicate that her right of encroachment was an absolute right and not regulated by reference to other means of her own which she might have. (at para. 19)
Essentially, the Court in Re Luke held that if the testator intended the trustee to take into account the personal financial means of the beneficiary, the testator would have used appropriate and clear language to express such an intention. The issue of whether a trustee is even permitted to inquire as to the personal financial resources of a beneficiary when deciding to encroach upon capital was directly considered in Hinton v. Canada Permanent Trust Company [1979] O.J. No. 275 (H.C.) (Q.L).
In Hinton, the testatrix provided for a trust for the benefit of her son. The executors of her estate were her son and a corporate trustee. The Will provided that the executors were to encroach on the capital if the interest income proved "insufficient" for the son's support. For a number of years, the executors paid the interest income to the son as well as an amount representing a capital encroachment. Eventually, the corporate trustee requested that the son provide information as to his own resources to determine whether the capital encroachment was appropriate. The son refused to provide such information on the basis that he was not obliged by the terms of the Will to do so. The Court agreed with the son and found that the lack of any reference in the Will to the son's income or assets as a factor in determining whether to encroach on the capital of the trust fund was intentional on the part of the testatrix. The son's personal resources were not relevant.
Based on my review of the case law, it would appear that in the absence of any specific language to the contrary in a Will, a trustee may exercise her discretion to encroach on capital without taking into account the personal financial resources of the beneficiary.
Conclusion: In summary, when providing advice with respect to capital encroachments, the first step is to examine the Will and the intentions of the testator to determine whether a power to encroach on capital has been granted. Once it has been determined that the Will grants a power to encroach, the next step is to determine the scope and extent of this power. Trustees are usually granted "uncontrolled discretion" in exercising their power to encroach. However, the scope and extent of such discretion is subject to the even-hand principle and the prohibition against acting on the basis of mala fides. Have a wonderful day!
--Bianca
