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The Interrelationship Between a Guardian of Property and a Trustee Under a Testamentary Trust
This week on Hull on Estates, Rick Bickhram and David M. Smith discuss the complications that can arise when an incapable person is both the subject of a guardianship order and the beneficiary of a testamentary trust.
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The Interrelationship Between a Guardian of Property and a Trustee Under a Testamentary Trust - Hull on Estates Podcast #133
Posted on October 21st, 2008 by Hull & Hull LLP
Rick Bickhram: Hello and welcome to Hull on Estates. You’re listening to Episode 133 on Tuesday, October 21st, 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.
Rick Bickhram: Hi and welcome to another episode of Hull on Estates. I’m Rick Bickhram.
David Smith: And I’m David Smith.
Rick Bickhram: If you want to be heard on Hull on Estates you can participate in our discussion by leaving a comment. Give us a call at area code 206-350-6636. The number is in the show notes along with our e-mail address which is hull.lawyers@gmail.com, or you can visit our blog at estatelaw.hullandhull.com. Today David Smith and I are going to be discussing the complications that can arise as a result of guardianship applications.
David Smith: That’s right, Rick. I think what we thought we would discuss is, we’re generally familiar with the concept of guardianship applications. I want you Rick, just to give us a refresher on that before we delve into some of the complications that can arise, because the management of property is not always a simple thing, especially when there are competing interests that arise which require the guardian to seek legal advice or consider whether there is any kind of conflict of interest. Before we get into that, Rick, though, let’s talk about guardianship generally. What are the two types of guardianship and how is a guardian appointed in Ontario?
Rick Bickhram: Well, there are two types of guardianships. The first type of guardianship is the guardianship of property. And basically a person is appointed to manage with the individual’s or the incapable’s financial affairs. And the other type of guardianship is the guardianship of personal care. And what that pretty much entails is a substitute decision-maker is appointed to handle the personal care decisions involving the incapable individual. Now looking at what governs substitute decision-makers, there is a statute, which is known as the Substitute Decision Act which is the primary statute governing the appointment of all substitute decision-makers in Ontario.
David Smith: That’s right, Rick, and you know, guardianship is under the supervision of the Court. It’s where the Court steps in and appoints a guardian in those circumstances where someone may not have otherwise provided for a substitute decision-maker by making a Power of Attorney either for property or for personal care. And of course, you can sometimes have situations where one or more attorneys are appointed under a Power of Attorney and can’t agree, and in that situation, where there’s a contest between the individuals who are meant to act jointly but can’t, that’s a situation where you’ll see a contested guardianship application, where the parties basically go in front of the Court and say, judge, over to you, we can’t agree, we need some help here. So that’s the subject of another podcast.
But today what we want to talk about is complexities that can arise when the alleged incapable person has an interest in property where the discretion to encroach or the discretion to exercise an entitlement may be in question. So, Rick, typically in the guardianship applications that we see in our office, and that you see in this area of practice, when someone is alleged to be incapable and the Court is asked to supervise the substitute decision-making for that person by appointing a guardian, obviously one step a guardian has to make is to prepare a management plan, right?
Rick Bickhram: My understanding of what a management plan is, is that it sets out the guardian’s plan, or his or her proposal to manage this individual’s property going forward.
David Smith: When we’re talking about property, Rick, what are we talking about? Are we talking about just real estate or are we talking about financial assets or can it be all these things?
Rick Bickhram: My understanding is that it involves all of the incapable person’s property, real estate, his bank accounts, any investments that he may have, etc.
David Smith: Right. Now the interesting thing with this area of law is you get all kinds of different scenarios. You will have an incapable person who may have no interest in property or money whatsoever. You may have someone who simply receives a pension. You may have someone who’s been brain-injured in an automobile accident and who, therefore, is receiving the benefit of a structured settlement. Or you may have someone who, through whatever means, has gained a significant amount of their own assets.
And the complication I want to talk today, Rick, is an interesting situation which I’ve run across, and that’s a situation where let’s suppose that the incapable person has been incapable since childhood. Through one means or another, that person has managed to accumulate some significant personal assets. In addition, that person’s parents, when they passed away, left Wills that provided a testamentary trust for the benefit of the incapable person. So the incapable person then has two sets of assets. One of the assets is let’s say, an investment portfolio, consisting of their own personal investments. The other asset is an interest in a testamentary trust. Now the testamentary trust will be in the discretion of the trustee appointed under the testamentary trust, and that trustee will have a discretion to pay out income to the incapable person. The interesting question, of course is, how does that responsibility dove-tail with the responsibility of the guardian? And the Courts are beginning to have to wrestle with this question. Because once the guardian is in place, the guardian has to manage the affairs. And while the guardian is responsible for administering the property of the incapable person, there’s also a responsibility to receive income from the testamentary trust. The complication, of course, is that the trustee under the testamentary trust is an entirely different person from the guardian. And so you’ve got two sets of responsibility here. You’ve got a trustee under a testamentary trust making decisions as to what and how much money to pay out to the incapable person. And on the other hand, you’ve got the guardian for the incapable person who is themselves looking after the property. It’s kind of an interesting question, eh, Rick?
Rick Bickhram: I completely agree with you. What’s your take on whether or not a conflict is present?
David Smith: Well, good question, Rick, because let’s suppose the guardian for the incapable person is also the same person who would be the capital beneficiary on the death of the incapable person. That is to say, let’s assume that the testamentary trust provides for the benefit of the incapable person, gives the trustee the discretion to encroach on the capital for the beneficiary person, but also says that on the death of the incapable person, the beneficiary is by happenstance the same person who seeks to be appointed as the guardian. Sounds like a conflict to me, Rick. What do you think?
Rick Bickhram: Absolutely, and the conflict, I guess, at least in my mind, has to deal with the even hand principle.
David Smith: What’s the even hand principle and how would that apply here, Rick?
Rick Bickhram: Well the even hand principle pretty much is where there’s a trust set up, there are two beneficiaries. There’s a capital beneficiary and then there’s the income beneficiary. And what the even hand principle stands for, is that the trustee has to act with an even hand for the benefit of both the income beneficiary and the capital beneficiary.
David Smith: That’s right. And of course, you know the difficulty is that the trustee who has to decide whether to exercise discretion, needs to, there are some questions to what criteria the trustee has to consider in deciding whether or not to pay money out of the trust. And there’s been some talk in some of the cases that talks about a means test which basically is, does the trustee have to look to the means of the alleged incapable to decide whether they’re in need of money from the trust, and if so, how much money?
Rick Bickhram: Well that sounds like an interesting decision, Dave. What case is that?
David Smith: Well you know, Rick, there was a case of Hinton and Canada Permanent Trust Company, and in that case, the wording of the Will in question was strongly in favour of a claim to encroach. Nevertheless, the principle applied. The failure of the author of the trust to allude to the resources of the beneficiary led to an inference that the trust is to maintain and benefit the beneficiary, regardless of and without recourse to his own needs.
So Hinton seems to stand for the proposition that you don’t necessarily look to means. I think the other interesting issue is there’s a whole body of cases that deal with when the Court has jurisdiction to interfere with discretion exercised by the trustee. And we’re not going to get into that now. One of the cases is Fox and Fox Estate, and there are some other cases that deal with situations when the Court will be critical of the trustee for not acting for the, not appropriately exercising discretion for the benefit of the beneficiary. That’s the issue for a separate podcast.
But again, I think the really curious issue here is, to what extent does the guardian have any sway over the exercise of the discretion by the trustee, and to put it another way, when the trustee has to consider on what basis to pay out money to the beneficiary. To my mind, that trustee is him or herself exercising a substitute decision-making role in a sense, over the incapable person because the trustee is having to consider what and how much money is required by the incapable person which, of course, is exactly the same responsibility that the guardian has. I suppose another way of looking at it, is that the guardian can simply just passively wait to see how much the trustee is going to give him. But in any scenario, it’s hard not to imagine that the trustee on a testamentary trust would have to communicate at some level with the guardian.
Rick Bickhram: Absolutely. It’s a give and take relationship it sounds like to me.
David Smith: Right, because both of them are looking after the same person. The guardian is safeguarded to look after the well-being of the incapable, whereas the trustee under the testamentary trust has a fiduciary duty to ensure that the beneficial entitlement of that person, who happens to be incapable, is provided for. And of course, the whole reason that the testamentary trust was set up was because the person was incapable and needed a trustee to look after their affairs. So you’ve got an interesting dove-tailing of responsibility between a trustee and a guardian.
Rick Bickhram: Sounds very interesting, Dave.
David Smith: Well, Rick, thanks a lot for this discussion. I really enjoyed it and it was good to sort of explore some of the outer limits of the relationship that can occur between guardians and trustees.
Rick Bickhram: It was a pleasure to podcast with you today, and we look forward to hearing from our listeners. You can send us an e-mail at hull.lawyers@gmail.com or just pick up the phone and leave us a message on our comment line at again, 206-350-6636. Be sure to visit our blog at estatelaw.hullandhull.com where you’ll find even more information and discussion on today’s practice of estate law. We hope you enjoyed the show. I’m Rick Bickhram.
David Smith: And I’m David Smith.
Rick Bickhram: Until next week, so long.
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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