Executor Cannot Use Estate Funds To Defend Personally

Executor Cannot Use Estate Funds To Defend Personally

In a Wills variation claim (now section 60, WESA) an executor cannot use estate funds to defend him or herself if a beneficiary, and may  use reasonable estate  funds to defend the claim but only in the capacity of executor and not beneficiary.

In a wills variation claim the executor cannot use estate funds to defend his personal interests.

The executor may have his reasonable legal fees paid in his role as executor but should have separate counsel in most cases and the fees should be kept to a minimum–typically for advising on estate developments, liabilities and assets.

Generally, the executor is required to play a neutral role in litigation, and as a result of having to play a neutral role, the executor is generally entitled to special costs from estate.

But when the executor is also a beneficiary the costs must be separated.

If one counsel acts for the executor in both the capacity of executor and personal beneficiary, then the legal fees must be apportioned between the two separate roles, with the estate paying only for the role of executor. Wilcox v Wilcox 2002 BCCA 574.

Steernberg v. Steernberg Estate (2007), 33 E.T.R. (3d) 78, 74 B.C.L.R. (4th) 126, 40 R.F.L. (6th) 106, 2007 BCSC 953, 2007 CarswellBC 1533, Martinson J. (B.C. S.C.); additional reasons to (2006), 2006 CarswellBC 2751, 32 R.F.L. (6th) 62, 28 E.T.R. (3d) 1, 2006 BCSC 1672, [2006] B.C.J. No. 2925, D. Martinson J. (B.C.S.C.)  is one of my favourite cases, primarily for the reason in the headnote.

Prior to this case, it was not uncommon for defendants to routinely use estate funds in the hope of depriving a plaintiff of sufficient resources to continue the fight.

Steernberg levels the playing field by making each party pay for their own legal costs as the litigation proceeds, save for the executor, who must remain neutral in the litigation.

Here are the facts of Steernberg:

The Wife, husband’s son, husband’s three daughters and husband’s brother-in-law were beneficiaries under husband’s will.

The Plaintiff wife challenged husband’s will–husband’s son was the executor of the will.

An offer to settle made under R. 37 of Rules of Court, 1990 was signed by son as executor and the other four beneficiaries, but not on behalf of son in his personal capacity as beneficiary.

Legal fees for defendant’ litigation counsel of $148,250.62 and legal fees of counsel for executor of $72,895.24 were deducted before net values of estate were calculated.

Shortly after the trial ended and before reasons for judgment were issued, the estate paid defendants’ litigation counsel’s invoice of $60,700.

None of these payments were made or recorded with the wife’s consent and no funds from estate were made available to the wife before, during or after trial for her legal fees.

During the trial, the wife raised the concern that the defendants took substantial sums of money out of estate for legal fees to defend action before the trial started.

The parties agreed that the issue would be decided after the court gave its decision on whether will should be varied.

It was inappropriate to withdraw funds from estate at start of litigation, or throughout the course of litigation to fund defence of Wills Variation Act claim in the absence of a court order or unanimous agreement of beneficiaries

In a Wills Variation Act (S. 60 WESA) claim the validity of will itself was not being challenged and there was no need for the executor to “defend” will

The son was not entitled, in his neutral role as executor, to make a R. 37 offer and he did not join in the offer in his personal capacity as a beneficiary.

It was not an offer made on behalf of all persons beneficially interested in the assets of the estate and hence would not be binding on the estate.

The losing beneficiaries must pay the wife’s costs personally, not out of the estate.

It was directed that the executor pass his accounts before a registrar and that the registrar inquire into and make recommendations with respect to the net value of the estate after taking into account appropriate legal fees and income that ought to have been earned on the funds had they remained invested.

Fiduciary Duty: Employee For Employer

Fiduciary Employee - Employer

The law of fiduciary duty is very relevant to estate litigation cases but is also prevalent in almost any other claim where equity is involved, including an employee can be found to be a fiduciary for the employer.

M A Concrete Ltd v Truter 2016 BCCA 138 quoted such law in an unrelated fiduciary claim re a failed business purchase and sale.

The facts Truter arose out of a failed attempt to purchase a business and the calculation of damages and costs arising out of it, but did quote some important statements of fiduciary law.

17      Employees cannot profit by taking unauthorized advantage of their employment. The law is clear: Reading v. R., [1951] A.C. 507 (Eng. H.L.). There, at 514, Lord Porter quoted Denning J., who was the trial judge, as follows:

… it is a principle of law that if a servant, in violation of his duty of honesty and good faith, takes advantage of his service to make a profit for himself, in this sense, that the assets of which he has control, or the facilities which he enjoys, or the position which he occupies, are the real cause of his obtaining the money, as distinct from the mere opportunity for getting it, that is to say, if they play the predominant part in his obtaining the money, then he is accountable for it to the master.

18      Lord Porter saw fiduciary duty as an alternative ground for liability (at 516):

As to the assertion that there must be a fiduciary relationship, the existence of such a connexion is, in my opinion, not an additional necessity in order to substantiate the claim; but another ground for succeeding where a claim for money had and received [i.e. bribery] would fail. In any case, I agree with Asquith, L.J. [[1949] 2 K.B. 232, 236], in thinking that the words “fiduciary relationship” in this setting are used in a wide and loose sense and include, inter alia, a case where the servant gains from his employment a position of authority which enables him to obtain the sum which he receives.

Reading is cited with approval in Canadian jurisprudence: see, for example, Frame v. Smith [1987] 2 S.C.R. 99 (S.C.C.), Wilson J. in dissent at 137; Tombill Gold Mines Ltd. v. Hamilton (City) (1954), [1955] 1 D.L.R. 101 (Ont. H.C.), at 133; aff’d [1955] 5 D.L.R. 708 (Ont. C.A.); aff’d [1956] S.C.R. 858, 5 D.L.R. (2d) 561 (S.C.C.); and Calbar Securities Ltd. v. Toole Peet Co. (1983), 29 Alta. L.R. (2d) 236 (Alta. C.A.), at 249.

On this point, the judge reviewed cases such as Canadian Aero Service Ltd. v. O’Malley (1973), [1974] S.C.R. 592 (S.C.C.) and Standard Life Assurance Co. v. Horsburgh 2005 BCCA 108 (B.C. C.A.) , which recognize that even an employee may be a fiduciary where he or she has control or discretionary authority over the employer’s assets. The duty includes, of course, the avoidance of conflicts of interest and the prohibition against taking for one’s self any “maturing” corporate opportunity of the person to whom the duty is owed.

Bearing in mind that once a breach of fiduciary duty is shown, the onus shifts to the defendant to disprove the amount of the loss (see Procon Mining & Tunnelling Ltd. v. McNeil 2010 BCSC 487 (B.C. S.C.) at para. 101), I see no error in the trial judge’s assessment of damages under this head at $32,2

Executor Removed For Delay and Disdain

Executor Removed For Delay and Disdain

Re Dirnberger Estate 2016 BCSC 439 removed an executor who had failed to settle and distribute a simple estate for more than four years and showed disdain and hostility towards his sister the other  major beneficiary.

The delay and behavior constituted an inability to act due to constant unaccountable hostility towards the other  beneficiary was a want of reasonable fidelity resulting in the removal of the executor and his replacement by the beneficiary. The executor had further failed to retain professional advisors that were necessary for the estate.

The Law: Removal of Executors/Trustees

[9]           The legal principles surrounding removal of a trustee are not in dispute. The court has the power under the Trustee Act, R.S.B.C. 1996, c. 464, to remove a trustee. The court also has such power under its inherent jurisdiction: Morelli v. Morelli, 2014 BCSC 106 (CanLII) at para. 29.

[10]        The court will remove a trustee where the welfare of the beneficiaries requires it. The existence of friction between the trustee and one or more beneficiaries is usually not sufficient, of itself, to justify removal of the trustee: Erlichman v. Erlichman, 2000 BCSC 173 (CanLII) at para. 8.

[11]        There are four categories of conduct on an executor’s part that will warrant removal:

1.         endangerment of the trust property;

2.         want of honesty;

3.         want of proper capacity to execute the duties; and

4.         want of reasonable fidelity.

[Conroy v. Stokes, [1952] 4 D.L.R. 124 (B.C.C.A.)]

[12]        The applicant relies on the first, third and fourth of these categories. The applicant takes issue with Mr. Chase’s failure to wrap up and distribute the estate at this late date and his “unaccountable and hostile behaviour towards Ms. Dirnberger”.

[13]        The duty of an executor is to settle the affairs of the deceased and to distribute the estate in accordance with the terms of the will in a timely manner. Mr. Chase has failed to do this.

[14]        I have concluded that Mr. Chase must be removed as trustee. I have reached this conclusion for two reasons. His actions demonstrate that he lacks the necessary capacity to act as trustee. I do not mean that he lacks legal capacity but rather that he has demonstrated an inability to perform his duties as administrator of the estate: see Figley v. Figley, 2012 SKCA 36 (CanLII) at para. 49, and Estate of Forbes McTavish Campbell, 2015 BCSC 774 (CanLII) at para. 18. There is as well a want of reasonable fidelity.

[15]        With regards to the first reason, this is a simple estate that has not been distributed more than four years after probate.

[16]        In Levi-Bandel v. McKeen, 2011 BCSC 247 (CanLII), Justice Butler stated at paras. 21 and 23:

[21]      … it is not only an act of misconduct that can be grounds for removal of a trustee. A failure to act can amount to grounds for removal ….

…

[23]      … I have little difficulty in concluding that [the executor’s] inaction and her intransigence caused unnecessary delay. Her refusal or reluctance to proceed with the administration of the estate amounts to a want of reasonable fidelity and a failure to carry out her duties.

[27]        I appreciate that Mr. Chase has never acted as an executor before. But inexperience is not a licence to delay for more than four years the distribution of the estate. In Stolarchuk Estate (Re), 2011 BCSC 168 (CanLII), Master Bouck aptly notes at para. 61:

…Nonetheless, inexperience does not excuse the four to five year delay in dealing with the Properties in an appropriate manner. The executor’s duty was to obtain the best possible result from the realization of assets and ensure a timely distribution of the Estate residue to all Beneficiaries.

Passing Over: Removing An Executor

Passing Over: Removing An Executor

Special circumstances sometimes occur where it is appropriate for the Court to Pass Over the named executor in favour of another  which effectively removes the named executor

In Re Thomasson Estate, 2011 BCSC 481 the court Passed over the named executor by reason of personal conflict of interest.

The Court stated:

[28]         The application is not to remove Alex as an executor but simply to pass over him so that an enquiry can be undertaken of the transfer of the Property to him and his wife by the deceased in 2006, and a determination can be made if any further actions need be taken in regards to the Property.

[29]         In the circumstances of this case, it is my opinion that there is a perceived conflict of interest between Alex in his role as an executor and his interest in his personal capacity. If an action is instituted by the executors as a result of the transfer of the Property, it would be against Alex. In my opinion, Alex, in his capacity as executor, cannot attack the transfer of the Property to himself while at the same time maintaining, in his personal capacity, that the transfer of the Property was proper. By making such a finding I am not prejudging the case. I am simply of the view that, in the circumstances of this case, if an action is commenced as a result of the enquiries into the transfer, Alex cannot conscientiously act as a plaintiff in his capacity as an executor in a case where he will be the defendant.

Many cases have stated that the right of a testator to nominate the executor to administer his estate should not be lightly interfered with. (see Re Agnew Estate (1941) 3 W.W.R.723) That case also stated that, apart from statute, a court of probate had no right to refuse probate to an executor named in a will unless he was legally incompetent to act.

Ill will or animosity displayed between the parties is in itself not a sufficient ground to pass over an executor.

In Mortimer on Probate 2nd ed., p.209, the learned author states: “Where a will has been made, and an executor appointed, “the court cannot exercise any discretion as to granting or refusing probate. If probate is refused, it must be on the ground of some legal disability, recognized and allowed by the common law. For an executor is but a trustee for the deceased, and such person as the testator thought proper to appoint for that office, without any previous qualification; nobody can add qualifications to him other than those which the testator has imposed, but he shall be who, and in what manner, the testator shall judge proper”.

In Re Wolfe Estate, 21 W.W.R. 85, B.C.C.A., the court held that under Section 92 of the Trustee Act, it is within the judicial discretion of the Supreme Court or judge thereof to appoint a judicial trustee before the grant of letters probate or letters of administration in place of an executor or person entitled to administration.

Re Haggerty Estate, 60 W.W.R. 574 held that Section 9 of the Estate Administration Act confers a limited and unusual discretion on a court to pass over a named executor “by reason of special circumstances”.

In that case a grant was refused where the named executor had within the last year been convicted of a crime involving misappropriation of estate funds. The court stated that while a testator’s choice of executor should not be lightly interfered with, this was a proper case where discretion should be exercised by refusing the grant to the named executor. The court discussed a long line of authorities that evidence of bad character alone is not a sufficient ground for refusing a grant.

In fact, in Re Oughton, 40 E.T.R. 296, the notorious sex offender Oughton who was sentenced to an indeterminate sentence was not passed over as executor, on the basis that his circumstances were not sufficient to justify passing him over.

In Stadelmier vs Hoffman 25 E.T.R. 174 however, the court passed over one of four named executors, where the other three intended to bring action against the fourth on the basis of undue influence with respect to some large inter vivos gifts. The court exercised its discretion to pass over due to the position of actual conflict that the fourth executor was in. He could not in his capacity of executor attack the gift to himself, while at the same time maintain in his personal capacity that the gifts were proper.

Pre-Taking Executors Fees is Breach of Fiduciary Duty

Pre Taking Executors Fees Is Breach of Fiduciary Duty

Despite holding that the pre-taking of a $70,000 fee by an executor was a serious matter, being contrary to Supreme Court rule 25 – 13, a breach of the executors fiduciary duty, and done without consultation with the beneficiaries or their consent, the court excused the administrator stating that he was not to be held to a standard of perfection judged on the basis of hindsight. The court further found that the executor had acted honestly in believing he was entitled to pre-take a portion of his executors fees. Zadra v Cortese 2016 BCSC 390

The court went on to approve additional remuneration of another $89,000 after reviewing the law and the duties carried out by the executor/trustee.

Pre-taking of fees

[49] The administrator is entitled to remuneration for his work. However, unless otherwise agreed, the amount of remuneration is to be determined by the court pursuant to Rule 25-13 of the Supreme Court Civil Rules. It is a breach of trust for an administrator to take remuneration from the estate without the approval of all the beneficiaries, or before a court order is made fixing remuneration.

[50] In administering an estate, an administrator is not to be held to a standard of perfection judged on the basis of hindsight. The standard of care is reasonableness. In Langley v. Brownjohn, 2007 BCSC 156, the Court addressed the issue of the standard of care in relation to whether a breach of trust ought to be excused. At paras. 64-66, the Court stated:

[64] At page 1258 Waters points out that the question of whether a trustee has acted honestly is not typically an issue in the cases. The more contentious question ordinarily focuses on whether the other requisite elements have been established and, in particular, whether the actions of the trustee can be characterized as being reasonable in the circumstances.

[65] At 1260, Waters describes in general terms what is considered to be reasonable conduct:

Reasonable conduct is what the prudent business person would have exhibited in his own affairs. The court puts itself in the position of the trustee at the time of the disputed conduct, and considers what the prudent business person would have done in the light of the facts as they were then known and the prevailing opinion among business people at the time. [footnotes omitted.]

[66] Among the factors to be considered when determining whether a trustee should be excused are: whether the trustee sought out and/or relied upon the advice of a professional in relation to the impugned conduct; whether the opinion relied upon was correct; the relationship and communication, or lack of it, between the trustee and the beneficiaries leading up to the commission of the breach; whether the breach was merely technical or a minor error in judgment; whether the trustee is a lay person or a professional; whether the trustee has received remuneration; and the quantum of the loss: Fales; Laird v. Lyne Estate (2004), 5 E.T.R. (3d) 132, 2004 BCSC 39; Re: Potter (2000), 32 E.T.R. (2d) 256, 2000 BCSC 628; Linsley v. Kirstiuk (1986), 28 D.L.R. (4th) 495 (B.C.S.C.); Re Heuvels Estate, 2001 MBQB 73; Verma v. Chopra, [1994] O.J. No. 111 (Ont. Ct. Gen. Div.); Re Stoyko Estate, [1992] M.J. No. 587 (Q.B.); Duthie et al. v. Gallagher and Duthie, [1930] 2 D.L.R. 582 (B.C.S.C).

[51] In equity, a trustee had no right to remuneration unless expressly given that right by the trust. In Re Prelutsky, [1982] 4 W.W.R. 309 (B.C.S.C.). The Court stated at para. 8:

What then, of the propriety of the pre-taking? In equity a trustee had no right to remuneration unless expressly given that right in the trust. The basis for that rule being that a trustee claiming compensation is in somewhat of a conflict of interest. In accepting compensation he would, in effect, be benefitting from his own trust. …

[52] The Court further stated at para. 10:

In my view there is no significant distinction between the pertinent section of the Alberta Trustee Act and section 90 of the B.C. Trustee Act. I adopt the reasoning and conclusions of the learned judge and hold that in British Columbia it is improper for a trustee to pre-take trustee compensation without court approval unless all of the beneficiaries are adults and have consented. I also agree that a trustee may estimate its expected allowance and may retain that sum in the trust to ensure a fund to pay the compensation ultimately allowed. The interest earned on that sum’ would, of course, accrue to the benefit of the beneficiaries.

Attorney’s Fiduciary Obligations Increase When Donor Incapable

Fiduciary Duty

Turning to the law, as one might expect, the fiduciary obligations of an attorney become elevated once the donor of the power becomes incapable. This is described by the Ontario Court of Appeal as follows (Richardson Estate v. Mew, 2009 ONCA 403):

  1. In Banton [Banton v. Banton (1998), 164 D.L.R. (4th) 176 (Ont. Sup. Ct.)], Cullity J. held that while an attorney acting under a continuing power of attorney is always a fiduciary, the scope of the attorney’s fiduciary duties depends on whether the donor of the power is incapable at the time of the transaction. If the donor is mentally incapable, the attorney’s position approaches that of a trustee. …
  2. As a fiduciary, Ms. Ferguson was obliged to act only for the benefit of Mr. Richardson, putting her own interests aside: see Ermineskin Indian Band and Nation v. Canada, [2009] 1 S.C.R. 222, at para. 125. In British Columbia (Public Guardian and Trustee of) v. Elgi, 2004 B.C.J. No. 796, 28 B.C.L.R. (4th) 375 (S.C.) aff’d [2005] B.C.J. No. 2741, 262 D.L.R. (4th) 208 (C.A.), Garson J. described the prohibition against using a power for the attorney’s profit, benefit or advantage, at para. 82, in the following way:

It is the attorney’s duty to use the power only for the benefit of the donor and not for the attorney’s own profit, benefit or advantage. The attorney can only use the power for his or her own benefit when it is done with the full knowledge and consent of the donor. I am not aware of any authority that detracts from this principle in circumstances where the benefit is conferred on family members.

The Factors To Determine an Executor’s Compensation

In the well-known case of Re Toronto General Trusts and Central Ontario Railway (1905), 6 O.W.R. 350 (H.C.), five central factors should be considered by the audit judge in arriving at the amount of an executor’s compensation. The maximum fee for obtaining probate and distributing the assets is %5 with management of capital charges available over and above that where appropriate.
Those factors are:
(1) the size of the trust;
(2) the care and responsibility involved;
(3) the time occupied in performing the duties;
(4) the skill and ability shown; and
(5) the success resulting from the administration.
The later case of Re Atkinson, [1952] O.R. 685, [1952] 3 D.L.R. 609 (C.A.) added some helpful clarifying comments on the s. 61(1) discretionary power, especially on the use of “percentages” to establish the level of compensation.
The Court said at p. 698 [O.R.]:
If these statutory provisions are properly borne in mind, then in many instances the proper compensation may well be reflected by the allowance of percentages, but the particular percentages applied, or any percentages, are not to be regarded as of paramount importance; they should be employed only as a rough guide to assist in the computation of what may be considered a fair and reasonable allowance; the words of the statute override everything else and that fair and reasonable allowance is for the actual ‘care, pains and trouble, and time expended’. In some estates, indeed perhaps in many, no fairer method can be employed in estimating compensation than by the application of percentages. In others, while percentages may be of assistance, it would be manifestly unreasonable to apply them slavishly and to do so would violate the true principle upon which compensation is always to be estimated.
It can readily be recognized that, depending upon the idiosyncrasies of the particular estate, the care, pains and trouble and time expended may be disproportionate to the actual size of the estate. A small, complex estate may make more demands upon the trustee’s care and time and skill than a much larger estate of a simpler nature; conversely, even in a large estate with many complex problems, assessment of the compensation by the adoption of what might be said to be ‘the usual’ percentages would result in a grossly excessive allowance.

Party Cannot Take Tax Benefit For One Purpose and Deny It For Another

In Rosenthal v Rosenthal, 1986 CarswellOnt 288 (HCJ), it was held that an individual cannot take a position to obtain a tax benefit and then deny that position to obtain a different benefit.

At para 51 of Rosenthal, the court noted that “it is being argued that for the purpose of the Income Tax Act in 1969, the transfer of shares was not a gift, but for the purpose of the Family Law Act in 1986, the transfer of shares was a gift. Such a result should not be condoned by the court on the grounds of public policy alone.”

Further, the husband could not assert for tax purposes that the transfers were not a gift but for division of family property purposes that they were. Thus, the value of these shares form part of the net family property.

The Prudent Investment Standard For Trustees

The Prudent Investment Standard For Trustees

Miles v Vince 2014 BCCA 290 allowed an appeal and removed a  trustee for failure to abide by the Prudent Investor Standard expected of a trustee.

The Trustee had used the funds from an insurance trust for a speculative real estate investment

The Prudent Investor Standard

[52]         The respondent’s legal obligation with respect to the investment of the property of the Insurance Trust is to act as a prudent investor. Section 15.2 of the Trustee Act, R.S.B.C. 1996, c. 464, provides:

In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.

[53]         The appellant argues that a prudent investor would not place all of the Insurance Trust’s assets into one investment, but instead, would have a diversified portfolio of investments. The respondent says that she was under no statutory obligation to diversify the investment portfolio or invest the trust funds in any particular manner.

[54]         In Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302, the Supreme Court of Canada held that the primary duty of a trustee is to preserve trust assets. This principle applies despite broad discretionary powers given to the trustee in the trust document. Justice Dickson (as he then was) articulated this standard (at 316):

This standard, of course, may be relaxed or modified up to a point by the terms of a will and, in the present case, there can be no doubt that the co-trustees were given wide latitude. But, however wide the discretionary powers contained in the will, a trustee’s primary duty is preservation of the trust assets, and the enlargement of recognized powers does not relieve him of the duty of using ordinary skill and prudence, nor from the application of common sense. [Emphasis added.]

[55]         This Court applied Fales to underscore the duty of a trustee to preserve trust assets in Froese v. Montreal Trust Co. of Canada (1996), 20 B.C.L.R. (3d) 193, leave to appeal ref’d [1996] S.C.C.A. No. 399.

[56]         In Froese, an employee was a beneficiary of a pension plan for which he was to receive regular benefits. His employer began to make irregular contributions to the plan, and soon ceased to contribute. As a result, the beneficiary’s pension was reduced significantly.

[57]         This Court held that Montreal Trust, as trustee of the plan, had a duty to inform the beneficiary when it became aware regular contributions were not being made. Chief Justice McEachern, for the majority, held (at paras. 57-58):

The trial judge framed the question as whether there was any obligation to volunteer information to the beneficiary. With respect, I think that is far too narrow. In my view, “true” trustees have obligations of prudence to protect not just the corpus of the trust, but also the interest of the beneficiaries from the ongoing operation of the plan.

I postulate a simple example. Assume that the Company appoints an investment manager, and that that manager instructs the trustee to invest the corpus, or so much thereof as the plan permits, in the subordinated securities of the company. (This is an extreme example because most plans provide investment rules that must be followed.) Absent such rules, can it seriously be argued that a trustee owes no larger, general duty of prudence respecting the trust which transcends the four corners of the agreement? In this respect, I agree with the comments of Dickson J. (as he then was) in [Fales], although stated in a different context. He said, no matter how wide their discretionary powers:

… a trustee’s primary duty is preservation of the trust assets, and the enlargement of recognized powers does not relieve him of the duty of using ordinary skill and prudence, nor from the application of common sense.

[58]         Section 15.2 of the Trustee Act enacted in statutory form the standard of care for trustees investing trust property. As noted above, it requires an investor to exercise the care, skill, diligence and judgment of a prudent investor.

[59]         The “prudent investor” is also referred to in s. 15.3 of the Trustee Act:

A trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor would adopt under comparable circumstances.

[60]         Professor Donovan Waters discusses the development of the “prudent investor” standard in Canada in Donovan W.M. Waters et al., Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Thomson Reuters Canada Limited, 2012) at 1006-1009.

[61]         Professor Waters notes (at 1008) that in 1997 the Uniform Law Conference of Canada promulgated the Uniform Trustee Investment Act, 1997, which imposed an obligation for trustees to diversify investments and provided a list of factors which a trustee may consider in making investment decisions.

[62]         He describes the “prudent investor” standard as used in the B.C. Trustee Act, (at 1018):

The reference to the “prudent investor” is intended to bring into the picture the requirements of modern portfolio theory, which teaches that one must first decide what is the level of appropriate level of risk, and then seek to maximize the return within that constraint.

[63]         He points out that diversification is implicit in the prudent investor standard, based on modern portfolio theory (at 1019-1020):

It is true that in some jurisdictions, particularly those retaining the prudent man standard, there is room for argument as to whether the trustee has the duty to diversify. The new prudent investor standard, based on modern portfolio theory, leaves less room for argument; diversity is inherent in modern portfolio theory. Even so, the circumstances of a trust might be inconsistent with diversification. For example, if a trustee expected to hold property only for a few weeks, it might not be prudent to expose the assets to the volatility which inheres in equity investments.

[64]         Unlike other jurisdictions in Canada, B.C.’s Trustee Act does not expressly impose a duty on trustees to diversify investments in accordance with modern portfolio theory (see The Trustee Act, 2009. S.S. 2009, c. T-23.01 s. 26; Trustee Act, R.S.O. 1990, c. T. 23 s. 27(6); Trustee Act, R.S.N.S. 1989, c. 479 s. 3B; Trustee Act, R.S.P.E.I. 1988, c. T-8 s. 3.1).

[65]         As Professor Waters suggests, however, the “prudent investor” standard implicitly brings modern portfolio theory into play, and thus requires the trustee to assess the level of appropriate risk and whether diversification is required.

Is the Loan a Prudent Investment?

[66]         In my opinion, the respondent trustee did not meet the prudent investor standard by investing all of the Insurance Trust’s assets, through the Loan, in the Main Street Properties.

[67]         The respondent says she consulted the Redden Report before embarking on the development of the Main Street Properties, and considered the information on the potential profitability of the development before making the Loan.

[68]         The respondent did not meet her statutory obligations to act as a prudent investor with respect to the assets of the Insurance Trust by relying on the Redden Report to assess the potential profitability of the development of the Main Street Properties. There is no evidence that she assessed the appropriate level of risk for the Insurance Trust, and then sought to maximize the return within that constraint. Rather, it appears she consulted the Redden Report to assess the development potential and required investment to develop the Main Street Properties, and used the funds from the Insurance Trust to meet those requirements.

[69]         The respondent maintains she was under no statutory obligation to diversify any investments made from the Insurance Trust. As Professor Waters points out, however, the link between the prudent investor standard and modern portfolio theory suggests that a trustee must assess whether diversification is required to preserve the trust assets.

[70]         In my view, prudent investment of the assets of the Insurance Trust required the trustee to consider the interests of all of the beneficiaries, including the appellant’s interest as an income beneficiary, in the context of the circumstances of the settlement of the Insurance Trust by Mr. Vince with proceeds of life insurance for the benefit of his wife and children after he knew he was ill. Mr. Vince’s interest in creating social housing, or his interest in the broader development of the Main Street Properties for market housing and commercial space with a component of social housing, which is what the respondent has embarked on, bears little relation to the creation of the Insurance Trust.

[71]         Had Mr. Vince intended that the proceeds of his life insurance be invested solely in the development of the Main Street Properties for the benefit of his children as the Division Date Beneficiaries, it is likely he would have provided for those proceeds to be settled on the Family Trust. I agree with the appellant that the existence of separate trusts indicates that Mr. Vince had separate intentions with respect to the use of the proceeds of the life insurance. It is a reasonable inference from the surrounding circumstances that Mr. Vince intended the life insurance proceeds to be used to support and maintain his widow and children after his death. It appears the chambers judge conflated Mr. Vince’s intention with respect to the Family Trust with that of the Insurance Trust.

[72]         Had the chambers judge correctly assessed Mr. Vince’s intention with respect to the Insurance Trust, he would not have concluded that investing all of its assets in the Loan was a prudent investment. The Loan is an illiquid asset invested in an illiquid real estate development project. It appears the Main Street Properties do not produce sufficient income to pay expenses including property taxes, as the proceeds of the B.C. Housing financing were used for that purpose. No interest or principal has been paid despite the Loan being due and payable, and there is no evidence of when the Loan will be repaid.

[73]         It is obvious that the Loan is in default. For the respondent to say that no demand has been made demonstrates “the difficult situation” for the respondent, recognized by the chambers judge, that arises if the Loan is in default. Only the respondent can make a demand for payment of the Loan, and as she argues, such a demand would put the development of the Main Street Properties at risk, contrary to her various interests as the primary promoter of that project.

[74]         Further, all of the security on the Loan was subject to the priority of the first mortgage and other security granted to B.C. Housing, including the priority agreement and option to purchase. If the option to purchase was exercised the Loan would have no value. To say that the priority agreement did not have that effect because the conditions under which it might be exercised had not occurred and were “highly speculative” simply ignores the terms of the Loan.

[75]         While the respondent in this case was under no express statutory duty to diversify the investment portfolio of the Insurance Trust, she nonetheless had a duty to act as a prudent investor. For the reasons above, I conclude her investment strategy in this particular case did not meet this standard.

[76]         The investment of the Insurance Trust’s assets into a single, illiquid set of properties has put the Insurance Trust’s assets at risk. The respondent has wide discretionary powers under the terms of the trust, but the respondent failed to undertake an appropriate risk assessment, in the context of the settlor’s intention with respect to the Insurance Trust, before investing all of the Insurance Trust’s assets in the Loan.

[77]         The respondent’s handling of the Insurance Trust assets also breached her duty of impartiality between the capital and income beneficiaries of that trust. The respondent justifies the investment of the assets of the Insurance Trust in the development of the Main Street Properties on the basis that her goal was to maximize the capital growth of the trust property for the benefit of the capital beneficiaries of both trusts. She dismisses her obligation to the income beneficiaries of the Insurance Trust, including the appellant, on the ground that the appellant did not provide financial information as to her needs as requested by the respondent, stating in her factum (R.F. at para. 84):

The extent of the respondent’s duty of even-handedness towards a beneficiary whose interest in the trust is merely discretionary cannot possibly be extended beyond a duty on the part of the trustee to make reasonable enquiries into the financial needs for the discretionary income beneficiaries. The respondent has done this.

[78]         The respondent has provided no authority for, in effect, ignoring the income beneficiaries in investing the trust property, and I find her argument unpersuasive. As noted by Professor Waters (at 1025):

With regard to the trust fund the income beneficiary is looking for the best yield obtainable, while traditionally the capital beneficiary is concerned with the safety of the fund. However, high yield usually means high risk, low yield low risk, and here is the inherent conflict between the interests of these two types of beneficiary. It is the duty of the trustees so to manage the fund that they do the best possible for both, and this means holding an even balance between yield and risk. Unless, and to the extent only that, the trust instrument requires or permits them to do otherwise, they must ensure that the assets originally received into the trust are put into a form which brings about this balance, and that the assets they subsequently acquire, again in the exercise of their power of investment, have the same result.

[79]         In this case, the respondent failed to undertake an investment strategy that balanced the interests of the capital and income beneficiaries of the Insurance Trust. As a result, I find she breached her duty to remain impartial between these beneficiaries.

Executor Ordered to Repay Monies

Executor Ordered to Repay Monies Back to Estate

Executor Ordered to Repay Monies Back to Estate Paid Out Before Expiration of 6 Month Limitation

Stevens v. Wood Estate (Re), 2013 BCSC 2380. Until six months have passed from the issuance of probate of a will, s. 12 of the Wills Variation Act, R.S.B.C. 1996, c. 490 (the “WVA”) prohibits, absent consent or court order, the distribution of any portion of an estate to its beneficiaries.

The question for determination on this application is the appropriate remedy when such a distribution has been made.

However, the case of Etches v. Stephens (1994), 99 B.C.L.R. (2d) 171 (S.C.) [Etches] assists with determining the purpose of s. 12(1) of the WVA.  Etches deals with the precursor to what is now s. 3(1) of the WVA which requires that an action under this Act must be brought within six months from the date of the issue or resealing of probate.  The court stated that this provision must be read alongside the precursor to what is now s. 12(1) which has the same time-limited language.  When the two sections are read together, the reason for the limits become clear (see paras. 9-12, and 15):

  1. The “main aim” of the WVA is “adequate, just and equitable provision for the spouses and children of testators” when a will does not provide for this: see Tataryn v. Tataryn Estate, [1994] 2 S.C.R. 807 at 815.  As such, it must allow those falling within these groups to apply to the court to have the will varied.
  2. If those affected were allowed to apply to court for a variation without any time limit on the action, then there would be the danger that the distribution of the assets would remain uncertain for a prolonged period of time.  Thus there is a limitation period of six months on the action.
  3. On the other hand, if there was not a rule against distributing the assets before the limitation period to challenge the will was expired, then there would be the danger that a legitimate action could be started but the assets would already have been distributed.  This would deprive those affected of an effective remedy and potentially result in an injustice.
  4. Furthermore, without the restriction placed on the administrator of the estate by s. 12(1), it would be possible for that administrator to attempt to thwart a legitimate claim by the dependents under s. 2 of the Act by distributing the assets before an action is brought.

[29]         The purpose of s. 12(1) is to keep the estate intact to ensure that a successful plaintiff is able to recover that to which they may become entitled. A breach of this statutory provision is a serious matter.  It goes to the heart of the legislative scheme.

[30]         Until the six-month limitation period has passed, a beneficiary’s entitlement to a share in the estate is not absolute. It is subject to variation if a successful action is brought under the WVA. Unless consents are obtained, the beneficiaries are not entitled to receive and benefit from their share of the estate until the WVA claims have been resolved or a court order has been obtained.

[31]         Similarly the plaintiff in a WVA action is entitled to have the assets in the estate preserved pending the outcome of their claim. They should not be put in the position of having to pursue after the executor or other beneficiaries to reap the benefits of a successful action.

[32]         Where there is a breach of the statutory provision and funds are distributed contrary to the legislation, the remedy of a claim against the executor or other beneficiaries, after the completion of the WVA action, does not sufficiently protect the successful WVA claimant. Those parties may, by then, be without assets or have taken steps that make it difficult to locate their assets.

[33]         It is the party who has breached the provisions of the statue who must make matters right. This application is not the forum to determine the strength or otherwise of a WVA claim. The WVA claimant is entitled to have the estate reconstituted to its state prior to the wrongful distribution.

[34]         I find that the appropriate remedy for a breach of s. 12 of the WVA is for the party who has breached the provisions to either repay the estate or to post security in the entire amount which has been wrongfully disbursed.

[35]         The Executrix in this matter must make matters right. She must, within 30 days of the date of these reasons, repay the estate or post security in the amount of $202,000, being the amount which she has improperly advanced to the beneficiaries. If the security is not posted within 30 days the plaintiff will be at liberty to seek further relief.