This week on Hull on Estate and Succession Planning, Ian and Suzana discuss delegation issues that arise when dealing with Investment Accounts and address a listeners question about the family cottage.

Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.

Posted on July 1, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #119 of our podcast on Tuesday, July 1^st, 2008.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.

Suzana Popovic-Montag:   Hi there, Ian.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: How are you today?

Ian Hull: I am great.

Suzana Popovic-Montag: That’s good.

Ian Hull: I think this podcast will actually be lodged into the internet through the mysteries of digital technology on Canada Day.

Suzana Popovic-Montag: Happy Canada Day everyone.

Ian Hull: Yes, big day here in Canada, and a big day for us as we continue our march towards our 200^th podcast. That’s our next benchmark, I guess, in some ways. We’re now at 119.

Suzana Popovic-Montag: Just a quick reminder to anyone who’d like to call in and give us feedback, comments on the show, please feel free to call us at 206-457-1985.

Ian Hull: And feel free, of course, to e-mail us at hullandhull@gmail.com, or jump on our webpage at hullandhull.com and surf around, find our blog, find all of the backup information that we tend to be using for a lot of these podcasts.  And we’re hoping to put more on where this summer’s project is looking toward trying to get some more video on there and certainly keeping the white papers on the website as well. 

So, before we begin our further analysis of the ever-pressing issue of investment accounts, when you’re putting together Court format accounts, I just wanted to talk about an e-mail that we received last week on our discussion about the prudent investor rule. And we got a great e-mail, again this is tied into some specific advice they were seeking so I’m just sort of summarizing what was being asked of us.  And the focus of the question was, just how much of a balanced portfolio do you have to maintain or how important is diversity when you have the main asset of the estate being the family cottage? And remember, we talked about the unique quality of a family cottage as an illustration of the escape clause that the Act and the Courts have allowed trustees to maintain an asset that, on the face of it, looks like it isn’t prudently being invested in the sense that it may be a wasting asset or it may be costing more than it’s making. And this person e-mailed us asking us what happens if it’s a fairly modest estate and you have essentially the bulk of the estate is indeed the family cottage? 

So it’s a tough question and one that, as all lawyers have to say because we are right when we say it, it depends on the facts and it depends on the circumstances. We didn’t get into any more detail on what this specific question was, but I’m going to add one layer onto that and that is, is that let’s say it is a trust for a surviving widow.  So in this case, a happily married couple, they have Wills that say all to the other in trust, and on the death of the final last person standing, everything to the child or the children, in this case there’d be two kids. So in that kind of scenario we have a surviving spouse, she’s 84 years old, the trust is only, and when I say only it’s made up of $900,000, $800,000 of it is the family cottage and $100,000 of it is cash. Well, in that kind of scenario, if the surviving spouse needs the money, then in that kind of situation it may be that the Court would say, you know what, you do have an obligation to diversify. Notwithstanding the fact that the two children are probably chirping away saying don’t sell the cottage, mom, it may be that that situation where, as a fiduciary, you have to assess it as being a unique asset certainly, but when you need cash, you need cash. So, again, it would depend on the personal circumstances of the surviving spouse and if she had her own wealth she may say, don’t worry, keep it. So that scenario works well, I think, as an illustration, because if the surviving spouse has their own wealth, and chooses to say to the fiduciary, don’t sell, then you’ve got some comfort to hang onto, it’s completely undiversified portfolio. But, if the surviving spouse says, I need the dough, then you’re faced with a difficult decision. And the third question would be, what about the children of the children, i.e., the grandchildren?  And what would the representative, the legal representative of the grandchildren, say about that diversification question?

Suzana Popovic-Montag: And that also raises, of course, the issue of the even hand rule and how a trustee has to maintain an even hand between the income and the capital beneficiaries of the estate. And I know we’ve talked, Ian, on previous podcasts a little bit about that rule as well as how a trustee would go about exercising discretion in light of the fact that the surviving widow either does or does not have her own assets in her own estate.

Ian Hull: And there’s that other layer, of course, that we’ve talked about, is that we’re not actually as a fiduciary allowed to ask the surviving spouse typically what they have or don’t have. So you’re hoping there’s some co-operation and some discussion that is frank and maybe outside the boundaries of what we’re allowed to ask. But I have seen cases where you’ve got the even hand rule tugging away at you and then, and that being basically, look, we’ve got to balance these three generations.  That this is the trust, the trust says look after the income beneficiary, the surviving widow, look after the children and keep in mind the grandchildren. So, I’ve seen cases where government agencies that monitor the grandchildren’s interest have insisted that that is not a diversified portfolio and that you have to seriously consider, notwithstanding the provisions of the Act, seriously consider selling the cottage. So really, from our perspective, I think what’s important to keep in mind is, if you keep, if you really want to keep a special cottage issue, or a chalet, or some recreational property, unique characteristic property, in a trust after you die, you’d better think through what all of the competing interests are going to be, and think through what the Court’s going to say to you. Because you may end up forcing the sale of this cottage property inadvertently, because of these competing interests.

Suzana Popovic-Montag: It really does underscore the importance of planning with proper professionals before these kinds of situations can unfold, so that you can sort of not predict but certainly try to anticipate the issues that can arise and perhaps creatively plan around that so that at the end of the day, you do have someone upholding what you ultimately intended to be your intentions.

Ian Hull: So I think that, anyway, I really appreciated the input from our e-mail participant on that one.  But it’s a good dovetail into the next concept I think that’s worth flushing out, because at the end of the last podcast, Suzana, you talked about this mutual funds and delegation and the kind of twists and turns that come up in the investment account environment. Let’s talk for a few minutes, if we could, about this concept of delegation first of all, and then dovetail it into this investment account problems that get created.

Suzana Popovic-Montag: And generally speaking, what we start with is the fact that as fiduciaries, we are somewhat restricted in terms of the level and the extent of delegation that we can make in doing our fiduciary responsibilities.  And one of the things that, in particular as I was saying previously years ago was a big issue with mutual funds, to what extent trustees could hire mutual fund advisors to actually help them administer these pools of funds and these assets.

Ian Hull: So when we say delegation, I guess we’re saying that we can’t hand off even the littlest jobs of any responsibility as a fiduciary. For example, signing a cheque. There is some authority that says that as a fiduciary we can ask someone else to give a Power of Attorney and ask someone else to sign the cheques. So in this situation, where we’re talking about delegation, we would say, hey we’ve got, the fiduciary is actually out of town most of the time but we’re running a bank account here. That fiduciary can delegate the job of signing the cheques probably.  but what he can’t do is delegate the decision-making to sign the cheque. So every time, say there was an income payment that had to be made and the fiduciary was out of town and their lawyer, for example, was in charge of sort of making sure the cheques went out once a month. Every time a cheque is written and signed, it has to be on the express instructions of the fiduciary. Now the fact that the lawyer, under a Power of Attorney, may sign the cheque is probably okay, but that’s a good illustration of what we say delegating. As long as you don’t give up the mental and the judicious decision to have the cheque signed, although you’re passing on the actual mechanics of it, you probably haven’t breached the delegation rule. Again, twists and turns, depends on the facts, but that’s an illustration of this delegation. And your example is the perfect one, because with a mutual fund, that was sort of like the ultimate delegation from a fiduciary standpoint, where you were a fiduciary, you handed $100 to an investment advisor and that investment advisor turned that money over, bought into different funds.  In the old days, they’d buy a bit of IBM, a bit of Bell Canada and you’d give them direct instructions. Well, with a mutual fund, of course, you’re handing it over to a further person, that is the fund manager of the mutual fund. So you give it to your investment advisor, who then hands it off to a fund manager.  And until the Act was changed in Ontario, there was some concern that that was essentially over-delegating. You had pushed out the decision-making too far. And it’s a really important point when you come to the expectations of the investment account which we’ll talk about more in our next podcast, but an important step. 

So in summary, we’ve got the old fashioned broker-client relationship untouched, but then we twisted it, we pushed it one step further and now we have some statutory protection to allow this sub-delegation, so to speak.

Suzana Popovic-Montag: And just to close the loop on that as well, we always underscore the importance of actually reading the documents and here the trust instrument or the Will, because that can be something that’s specifically planned for and language can be put into these documents that can authorize things over and above what the statute or what the common law itself provides for. So just another thing that we try to keep in mind in these situations.

Ian Hull: Well that’s great, Suzana. Hopefully we’ve had a good discussion on the question of delegation and certainly answered the question that came in from the listener. So thanks very much Suzana.

Suzana Popovic-Montag: Thanks to you, Ian and thanks to everyone who has joined us.   Again, just a quick reminder of our call-in number for any questions or any comments that you might have on the show, 206-457-1985.

Ian Hull: And any direct feedback, go to our blog at estatelaw.hullandhull.com or our e-mail at hullandhull@gmail.com. Thanks so much.

Suzana Popovic-Montag: Thank you.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. 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.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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Posted on April 8^th, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi and welcome to Hull on Estates. You’re listening to Episode #105 of our podcast on Tuesday, April 8^th, 2008.

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.

Ian Hull: Hi Suzana, its Ian Hull here.

Suzana Popovic-Montag: Hi and it’s Suzana Popovic-Montag. How are you today?

Ian Hull: Just great. We’re celebrating what, 105 now? We haven’t been doing this since 100 so good to be back, good to think about some issues that have been rumbling around in my mind. Just want to remind everyone to feel free to call in to our call-in number at 206-350-6636.

Suzana Popovic-Montag: Or you can drop us an e-mail at our gmail address which is hull.lawyers@gmail.com. Or, of course, you can visit us at our blog which is estatelaw.hullandhull.com.

Ian Hull: So Suzana, I know that when this launches into the internet, we are going to both actually be out of the country. I’m not going to be as nearly as exotic a spot as you are. But you’re off to Vienna and Prague to test the world markets on estate law and on law generally at a great conference. What your trip triggered in my mind was I thought we might have a discussion today about was issues that have, sort of, a broad and international perspective. And that, of course, ties into trust law generally. Where you’re going, both jurisdictions in Prague, it’ll be slightly different, I think it’s more of a civil code, but the Vienna system as well you’re going to be tied into the – learning a lot about the civil code. But the common law and where to cross the border is governed, trust laws are fairly consistent. And one of the things that they use tremendously in planning in Europe is, of course, trusts to avoid what can be very draconian and overwhelming tax liabilities on death. The classic scenario, certainly in the U.K., that a lot is written about and much case law comes out of, is situations where you create a trust that isn’t really a trust and we call it, of course, sham trusts. Another scenario is, of course, where you might have a situation where you created a secret trust or a semi-secret trust. So I thought it might be fun to talk a little bit about those angles on trust law.  And why don’t we start with the sham trust, if that’s ok.?

Suzana Popovic-Montag: That’s great, Ian and I know you’ve written quite a bit on this topic and I think it’s a really interesting one. It doesn’t necessarily – it isn’t necessarily something that we see a lot of but it definitely is something that is on the rise in terms of the literature that’s out there. What a sham trust really is and I guess the best way to, sort of, start with a description of it, is to start with the concept of a bare trust which is a simple trust in that the trustee is a repository of the trust property and he or she or it has no real active management duties to perform.

Ian Hull: And, of course, we’re talking about sham trusts, trying to essentially avoid sham trusts because if it is called a sham trust, then CRA and, of course, the Courts won’t give you the protections nor the tax advantages that may or may not exist. So your comment about the bare trust is crucial because that can be a useful and legitimate tool to create a trust relationship. There are, of course, really the opposite to a trust, proper trust with the three certainties or a bare trust as you’re describing, which is a proper trust with the three certainties only with a see-through flow-through in terms of the responsibilities. The opposite would be the sham trust itself. And that’s where the Courts and CRA get a little fussy about it.

Suzana Popovic-Montag: And on the face of it, it really does appear to be a trust in the sense that there is a trustee, there is a beneficiary and equitable rights are created in those beneficiaries.

Ian Hull: So in a situation where a sham trust has been held by the Court, a trust has been held to be a sham trust and not legitimate for the purposes being sought, is where the Court finds that the only real duty of the trustee is to do what the settlor says. And I know that’s sort of a bit vague but the Courts often go on and say well, you know, they describe these sham trusts as pretend trusts.

Suzana Popovic-Montag: And they do that because the common intention of the parties in these kinds of circumstances, the Court will find, is that it was not to actually create a trust with its associated rights and obligations.

Ian Hull: And really the Court just gets frustrated and a little cranky with people who create these sort of trust arrangements because they see them as an act or a document that is intended to mislead third parties.

Suzana Popovic-Montag: And I know sometimes the cases will actually go so far as to say and I’m just quoting from one of the cases that I am thinking of, that it’s an illusion basically, that it’s calculated to lead the tax collector, i.e. CRA, away from the actual tax payer. And so what it ultimately does is creates this façade of a reality of a trust, when in fact there isn’t one.

Ian Hull: Alright, so let’s talking about determining if it is a sham trust and what the Courts will look at.

Suzana Popovic-Montag: Well I think the first thing that they start with, of course, is the actual terms of the trust.

Ian Hull: And then they tend to talk about it being really a question of control.

Suzana Popovic-Montag: And in that sense, you know, it seems to be that they’re looking at whether or not the settlor has maintained control notwithstanding the fact that a trust has, on the face of it, been established.

Ian Hull: And one of the tests that I’ve seen in the case law is that the Courts will say, is the trust a mere alter ego of the settlor and that’s all?

Suzana Popovic-Montag: Now, Ian, I think we sort of understand the concept of a sham trust.  And what would you say would be sort of a good example of that, that you’ve seen recently or where people would want to try to create these situations and then ultimately not be successful because a Court finds that, in fact, it’s not a valid trust?

Ian Hull: Well the classic one that we see in Canada is the off-shore trust. Of course, off-shore trusts can be a good idea, they’re not all sham trusts, for sure. They create excellent tax planning, estate planning and creditor protection availability for wealthy clients. But if it’s not done correctly, you do create the difficulties that a Court from another jurisdiction will be looking through the trust and determining whether or not it is a sham.

Suzana Popovic-Montag: And I guess that sort of underscores the importance of working possibly with counsel in the jurisdiction where you’re trying to establish that trust, as well, in order to create something that hopefully will sustain the test by a Court.

Ian Hull: And, of course, and you know again, talking about the positives, is these trusts, the bare trusts in particular, can be a useful tool, these off-shore trusts can be useful tools, they create a tremendous amount of ability for wealthy clients to have confidentiality.  And while they have to in Canada, of course, declare their worldwide income, they don’t necessarily have to have it openly documented for others to see what exists and where it exists.

Suzana Popovic-Montag: And so there definitely are advantages to it. But what would you say would be a consequence of the fact that it’s a Court or someone who would ultimately determine, I guess CRA, that it isn’t in fact a valid trust?

Ian Hull: Well I think the key is, I mean many times these sham trusts are established for tax reasons. But the trust… where the Courts, what the Courts will do is, is that they’ll say, if it is indeed a sham trust, the trust assets are then taxed as if it was in the hands of the settlor. So, you know, any of the advantages that you may have tried to create are lost.

Suzana Popovic-Montag: And I guess most importantly, the creditor protection and, I guess, as well the loss of confidentiality to some extent, as well.

Ian Hull: For sure and I think that’s  – you know, in many situations, a bit of a deal breaker.

Suzana Popovic-Montag: I think if we just spend a couple minutes, we’ve got some time here, Ian, to turn to the concept of secret trusts. And I know I’ve heard you speak about them in the past and you say, you know, what they really amount to is taking the trust concept as we understand it at law and then becoming, you know, agent 007s.

Ian Hull: Absolutely. It’s the James Bond trust. And this trust, if done properly, can be a useful tool to again, it doesn’t elude CRA, but it might elude people who want to keep their assets more confidential and it’s an on-shore opportunity and an off-shore.  But it’s an on-shore opportunity to create a situation where the assets transfer from the settlor or a testator, depending if it’s someone who’s passed away, to a beneficiary, but through a third party.

Suzana Popovic-Montag: And the advantage there is that, of course, trusts can remain private documents, whereas Wills are potentially very public. And so if you’re trying to create an arrangement where you’re providing for a beneficiary-trustee relationship without it necessarily being known by everyone, you try to create this kind of secret trust arrangement.

Ian Hull: That’s right. And I mean, so the client really in this situation wants to make a gift but the nature of that gift they do not want to make public for whatever reason. And I think of an easy illustration was one that I ran into on a case that talked about a situation where the individual had a lot of wealth, wanted to pass on some of that wealth to the child after death, didn’t want the child really – not that the child should know, but didn’t want the public to know just how wealthy that child was going to be, because he feared people would prey on that child and try to take advantage of that child’s financial circumstances.

So the steps were to leave it through to a third party, hold it on a secret trust, the terms of which we’ll talk about in a moment here.  But the terms of which are disclosed properly and then the identification of the terms of the trust can, sort of, hold their own.

Alright, so we’re just about winding up, but I just want to remind, sort of, when I think about it, I’m reminded of the secret trust because the key is, is that the trust is typically not reduced in writing, the trustee will typically keep the money for him or herself, which obviously creates its own problems, but it is one that you need to have in some way, either through provisions of the Will or some way, articulated what the terms of the trust are.

Suzana Popovic-Montag: And that really is the key because this arrangement, by very virtue of the fact that it is a secret one, has to somehow be, as you say, reduced to provide the settlor with as much guarantee or as much protection as possible, in light of the fact that, you know, there are these inherent difficulties with it.

Ian Hull: So, in conclusion, you need, sort of, the essential ingredients to pull off a secret trust, is of course, you need a trust with the three certainties.

Suzana Popovic-Montag: And you also need an intention of the deceased to actually benefit the secret beneficiaries.

Ian Hull: You need communication of the trust terms to the trustee and/or the beneficiary.

Suzana Popovic-Montag: And thirdly, you want to have acceptance by the trustee or the beneficiary which is going to be sufficient to actually induce the testator not to execute a Will to that effect.

Ian Hull: Terrific. Okay well, thank you very much, Suzana, good to be back on Hull on Estates. Hope that was certainly interesting for me to review these reasonably unique trust questions, but they do pop up from time to time and can be an important part of an estates practice. So I remind everyone to feel free to call in to our call-in number, 206-350-6636.

Suzana Popovic-Montag: Or, of course, feel free to send us an e-mail at hull.lawyers@gmail.com or visit our blog and webpage at estatelaw.hullandhull.com. Thanks very much, Ian

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.

To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.

Our theme music is Upper Structure by DJ AKid  and is courtesy of the Podsafe Music Network.

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