Trustees are provided with a broad range of powers in order to fulfill their fiduciary duties to beneficiaries. As trustees are given such extensive powers, their actions are scrutinized subjectively based on the intended consequences of their efforts.
The test for a fraud on a power involves an examination of whether the powers given to a trustee were used in a manner that benefited a non-object of a trust and whether the trustee actually intended for the non-object to benefit. The test tends to be difficult to apply because the purpose and intention of the trustee to go beyond the scope of the instrument that granted and created the power is used as the basis of the fraud.
The finding of fraud on a power can be quite complicated, and often elusive facts are the basis of a determination. However, it is important for trustees to have an understanding of the concept due to the severe ramifications that can arise as a result of such a fraud. These ramifications can include:
- personal liability imposed on the trustee to reimburse lost trust funds;
- depending on the terms of the trust indemnity, a trustee may not be indemnified by the trust for the loss of funds due to fraud on a power;
- trustees have to take all necessary steps to recover proceeds of the fraud from the donee or payee; and
- regardless of the terms of indemnity provided by the trust, courts are still authorized to order trustees to pay costs on a successful claim against them.
As an example of the complexity that can arise in the application of fraud on a power, a trustee may provide trust assets to a beneficiary with the intention that those assets pass from the beneficiary to a non-object. This transfer is prima facie valid since providing such assets to a beneficiary is a valid exercise of the trustee’s power; however, because the ultimate benefit is derived by a non-object, such an action may be found to be a fraud on a power. Alternatively, if the beneficiary has an obligation to the non-object, and has no other assets upon which to fulfill this obligation, there would be a personal benefit to the beneficiary in instructing the trustee in this manner. In such an instance, the actions of the trustee may well fall within the scope of their powers.
Clearly, the concept of a fraud on a power is somewhat fluid and very fact specific. It is therefore advisable that trustees always ensure they act within the terms of the trust, and if they are instructed to pursue actions which may fall outside of the ambit of their powers, to seek court approval in advance of that action to avoid personal liability.
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