Rules - Hull on Estates #206
Listen to: Rules – Hull on Estates #206
This week on Hull on Estates, Sharon Davis and Craig Vander Zee discuss two rules which arise when a trustee mixes trust funds with personal assets and when a trustee mixes assets from one trust with one or more trusts. These rules are called the rule in Re Hallets’s Estate and the rule in Clayton’s Case.
As discussed in the podcast, more information on these rules can be found in book “The law of trusts: a Contextual Approach” By Mark R. Gillen and Faye Woodman.
If you have any comments, send us an email at hull.lawyers@gmail.com or leave a comment on our blog.
Sharon Davis - Click here for more information on Sharon Davis.
Craig R. Vander Zee - Click here for more information on Craig Vander Zee.
Rules - Hull on Estates- Episode #206
Posted on May11, 2010 by Hull & Hull LLP
Sharon Davis: Hello and welcome to Hull on Estates. You’re listening to episode #206 on Tuesday, May 11th, 2010.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and wills. Now, here are today’s hosts.
Craig Vander Zee: Hi and welcome to another episode on Hull on Estates. I’m Craig Vander Zee.
Sharon Davis: And I’m Sharon Davis.
Craig Vander Zee: And if you want to be heard on Hull on Estates, you can participate by leaving us a comment. Email us at hull.lawyers@gmail.com or you can visit our blog at estatelaw.hullandhull.com.
Sharon Davis: Hi Craig, how you doing today?
Craig Vander Zee: I’m fine, Sharon. Yourself?
Sharon Davis: I’m doing great, thanks. I thought perhaps today we might discuss some rules. The world is full of rules and we all have to live by them.
Craig Vander Zee: Well I thought that, yeah, more so on that. I think we’re gonna touch upon two rules which arise when a trustee either inadvertently or perhaps purposely mixes trust funds or trust assets with his or her own assets, that is, personal assets. And then another scenario where a trustee might mix assets from one trust with another trust, or even beyond that, more than two trusts. And the rules themselves are called the rule in Re Hallets’s Estate and then the rule in Clayton’s Case. And just before we get started, Sharon, there is a textbook out called The Law of Trusts: A Contextual Approach, Second Edition, 2008. And the editors are Mark Gillen and Faye Woodman and Chapter 10 of that book deals with trustee remedies and touches upon both of these rules as well and deals with them in more detail than we would be dealing with them today.
Sharon Davis: That’s great. So anyone who wants to can look that up and find out some more detail. Let’s start with the rule in Re Hallets’s Estate. This is a case where a trustee mixes trust fund monies with his or her own money in a bank account.
Craig Vander Zee: Right and again this is a principle that arises from the Re Hallets’s Estate case. And that’s where it generates its name from and is known as the rule in the Re Hallets’s Estate. And the rule states that where a trustee mixes money with his or her own money in a bank account and then withdraws money from the account, it is assumed…perhaps wrongly…but it is at least initially assumed that the trustee first took out his or her own money rather than the money belonging to a trust beneficiary. So that’s the principle that we operate under when that circumstance arises.
Sharon Davis: Consequently it may be seen that the rule in Re Hallets’s Estate is based on the assumption that trustees are honest and they act accordingly. So they’re gonna act in accordance with their duties.
Craig Vander Zee: Well and that…you know there may be an inadvertent mistake with respect to the trustee where the trustee does this, perhaps not knowing that they should and ought not to mix trust funds with their own personal funds. But in that scenario, the Court or the law rather initially assumes that there is not a devious…although that might not be a fair in all cases assumption…but that’s the initial assumption that there’s not a devious motive there. So then what happens? Even in the case then where the trust funds are mixed with their own money, it’s not presumed that there is a situation of defrauding or fraud. That may turn out to be the case but that’s not the initial assumption. So is there a restriction to the rule itself?
Sharon Davis: So how do you deal with the money that’s left in the Estate? And the rule is restricted by another rule that a person may only lay claim to a maximum value of the lowest balance in the account during the intervening period. So any amount above the lowest intermediate balance is deemed to be money replenished by the trustee and is considered to be the trustee’s own money.
Craig Vander Zee: So perhaps…that’s certainly a mouthful, Sharon. So perhaps what we can do is provide an illustration. So let’s imagine a context where a trustee puts $10,000 of trust money into a bank account containing $5,000 of his or her own money. If the trustee takes out $5,000 or less, then the law presumes that the balance, which is the $10,000, belongs to the trust. In this particular situation, there is no real loss to the trust because they’re getting back the $10,000. So in this particular case, the presumption of what I’ll call honesty is one that’s warranted because there is enough money to satisfy the trust itself and the beneficiaries of the trust.
But let’s take one step more in respect of this example. What happens now in a situation where there’s $10,000 of trust funds mixed with $5,000? So the same beginning scenario, so that there’s now $15,000 in the account, but now the trustee takes out $12,000 for their own use and spends it, leaving a balance of $3,000. Obviously that $3,000 isn’t enough to satisfy the $10,000 owing to the trust. In that scenario, the beneficiaries of that trust would have a claim to the $3,000 that’s left over and they’d have a claim for $7,000 as against the trustee. So that is one potential further scenario.
What happens, though, if there is that same fact scenario but then the trustee adds an additional $2,000? So now you have $5,000 left in the account, $10,000 of which is owed to the trust. In that particular situation, the trust is not helped by the rule. In that particular case, the law continues to allow the trustee to be deemed the property of the $2,000. So even in that situation, there is still a claim to the $3,000 by the trust, representatives of the trust, and $7,000 against the trustee personally.
So there are a bunch of different scenarios that could arise from that where the presumption of honesty is a correct one and in a scenario where it may be the presumption that the law places on the situation but not in the end warranted because there is frankly assets that are taken from the Estate by the trustee. So that is also a long answer but I hope that can be followed.
Now then, turning to the rule in Clayton’s Case.
Sharon Davis: Again you have the mixing of money and this time it would really be more the mixing of more than one trust fund’s money. Now that may or may not be with the trustee’s own money. But if you have money from more than one trust in the one account, what happens in that situation?
Craig Vander Zee: So let’s pretend that it’s three trusts. So you have trust A, B and C. And in this particular context, you have the three trusts having $5,000, $2,000 and $3,000. So they’re co-mingled together. First of all you wouldn’t want that situation but when you’re left with that situation you’re then looking at how do we work it out? And again, Sharon, as you mentioned, it’s the rule in Clayton’s Case. And it holds that where a trustee mixes money from two or more trusts in one account and then moves money from it, the trustee is deemed to have taken out the money that was first deposited in the account. The reason for the creation of the rule in Clayton’s Case seems to be to facilitate the tracing of funds in situations where there appears to be really equality between all the beneficiaries in the respective Estates and trying to deal with the proportionment and I guess the repayment to those respective trusts.
So again, in the scenario that I provided, there is $5,000 from one trust, $2,000 for another and $3,000 from yet another. So that makes $10,000 from three different trusts. And let’s presume then that the following week the trustee takes out $6,000 for his or her own personal use. At the end of that situation, there’s only $4,000 left. So how are we going to deal with the repayment or the claims by these respective trusts for the money? Well, according to the rule in Clayton’s Case the first trust, the one that provided $5,000 to the account, gets nothing. The second trust which provided $2,000, gets $1,000 of the $4,000. And then the last trust which is $3,000 as a contribution to the account, gets the balance of the $3,000. So again, hopefully not too confusing of an explanation but in the end, it’s really looking at first in - first out.
Sharon Davis: And the purpose for that really is more expediency. It doesn’t appear fair necessarily but in the interests of trying to determine who owns what money when it comes to co-mingled funds in a trust.
Craig Vander Zee: Yeah, I would agree. It seems to be a rule of convenience and administrative expediency and whether that seems fair to the first trust that I mentioned in the example, I think their beneficiaries may not think that it is. But there again there’s some exceptions to the rule in Clayton’s Case. One of them being the rule in Hallets’s case. And again you’ll recall that in the example I gave, there was three separate trusts which had monies in the same account. We didn’t factor into whether the trustee has personal monies into that account. And so that would be an exception to that as well.
Sharon Davis: Another exception would be if the withdrawal is designated to a specific trust, in which case there is no difficulty with trying to determine whose funds came out because it was specified. Are there any other exceptions?
Craig Vander Zee: There are. When transactions are entered in a bank account on the same day, where all the claims can be satisfied obviously because if there was $10,000 in the account still then all the claims can be satisfied. In that particular situation, the rule works to give everyone their money back. Or sorry…there isn’t a need to have the rule to operate to give everyone the proper amount of monies. And then lastly where a trustee withdraws money from a mixed account for the purposes of a particular trust beneficiary but then misappropriates it. So in that particular situation, the rule in Clayton’s Case is not gonna be applicable either, or at least that’s gonna have an exception that’s gonna work against it.
So while the rules can seem to be complicated, they’re really intended to sort out situations where trustees have inadvertently or perhaps wrongly co-mingled either trust funds with their own personal assets or co-mingled trust funds with other trust funds or trust assets and these rules will work to try and assist people with working out those scenarios.
Sharon Davis: Right. I guess the lesson being no co-mingling is better than any kind of co-mingling at all. If you want to read a little bit more about this, certainly on our blogs Craig has blogged on these topics for March 31st and April 1st. You can refer there and you can…because it is a little bit of a confusing scenario, it’s all set out there in writing for you if you’d like to read it. And I think that brings us to the end of this week’s discussion. Thanks for listening and thanks for joining me today, Craig.
Craig Vander Zee: It was a pleasure, Sharon. And I look to podcasting with you again soon.
Sharon Davis: And we look forward to hearing from our listeners. You can send us an email at hull.lawyers@gmail.com. Be sure to visit our blog at estatelaw.hullandhull.com where you’ll find even more information and discussion on today’s practice of Estates law. We hope that you enjoyed the show. I’m Sharon Davis.
Craig Vander Zee: And I’m Craig Vander Zee, and until next week, so long and have a great week.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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