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22 min read
Overview
Perfection in drafting and administering trusts is illusive. Mistakes can occur at the drafting, administration, and/or wind up stages. Further, many trusts are meant to last for a long time, during which there will be changes in public policy, social norms, economic conditions, the law, and the parties to the trust. Hence the need for remedies. Legislators and courts have wrestled with certain competing foundational principles- honouring settlor intentions v. the need for formalities; and prioritizing settlor intentions v. the interests of the beneficiaries. Four predominant remedies have emerged, each with its own parameters and limitations: variation or amendment of the trust by statute; by way of the rule in Saunders v. Vautier; by use of the equitable remedy of rectification; and by use of the powers contained within the trust deed. In this paper the writer will discuss these types of mistakes, some of the possible remedies and the opportunities and limits of their application, and finally some practical drafting take aways to consider.
Types of Mistakes
The types of trust mistakes fall generally into three categories: drafting mistakes made either when setting up the trust, or when drafting trustee resolutions, or other related trust documents; mistakes that occur during the administration of the trust; and errors in the wind up of a trust. For the purposes of this paper the writer is not discussing in any depth claims against trustees for trustee errors, mistakes or conduct which would be more properly characterized as breaches of their fiduciary duties.
Drafting mistakes might include spelling errors in naming beneficiaries, cross reference to wrong clause numbers, or naming the wrong beneficiaries.
Mistakes that occur during the administration of the trust would include the settlor’s naming of trustees who, with the passage of time, are no longer are suitable, for example, due to insolvency, a change of tax residence, or conviction for fraud. It might also include an inability or imprudence to carry out the purposes or directions outlined in the trust either due to a change in the legality of the purpose, public policy, or economic conditions; or a change in the tax laws.
Mistakes in the wind up of the trust would include the trustee’s and/or the beneficiaries’ interest in winding up a trust where, for example, the trust contains nominal assets, and the costs of honouring the settlor’s intentions to hold the trust property for a longer period outweigh, minimize or exhaust any benefits to the beneficiaries.
Remedies to Fix Mistakes
Remedies for fixing mistakes such as outlined above come from four sources: statute, common law, equity, and the trust deed itself.
1. Statute
Legislative fixes for trust mistakes are found in our wills legislation, our trust variation legislation, and our trustee legislation. The writer will discuss each in turn.
a. Wills Legislation
Historically, the law required strict adherence to formalities in will drafting, and offered limited reprieve for mistakes, particularly where formalities of execution were not met. In deference to certainty and the solemnity of expressing testamentary wishes, the law preferred clearly formal documents showing fixed and final testamentary intentions. In the past several years, there has been a trend to loosen slightly these strict formalities through legislation permitting validation of formally non compliant or deficient wills and will trusts where the testator’s testamentary intentions can be reasonably ascertained. In Alberta, pursuant to s. 37 of the Wills and Estates Act, SA 2010, cW-12.2, “the Court may, on application, order that a writing is valid as a will or a revocation of a will, despite that the writing was not made in accordance with section 15, 16 or 17, if the Court is satisfied on clear and convincing evidence that the writing sets out the testamentary intentions of the testator and was intended by the testator to be his or her will or a revocation of his or her will.”
BC has similar provisions at s. 58 of its Wills, Estates and Succession Act, SBC 2009, c – 13:
(4) If an alteration to a will makes a word or provision illegible and the court is satisfied that the alteration was not made in accordance with this Act, the court may reinstate the original word or provision if there is evidence to establish what the original word or provision was.
There has also been a legislative trend to allow statutory rectification of certain mistakes. For example, pursuant to s. 39 of Alberta’s Wills and Estates Act:
39 (1) The Court may, on application, order that a will be rectified by adding or deleting characters, words or provisions specified by the Court if the Court is satisfied, on clear and convincing evidence, that the will does not reflect the testator’s intentions because of
(a) an accidental slip, omission or misdescription, or
(b) a misunderstanding of, or a failure to give effect to, the testator’s instructions by a person who prepared the will.
(2) Subsection (1) applies to the omission of the testator’s signature only if the Court is satisfied on clear and convincing evidence that the testator
(a) intended to sign the document but omitted to do so by pure mistake or inadvertence, and
(b) intended to give effect to the writing in the document as the testator’s will.
Similarly, in BC, s. 59 of the Wills, Estates and Succession Act permits rectification of mistakes as follows:
59 (1)On application for rectification of a will, the court, sitting as a court of construction or as a court of probate, may order that the will be rectified if the court determines that the will fails to carry out the will-maker’s intentions because of
(a) an error arising from an accidental slip or omission,
(b) a misunderstanding of the will-maker’s instructions, or
(c) a failure to carry out the will-maker’s instructions.
(2) Extrinsic evidence, including evidence of the will-maker’s intent, is admissible to prove the existence of a circumstance described in subsection (1).
After centuries of a regime of strict compliance for will formalities, these trends, as well as the accelerated changes of necessity implemented during, and lasting since, the Covid pandemic, indicate a practical softening of the approach to wills formalities in favour of honouring testator intentions.
b. Trust Variation Legislation
Since the creation of a trust does not depend on written formalities, but rather, evidence of the creation of the relationship and the three certainties, mandated written trust execution formalities are scarce. Of course drafters prefer the clarity of written confirmation of the terms of a trust, so trust deeds are the norm, but preferred formalities of execution vary.
Relating to variation of an inter vivos or testamentary trust, if the deed is silent, or does not permit the variation or revocation of certain terms, or additions of certain powers, either explicitly or implicitly, or if there is no deed, the Court has the power to make those changes, if certain conditions are met. In BC, pursuant to ss. 1 and 2 of the Trust and Settlement Variation Act, RSBC 1996, c- 463:
1 If property is held on trusts arising before or after this Act came into force under a will, settlement or other disposition, the Supreme Court may, if it thinks fit, by order approve on behalf of
(b) any person, whether ascertained or not, who may become entitled, directly or indirectly, to an interest under the trusts as being at a future date or on the happening of a future event a person of a specified description or a member of a specified class of persons,
(c) any person unborn, or(d) any person in respect of an interest of the person that may arise by reason of a discretionary power given to anyone on the failure or determination of an existing interest that has not failed or determined,
any arrangement proposed by any person, whether or not there is any other person beneficially interested who is capable of assenting to it, varying or revoking all or any of the trusts or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts.
2 The court must not approve an arrangement on behalf of a person coming within section 1 (a), (b) or (c) unless the carrying out of it appears to be for the benefit of that person.
Alberta’s new Trustee Act, SA 2022, c T8, came into force on February 1, 2023. Pursuant to s. 67 of the Trustee Act, the Court’s ability to approve of variations, particularly on behalf of those not able or willing to consent, was considerably expanded, as follows:
(2) On application by a trustee or beneficiary, the court may approve a variation after taking into account the following factors:
(a) the nature of all interests and objects and the effect any proposed variation may have on those interests and objects;
(b) the benefit or detriment to any person that may result from the court approving or declining to approve any proposed variation;
(c) the intentions of the settlor, to the extent they can be ascertained;
(4) On an application under subsection (2), the court may approve a variation despite that one or more of the following persons who are beneficially interested in the trust have not consented to the application:
(a) a person who is not capable of consenting because the person is a minor or is incapacitated;
(b) an unborn person;
(c) a person who after reasonable inquiry cannot be located;
(d) a person, whether ascertained or not, who may become entitled directly or indirectly to an interest under the trusts as being, at a future date or on the happening of a future event, a person of any specified description or a member of any specified class of persons;
(e) a person who has the capacity to consent to a variation but refuses to consent to the variation;
(f) a charitable organization that is legally incapable of consenting in its own right;
(g) a charitable trust or a non charitable purpose trust;
(8) This section prevails over any contrary provision in a trust instrument.
c. Advice/Forgiveness Pursuant to the Trustee Act
If the wording of a will or trust is uncertain (perhaps due to a mistake or otherwise) most Canadian jurisdictions have legislative authority permitting a trustee or executor to seek advice and direction from the Court on interpretation and implementation (for example, see s. 82 of Alberta’s Trustee Act). Where the trustee acts further to that advice, the trustee’s duties are deemed to have been properly discharged, unless there is fraud or willful concealment or misrepresentation.
Further, if a trustee has acted in breach of their duties or pursuant to the trust instrument, the Court is typically given the power to relieve the trustee of liability for the breach, where the trustee acted honestly and reasonably, and ought fairly to be excused for the breach (see, for example, s. 84 of Alberta’s Trustee Act). Thus, honest and reasonable mistakes may be forgiven. As a public policy matter, we need people to be willing to step forward to be executors and trustees, so a degree of tolerance for honest human error is necessary.
2.Common Law- the Rule in Saunders v. Vautier
The Rule in Saunders v. Vautier states that if all the beneficiaries of the trust are sui juris- that is, all are competent adults- the beneficiaries can enter a deed of arrangement to wind up the trust, and the trustee must comply, without court order. The Rule comes from the case of the same name heard by the English Chancery Division Court in 1842.
The Rule is a clear statement of prioritizing the interests of the beneficiaries over the intentions of the will maker/settlor. This Rule has been adopted in several jurisdictions across Canada, but not in Alberta, where a court order, and proof of benefit to all, must still be provided. Further, as is highlighted by the differences between BC’s and Alberta’s legislation permitting variations to trusts, outlined above, Alberta explicitly requires the court to consider the settlor/will maker’s intentions as one of the factors in deciding to vary a trust. Conversely, BC’s legislation mentions only the requirement to ensure the variation is for the benefit of the beneficiaries.
Note that where there are beneficiaries who receive a benefit after a life interest, or upon termination of other contingencies, and where some of those beneficiaries may be minors and/or unborn ‘issue’, the Rule does not apply and a court order would still be necessary.
Also note that there is some debate as to whether the Rule is limited to winding up a trust, or whether it can also be used to vary or fix a trust.
3.Equitable Remedies- Rectification
The courts of equity have long exerted their supervisory role over trusts. The equitable remedy to fix mistakes in trusts, rectification, has received considerable recent attention from the courts, particularly in relation to whether it can be used to fix mistakes with unintended tax consequences.
The Supreme Court of Canada set out the current test for rectification in Canada (Attorney General) v. Fairmont Hotels, 2016 SCC 56, [2016] 2 S.C.R. 720 (‘Fairmont’), at paragraphs 14 and 38, and as cited in Slighthamet al. v. AGC, 2023 ONSC 6193, 2023 CarswellOnt 17274, (‘Slightham’) at paragraph 14.
d. If rectified as proposed, the instrument would carry out the agreement.
Rectification is an equitable remedy designed to correct errors in the written documentation which do not reflect the parties’ actual terms of agreement. As an equitable remedy, it is discretionary, and the court must be satisfied that it would be unconscionable or unfair to bind the parties to terms that do not reflect what they thought they had specifically agreed upon.
Interestingly, the Supreme Court of Canada in Fairmont, and in Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670 (Jean Coutu) and then in Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26, 471 D.L.R. (4th) 1 (‘Collins’) have indicated that the equitable remedy of rectification (and of rescission) is not available to fix mistakes simply to reflect the parties’ common, general intention of tax neutrality. The Court in Collins observed that “taxpayers should be taxed based on what they actually agreed to do and did, and not on what they could have done or later wish they had done,” (at paragraph 1).
These cases reflect a significant narrowing of the willingness of the Court to use equitable remedies to fix mistakes, particularly where the mistake is characterized primarily as either a failure to reflect the parties’ common intention of tax neutrality (Fairmont), or as retroactive tax planning (Collins). It is a shift in preference from honouring the parties’ intentions, to adherence to stricter formalities requirements in documentation.
In granting the relief of rectification in Slightham, the Court attempted to distinguish its facts from Fairmont and Collins. In Slightham, the applicant trustees sought to delete the “inadvertent inclusion of five words, the effect of which is to prohibit the Trustees of the Trusts from distributing dividends received from a family operating company, Signature Realty Inc. (Signature), to the corporate beneficiary of the Trusts, 2267134 Ontario Inc. (Holdco”)” (paragraph 5).
The parties intended that Holdco would be prevented from paying out amounts to itself, in order to avoid the Attribution Rule pursuant to s. 75(2) of the Income Tax Act, R.S. C. 1985, c. 1 (5th Supp.). The deed indicated that Holdco could not receive income or capital from Signature (instead of only from Holdco).
Several years later, Signature paid dividends to the trusts, which in turn paid dividends to Holdco. Holdco claimed the intercorporate dividend deduction. The mistake was discovered when CRA reassessed the trusts on the basis that, pursuant to the deed, the trusts were prevented from making payments from Signature to Holdco.
The trustees proposed to CRA to amend the trust deeds pursuant to the powers of amendment given to them in the deed. CRA indicated that such a change could only be future looking. If the trustees wished to retroactively change the terms of the trust, CRA indicated a court order would be necessary. Hence the application for rectification, which CRA did not oppose. The court inferred from this that CRA “was also satisfied that rectification was appropriate…” (at paragraph 54).
The trustees submitted a comprehensive record of corroborating documents, all of which reflected the parties’ mutual intention at time of creation of the trusts, to allow payments from Signature to Holdco. The record included affidavits from the three trustees, the settlor, the tax lawyer and the trust lawyer at the firm who assisted with the transactions, and the CPA and CGA who assisted the family for over 20 years. Attached as exhibits to the affidavit were contemporaneous planning memos and the draft closing agendas, all of which corroborated the parties’ united description of their shared intentions.
The Court found that “Collins is completely consistent with Fairmont and Jean Coutu: parties cannot resort to equity (whether in the form of rectification or rescission) to change their agreement in order to avoid an unintended tax consequence,” (at paragraph 64). Further, the Court found that the parties were not seeking to change their “antecedent agreement. Rather, they are seeking the assistance of equity to change the written instrument that did not at the time it was executed, and does not now, properly and accurately reflect the agreement of the parties that has remained unchanged throughout,” (at paragraph 65).
The final recent case of interest comes from the offshore jurisdiction of Jersey: In the matter of the Indigo Trust [2023] JRC 47, [2023] JCR 047 (21 March 2023) (Indigo), where the Court did not deem that a primary intention of tax efficiency precluded the court from using equity to fix a mistake. In Indigo, the settlor settled a trust on April 1, 2019, which, unknown to him, triggered significant UK taxes and ongoing reporting requirements. Had he settled it 5 days later, on April 6, 2019, he would have been outside of the 6 year time period from which he resided in the UK, and therefore would not have triggered the significant UK tax. He sought to have the trust declared voidable for this mistake, and therefore of no force and effect. He further sought to have a trust on the same terms declared in existence since a later date. The court granted the equitable remedy to fix the mistake, to void the creation to the April 1, 2019 trust, but failed to grant the remedy of declaration of a new trust being in existence at a later date.
The Court confirmed the settlor’s intentions: “to put in place a tax efficient structure that would allow the Settlor and his wife to, inter alia, equalize the inheritance between their daughters…and to make sure that the Settlor and his wife’s pans for returning to Canada for the last chapter of their lives could proceed as soon as possible,” (paragraph 19). Settlement of the trust on April 1, 2019 instead of on or after April 6, 2019, had the unforeseen consequence of triggering significant tax. Unforeseen consequences, of which the settlor was truly unaware, and which, had he known of, he would have corrected, brought the request for relief within the realm of equity. The mistake was rectified by voiding the creation of the trust.
However, the Court failed to grant the settlor’s request for a declaration that a second trust be deemed to have been created at a later date. The Court found that its powers to fix a mistake did not extend to the creation of a new trust. Instead, the trustees held the assets as bare trustees for the Settlor, since April 1, 2019.
These cases offer some possible takeaways for drafters. Since rectification is an equitable remedy, meant to fix unforeseen circumstances, injustices, fairness, and issues of public policy; and since the various recent cases discussed above indicate the court is unmoved by shared intentions characterized as tax neutrality or retroactive tax planning, regardless of the benefit to the beneficiaries of the trust, (and unless there is a foundational mistake to be fixed such as in Indigo), it behooves advisors to flush out, and document the parties’ intentions at time of creation of the settlement, both in the deed, and in the contemporaneous, corroborating documents, such as the steps memo or planning agenda for the transactions.
4. Using Powers in the Trust
Most trusts will include powers given to the trustee and/or others, to amend or vary the trust, within certain parameters. For example, the trustee may be given the power to remove and appoint alternate trustees. Or the trustee may be permitted to add or delete beneficiaries. In Slightham, above, the trustees first attempted to use their power of amendment contained within the deed to fix the error which CRA had found. It was because CRA indicated they would only accept the amendment if it was supported by a court order, that the trustees sought court approval.
The powers of amendment or variation are often intentionally very broad, and can be very useful in correcting mistakes, or in making changes, as needed to various terms of the trust. The question remains, if the trustee must use these powers always within the scope of the terms of the trust, and for the purposes outlined in the trust, as a fiduciary, when will their use of these powers be offside? The limits of these powers were discussed by the Privy Council of Bermuda in the recent case of Grand View Private Trust Co Ltd et al v. Wen-Young et al [2022] UKPC 47 (Grand View).
In Grand View, the Founder established two Bermuda trusts (where purpose trusts are allowed), one for his extended family (the Family Trust), and one for various purposes, including charity and business, but excluding family (the Purpose Trust). The trustees of the Family Trust were given the power to add and exclude beneficiaries. After settling the Family Trust, the Founder restructured his financial empire such that considerable wealth would flow to his family directly, through his estate. The Founder then repeatedly expressed to his family and others his intentions that he wished to leave a considerable portion of his wealth to greater social good, since his family would be well taken care of. With this in mind, the trustees of the Family Trust consulted its board of advisors, and made the decision to add the Purpose Trust as a beneficiary of the Family Trust, and then to transfer all assets in the Family Trust to the Purpose Trust, thereby winding up the Family Trust. Some of the family members objected to this, and brought an application to set aside the transfer. The Court held that the primary, overriding purpose of the Family Trust was to benefit family. The trustees acted outside or beyond this purpose in choosing to name a non family member as a beneficiary, and then in transferring all assets to the non family member. The power to add beneficiaries did not extend to ‘the world’. The trustees acted in excess of their scope of powers, and for a purpose not permitted by the deed. The transfer was set aside.
The Court held that the purpose of a power will be informed by the entirety of the trust instrument. The court may also consider contemporaneous documentation and letters of wishes to determine the purposes. A trustee may also consider a settlor’s later wishes, but first and foremost, must be guided by the purposes as set out in the trust (paragraph 62 and 63).
Grand View is an interesting illustration of the tension between honouring settlor intentions at the time the trust is created, versus later. It is also an important reminder of the importance of defining the stated purposes of a trust, who the beneficiaries are or might be, and the scope of powers given to a trustee.
Drafting Suggestions
One of the fundamental features of trusts is their intrinsic flexibility to allow trustees to respond to changing circumstances over time, using their wide discretion. However, as can be seen from the discussion above, the ability of trustees or the Court to fix trust mistakes depends on some certainty as to the scope and purposes as set out in the trust deed and the documents created contemporaneously at time of creation of the deed.
The writer suggests some possible takeaways to assist in striking the illusive balance between certainty and flexibility:
e. perhaps a memo to the trustees stating the settlor’s intentions and attaching the planning memo?
2. Consider a statement from the Settlor outlining dominant or highest priority goal(s) in setting up the trust, so that if not all goals can be honoured, the most important ones are triaged or prioritized. Given the apparent aversion of the courts to using equity to correct mistakes in tax planning, consider if there are other, genuine, non tax reasons for the trust, and include them.
3. Be cautious of too many letters of wishes, as time goes on, from the Settlor. At what point might the letters be construed as ongoing control and therefore the trust is illusory? The best evidence to support the exercise of powers by the trustees is evidence at time of settlement.
4. Consider contingent beneficiaries - by naming possible charities, etc. and giving the trustees the power to add/change beneficiaries, has the Settlor contradicted or weakened his stated purpose of creating a family legacy? Or perhaps the Settlor would in fact like this broadened class of potential beneficiaries?
5. Consider defining a class from whom beneficiaries can be added, instead of giving the trustee the power to appoint ‘the whole world.’ Also consider whether adding ‘issue’ of beneficiaries broadens the class of beneficiaries such that the trust can never be wound up without Court approval. Perhaps the settlor would like this certainty or lasting control to know the trust will not easily be extinguished?
6. Consider including the appointment and approval of a protector, or a board of advisors for certain changes such as adding or deleting a beneficiary, changing a trustee(s) or making a major change of investment approach or asset mix - a kind of built in watch dog to balance wide trustee discretion on key points- along with guidelines or terms of reference for the protector or board of advisors to consider in issuing their approval.
