In a recent British Columbia case, a brother asked the court to remove his sister as the trustee to the trust established by his deceased father for him, alleging that she had been untruthful and self-interested in the trust’s management.
Testator Creates Trust for Younger Son in Will
The testator passed away in 2014, leaving a will dated 2012. He and his wife, who had predeceased him, had three children: two sons and a daughter.
Under his will, the testator left his estate to his three children in equal shares, but the younger of the two son’s share was put into a trust. The younger son, unlike his two siblings, had always struggled financially, both in terms of income level and money management. The testator had set up a trust for the younger son for these reasons.
The older brother was named as the executor of the estate and the daughter, who is an accountant by training and vocation, was named trustee of the younger son’s trust.
After the older brother had distributed the testator’s assets according to the terms of the will, the daughter received $295,249 in trust for the younger son in April 2014, and she deposited that amount into a bank wealth management account.
Younger Son Seeks to Remove Daughter as Trustee of His Trust
Subsequently, the younger son brought a claim to the court, seeking to remove the daughter as the trustee of his trust. He wanted either the older brother, or the older brother’s wife, to be appointed in her place. In fact, the testator had named the older brother as the alternate trustee for the trust in his will.
The younger brother had numerous complaints about the daughter’s trusteeship, which were broken down into three broad categories as follows:
1) She had failed to adequately report on the activities of the trust;
2) She had not provided adequate funds from the trust during his times of need; and
3) She had made an improper investment using trust funds for which she may derive a personal gain.
Additionally, the younger brother inferred that the daughter was untruthful, self-interested, and had a sense of entitlement.
Court Reviews Legal Principles for the Removal of A Trustee
The court began by reviewing the applicable legal principles, noting that it possessed the statutory and equitable authority to remove and replace a trustee and appoint a new trustee. The court then noted that the overarching concern for a court on an application to remove a trustee is whether the trustee’s conduct is putting the assets of the trust or the purposes of the trust in jeopardy.
Additionally, citing Ontario case law, the court explained that the decision to remove a trustee must not be undertaken lightly, and should only be done in the clearest of cases and when it is necessary to protect the beneficiaries or the purpose of the trust.
Court Rejects Son’s First Two Allegations Against Daughter
The court began by addressing the younger son’s claims regarding the daughter’s alleged failure to adequately report and to account on the trust’s activities. While the daughter claimed that she regularly provided the younger son with statements, including a full accounting on an annual basis, he claimed that she only reported sporadically and provided him with incomplete information.
After reviewing the evidence, the court ultimately held that the daughter had accounted for the trust assets, and had reported regularly to the younger son.
The court then turned to the allegations that the daughter had failed to provide the younger son with adequate funds from the trust during his times of need. While he claimed that the daughter had refused or been reluctant to provide him with trust funds when he needed them, she stated that she had never refused to assist him, except on one occasion.
While the court found that the daughter could have paid more to the younger son through the years, it also found that she could have paid him less, and ultimately rejected his argument that she had managed the trust contrary to the testator’s intentions.
Court Maintains Daughter as Trustee Despite Improper Investment of Trust Funds
Finally, the court examined the younger son’s allegation that the daughter had made an improper investment when she invested $25,000 from the trust, along with $25,000 of her own money, into a start-up company that was not listed on any exchange. The daughter claimed that she was empowered to make the investment under both the testator’s will and statutorily, while the younger son claimed that the investment was inappropriate and that she had essentially used the trust as her own personal bank account. He further alleged that he was not told about the investment in advance and she had refused to provide him with any information when he asked for it. In response, the daughter claimed that the investment was within her legal rights of discretion and she had in fact discussed the matter at length with the younger brother.
On this issue, the court had several concerns. While it accepted the daughter’s evidence that she had told the younger brother about the investment and that it had been her expressed intention that the trust would not lose money and would be reimbursed by her personally if it did not succeed, the court stated:
“However, it does not necessarily follow from my conclusion that [the daughter] was transparent and intended to indemnify the trust in the event of a loss that the investment was appropriate.
The rules surrounding private placements are to ensure that investments that carry significant risk may only be made by those with sufficient assets and who can afford to lose the investment. While I accept [the daughter]’s explanation that the investment had to be held in her name alone because the trust was not an accredited investor, I cannot agree that fashioning a structure to circumvent the rules was appropriate.”
Additionally, the court raised the concern that, because she had co-mingled her money with that of the trust in the investment, if the investment proved fruitful, the daughter stood to personally benefit from the trust as a trustee.
Thus, the court held that the daughter’s investment into the start-up was not an appropriate one for the trust to make. However, it further concluded that her conduct was not sufficient to warrant her removal as trustee, finding that her decision had been made in good faith and the trust was never at risk.
In the result, the younger son’s application to remove the daughter as trustee was dismissed.
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