Trusts are often mistakenly viewed as entities akin to corporations. In fact, a trust is a relationship.
Here’s what happens: A person gives her property to a trustee (in some cases, herself) to hold it for beneficiaries. This can be done while she’s alive or through a will. The trustee is compelled to hold the property on the beneficiary’s behalf. Legal ownership of the property is usually transferred to the trustee and remains with that person unless and until that property is transferred to a beneficiary. At that point it ceases to be trust property.
The beneficiary doesn’t have legal title to the property as long as it’s part of the trust. Rather, the beneficiary has the right to benefit from the property in accordance with the terms of the trust. For example, the beneficiary may have a right to receive certain payments from time to time or to live in a home that forms part of the trust property.
The rights of the beneficiary and the obligations and powers of the trustee are the core of this relationship.
A trustee has an important role and must take it seriously. But sometimes she no longer wants the responsibility; in other cases he shouldn’t be permitted to keep it.
Legal advice is always necessary when dealing with resignation, removal or substitution of trustees. This article provides insight into the process and highlights how important it is to address these issues in the trust document. Ontario laws are our point of reference. (While most provinces have similar provisions, there are key differences.)
Resignation of a trustee
Acting as a trustee can be a lot of work, and in some cases the trust relationship can last a long time. For these reasons and others, trustees sometimes wish to resign. If the trustee is still capable of doing the job, resigning isn’t as easy as she might hope. She has an obligation always to act in the best interest of the beneficiary.
Unless otherwise set out in the trust agreement, the provisions of Ontario’s Trustee Act determine when a trustee is permitted to resign.
Resigning without appointing a replacement would not be in the best interest of the beneficiary, so it’s typically not permitted without a court order. When there are three or more trustees, one may resign without appointing a replacement, provided the others — and anyone entitled to appoint trustees — consent.
In order to avoid the necessity of obtaining a court order, a carefully drafted trust agreement should include provision for trustees to resign where appropriate. Even if there’s no actual opposition, this is a time-consuming and costly process. Accordingly, when creating a trust it’s critical to identify the circumstances in which a trustee may resign and who may appoint a replacement.
Removing a trustee
Sometimes trustees do not live up to their obligations.
For instance, they may take trust property or commit some other egregious act. In these cases it’s often necessary to remove the trustee. Removal may also be necessary when there is disagreement or hostility between the trustees, undue delay or conflicts of interest.
Removing a trustee isn’t easy, unless it’s provided for in the trust document. The person who wants to remove the trustee must seek a court order, and obtaining one isn’t guaranteed. In addition, that trustee will likely oppose being removed. The person seeking removal must persuade the court the trustee cannot properly carry out his duties.
This is difficult because the court puts a great deal of weight on the choice made by the person who created the trust.
Many of the problems that result in court battles can be avoided with proper planning. The trust document can include dispute resolution provisions that can help resolve disagreements between trustees. It can also give someone the ability to remove and replace trustees.
Appointing a new trustee
Unless otherwise provided for in the trust document, a new trustee can only be appointed as a replacement for a resigning trustee. The courts also have the power to appoint a new or replacement trustee in appropriate circumstances.
Accordingly, it is preferable to set out in the trust document the circumstances under which, and by whom, new or replacement trustees may be appointed.
Planning for these situations at the outset may take more of the client’s time and mean slightly higher fees.
However, the additional time and expense is minor in comparison to the financial and personal strain that can result from a failure to do so.
Paul W. Taylor is an associate in the Ottawa office of Borden Ladner Gervais LLP. His practice is focused on estate and trust planning and administration.