CETA-1 (3rd ed) - Chap 02 - Trustees Personal Reps - for posting.pdf

Chapter 2 Trustees, Personal Representatives, and Substitute Decision-makers Learning Objectives.................................................................................................

Chapter 2 Trustees, Personal Representatives, and Substitute Decision-makers Learning Objectives............................................................................................................... 2-4 2.1 Introduction.............................................................................................................. 2-6 2.1.1 Quebec Only: Administration of the Property of Others.............................................. 2-6 2.2 Trustees.................................................................................................................... 2-8 2.2.1 Common Law Only: What Is a Trust?......................................................................... 2-8 2.2.1.1 Definition.................................................................................................. 2-8 2.2.1.2 Three Essential Features of the Common Law Trust................................ 2-8 2.2.1.3 A Trust Continues..................................................................................... 2-9 2.2.1.4 A Trust Is Irrevocable............................................................................. 2-10 2.2.1.5 A Settlor May Be a Trustee or a Beneficiary and/or Reserve Powers..... 2-10 2.2.1.6 Who Can Be A Settlor or a Trustee?...................................................... 2-10 2.2.1.7 The Quebec (Civil Code) Trust............................................................... 2-11 2.2.1.8 Establishing a Trust Under the CCQ....................................................... 2-11 2.2.2 Quebec Only: What Is a Trust?................................................................................. 2-11 2.2.2.1 The Patrimony........................................................................................ 2-12 2.2.2.2 Definition................................................................................................ 2-12 2.2.2.3 Four Essential Elements of a Quebec Trust........................................... 2-12 2.2.2.4 If a Settlor or Beneficiary Is the Trustee of a CCQ Trust......................... 2-14 2.2.2.5 A CCQ Trust Continues and May Not be Revoked................................. 2-14 2.2.2.6 Who Can Be a Settlor or a Trustee of a CCQ Trust?.............................. 2-14 2.2.2.7 The Common Law Trust......................................................................... 2-15 2.2.3 Common Law Trusts and Quebec Trusts Compared................................................ 2-15 2.2.4 Types of Trusts......................................................................................................... 2-16 2.2.4.1 Common Law Only: Introduction............................................................ 2-16 2.2.4.2 Quebec Only: Introduction...................................................................... 2-16 2.2.5 Classifications Used to Describe Trusts.................................................................... 2-17 2.2.5.1 How the Trust Was Created: Express Trusts.......................................... 2-17 2.2.5.2 When the Trust Was Created: Inter Vivos and Testamentary Trusts...... 2-18 2.2.5.3 Common Law Only: Purpose of the Trust............................................... 2-18 2.2.5.4 Quebec Only: Purpose of the Trust........................................................ 2-19 2.2.5.5 Interests in the Trust............................................................................... 2-19 2.2.5.6 Personal Trusts: Further Classifications................................................. 2-20 2.2.5.7 Common Law Only: Trusts Arising by Operation of Law – Resulting Trusts................................................................................................................... 2-22 2.2.5.8 Quebec Only: Trust Arising by Operation of Law.................................... 2-23 2.2.5.9 Trust Classification Diagram................................................................... 2-23 2.2.6 Common Law Only: Four Requirements to Establish a Trust.................................... 2-25 2.2.6.1 Capacity of the Relevant Parties............................................................ 2-25 2.2.6.2 The Three Certainties............................................................................. 2-26 2-1  2.2.6.3 Constituting the Trust – Transferring the Assets..................................... 2-27 2.2.6.4 Compliance with the Formalities............................................................. 2-27 2.2.7 Quebec Only: Requirements to Establish a Trust..................................................... 2-27 2.2.8 Choosing a Trustee.................................................................................................. 2-28 2.2.9 Accepting the Appointment as Trustee..................................................................... 2-29 2.2.9.1 Common Law Only: Accepting the Appointment..................................... 2-29 2.2.9.2 Quebec Only: Accepting the Appointment.............................................. 2-29 2.2.10 Trustee Duties.......................................................................................................... 2-29 2.2.10.1 Introduction............................................................................................ 2-29 2.2.10.2 Overriding Duty of Care.......................................................................... 2-30 2.2.10.3 Duty Not to Delegate.............................................................................. 2-31 2.2.10.4 Duty of Loyalty (No Conflict of Interest).................................................. 2-31 2.2.10.5 Duty of Impartiality.................................................................................. 2-32 2.2.10.6 Duty to Account (Provide Information).................................................... 2-33 2.2.11 Trustee Powers........................................................................................................ 2-33 2.2.12 Trustee Duties and Powers and the Administration of a Trust.................................. 2-34 2.3 Personal Representatives (Executors and Administrators; Liquidators in Quebec).................................................................................................................................. 2-34 2.3.1 What Is a Will?......................................................................................................... 2-34 2.3.1.1 Terminology for Maker of a Will.............................................................. 2-34 2.3.1.2 When There Is No Will............................................................................ 2-34 2.3.2 Personal Representatives (“Liquidators” in Quebec)................................................. 2-35 2.3.2.1 When There Is a Will (Executor)............................................................. 2-35 2.3.2.2 When There Is No Will or There Is No Executor..................................... 2-35 2.3.3 Personal Representative Responsibilities 36 2.3.3.1 Common Law Only: Appointment of the Personal Representative.......... 2-36 2.3.3.2 Quebec Only: Appointment of the Liquidator.......................................... 2-37 2.3.4 Personal Representatives versus Trustees.............................................................. 2-37 2.4 Agents..................................................................................................................... 2-38 2.4.1 Introduction to the Law of Agency............................................................................. 2-38 2.4.1.1 Types of Agency Relationships.............................................................. 2-38 2.4.2 Responsibilities of an Agent..................................................................................... 2-39 2.4.2.1 Agent for Executor.................................................................................. 2-39 2.4.3 Trustee Versus Agent............................................................................................... 2-40 2.5 Substitute Decision-makers.................................................................................. 2-43 2.5.1 What Is a Substitute Decision-maker?...................................................................... 2-43 2.5.1.1 Supported and Assisted Decision-making.............................................. 2-43 2.5.2 Financial and Legal Decision-makers....................................................................... 2-43 2.5.2.1 Power of Attorney................................................................................... 2-44 2.5.2.2 Guardian (Committee, Trustee, Tutors, and Curators)............................ 2-46 2.5.2.3 Estate (Property).................................................................................... 2-47 2.5.3 Personal and Health Care Decision-makers............................................................. 2-47 2.5.3.1 Pre-Planning for Personal and Health Care Decisions – Terminology.... 2-47 2.5.3.2 Personal-care and Health-care Decisions Defined................................. 2-48 2.5.3.3 Living Wills............................................................................................. 2-49 2.5.3.4 Ulysses Agreements.............................................................................. 2-49 2.5.3.5 Personal Guardians................................................................................ 2-49 2-2 2.5.4 Requirements to Appoint a Substitute Decision-maker............................................. 2-50 2.5.4.1 Appointment by the Adult....................................................................... 2-50 2.5.4.2 Appointment by the Court....................................................................... 2-50 2.5.5 Responsibilities of a Substitute Decision-maker....................................................... 2-51 2.6 Legal Capacity........................................................................................................ 2-51 2.6.1 Capacity to Enter a Transaction................................................................................ 2-51 2.6.1.1 Legal Capacity and Age of Majority........................................................ 2-52 2.6.1.2 Legal Capacity to Enter Transactions..................................................... 2-52 2.6.1.3 Capacity to Make Decisions and Manage One’s Affairs.......................... 2-52 2.6.1.4 Terminology: Capacity, Capability, Incapacity, and Incapability.............. 2-53 2.7 Choosing a Fiduciary and Accepting a Fiduciary Appointment......................... 2-54 2.7.1 Introduction.............................................................................................................. 2-54 2.7.2 Choosing a Fiduciary................................................................................................ 2-54 2.7.2.1 Skill, Ability, and Time............................................................................ 2-54 2.7.2.2 Availability and Alternates...................................................................... 2-55 2.7.2.3 The Settlor as Trustee............................................................................ 2-55 2.7.2.4 Location................................................................................................. 2-55 2.7.2.5 How Many?............................................................................................ 2-55 2.7.2.6 How Will Multiple/Co-fiduciaries Work Together?................................... 2-56 2.7.2.7 Compensation........................................................................................ 2-56 2.7.2.8 Willingness to Accept............................................................................. 2-56 2.7.3 Corporate Trustees................................................................................................... 2-56 2.7.4 Accepting a Fiduciary Appointment.......................................................................... 2-57 2.7.4.1 Reason for Being Appointed................................................................... 2-57 2.7.4.2 Assets to be Managed............................................................................ 2-57 2.7.4.3 Unique Characteristics of the Beneficiaries............................................ 2-57 2.7.4.4 Time Involved and Duration of the Appointment..................................... 2-58 2.7.4.5 Co-fiduciaries......................................................................................... 2-58 2.7.4.6 Compensation........................................................................................ 2-58 Figure 2.1: Classification of Trust Diagram........................................................................................... 2-24 Figure 2.2: Common Law Only: Trust and Agency Compared............................................................... 2-41 Figure 2.3: Quebec Only: Trust and Mandate Compared....................................................................... 2-42 Figure 2.4: Age of Majority by Jurisdiction............................................................................................ 2-52 Figure 2.5: Substitute Decision-makers of Jurisdiction.......................................................................... 2-59 2-3  Chapter 2 Trustees, Personal Representatives, and Substitute Decision-makers Learning Objectives This chapter examines the nature of the three fiduciary roles that are the subject of this course – trustee, personal representative, and substitute decision-maker. The nature and responsibilities of each are examined, with special attention to the nature of a trust. The chapter ends with a review of the factors to consider when appointing or accepting a fiduciary relationship. Upon completing this chapter, students will be able to:  Summarize the nature of a trust  Identify purposes for creating a trust  Identify ways to classify a trust  Identify who can make a trust and who can be a trustee  Summarize the requirements to create a trust o Common Law: Identify the three certainties required for a valid trust o Quebec: Identify the four essential elements of a trust  Summarize the core duties of a trustee  Distinguish between a duty and a power  Summarize the nature of a will  Identify the different types of personal representatives  List the responsibilities of a personal representative  Distinguish the roles of a trustee and a personal representative  Summarize the nature of an agency (mandate in Quebec)  List examples of agency relationships  Distinguish the roles of a trustee and an agent (mandate in Quebec)  Summarize the nature of a substitute decision-maker’s role  Identify the types of substitute decision-maker roles  Identify the requirements for appointing substitute decision-makers  Summarize the responsibilities of substitute decision-makers  Identify the two tests that must be satisfied to have legal capacity to enter a transaction  Identify factors to consider when selecting a fiduciary  Identify the factors to consider before accepting a fiduciary appointment  Identify issues to be addressed when two or more fiduciaries are appointed to act together 2-4 REMINDER: Terminology varies significantly between provinces, and even more so with Quebec. This chapter introduces a number of names and terms for different types of fiduciaries. For ease of reading, as terminology is defined, one word or phrase is selected for purposes of the materials in this course. Jurisdiction-specific terminology is only used if required. See the Generic Terms Cheat Sheet for the full list of generic terminology. 2-5  Trustees, Personal Representatives, and Substitute Decision-makers 2.1 INTRODUCTION Whether one is appointed to act as a fiduciary or is providing advice or services to a fiduciary, it is important to appreciate the nature of the duties and responsibilities of the different fiduciary roles, as well as their similarities and their differences. This chapter introduces students to each of the roles addressed in this course – trustee, personal representative, and substitute decision-maker. The nature and responsibilities of each are examined, with special attention to the nature of a trust and the core duties of a trustee that apply to all fiduciary roles. The chapters that follow examine the details of those responsibilities as they apply to personal representatives and substitute decision-makers.1 For students employed by corporate trustees it is important to be able to anticipate what the responsibilities will be before accepting the appointment. Although not everything can be known, an experienced fiduciary will be able to review available information and ask important questions. Similarly, a legal professional advising a potential fiduciary should be able to identify and explain the nature of the role and the responsibilities to the client when creating the document, and/or to the fiduciary before an appointment is accepted. Based on the information gathered, the fiduciary will be able to anticipate the nature and scope of the responsibilities being accepted. Issues to be considered include:  the practical responsibilities that will arise when dealing with assets and liabilities,  legal and tax issues that may need to be addressed, and  issues that may arise between the fiduciary and the beneficiary or others, including a co- fiduciary or, if the client is alive, family members or other key persons. Ultimately, the fiduciary needs to determine whether or not the compensation that will be earned, if any, is sufficient for the responsibilities and time involved, including the risks and issues to be addressed. An appreciation of the fiduciary’s duties and responsibilities, as well as the issues that can arise, will also assist students who will be advising or assisting a client who has accepted a fiduciary role. Students who complete the full Certificate in Estate and Trust Administration will acquire these skills. 2.1.1 Quebec Only: Administration of the Property of Others Trustees, liquidators, tutors, curators, and mandataries in Quebec are generally referred to as administrators of the property of others. In addition to the specific rules that apply to each role, they are subject to the general rules set out at articles 1299-1370 CCQ found in Book 4, Title 7. These rules codify the standards that govern the conduct of administrators and will be referred to 1 More detailed discussion of issues unique to the law and administration of trusts is found in the second course in the Certificate to Estate and Trust Administration program, Advanced Topics in Estate and Trust Administration (CETA 2). Hereafter referred to as CETA 2. 2-6  Trustees, Personal Representatives, and Substitute Decision-makers throughout this course. A brief overview is set out below to introduce students to these provisions. The applicable laws are addressed in more detail in this course and in CETA 2. Article 1299 CCQ stipulates that a person charged with the administration of property that is not his own is governed by the general rules regarding the administration of the property of others, except where more specific rules (in the law or the governing act) apply to his particular type of administration. Although a trust is not a “person” in Quebec law, the trust has a patrimony that is distinct from the patrimonies of the settlor, the trustee(s), and the beneficiaries. The articles from the CCQ that govern the administration of the property of others are identified and briefly summarized here.  Article 1300 CCQ provides for when an administrator may be remunerated (see Chapter 9 Compensation and Expenses).  Articles 1301-1305 CCQ establish the general rules governing the duties and authority of an administrator responsible for the simple administration of the property of others. This includes acting as a liquidator (unless the will provides otherwise) (see Chapter 4 Initial Stages of an Estate Administration) and a tutor (see Figure 2.5 Substitute Decision- makers by Jurisdiction and Chapter 11 Substitute Decision-makers for Financial Affairs).  Articles 1306-1307 CCQ establish the general duties and obligations for an administrator with full administration of the property of others. This includes trustees (unless the trust deed provides otherwise) (see remainder of Chapter 2 and CETA 2) and curators (see Figure 2.5 Substitute Decision-makers by Jurisdiction and Chapter 11 Substitute Decision-makers for Financial Affairs).  Articles 1308-1370 CCQ set out the general rules of administration. They deal with: o obligations of the administrator towards the beneficiary (arts. 1308-1318 CCQ) (see 2.3.3 Personal Representative Responsibilities and CETA 2); o obligations of the administrator and beneficiary to third parties (arts. 1319 – 1323 CCQ) (see 2.3.3 Personal Representative Responsibilities and CETA 2); o inventory, security, and insurance over property and/or to guarantee performance of administrator’s obligations (arts. 1324-1331 CCQ) (see Chapter 5 Estate Assets); o joint administration and delegation (arts. 1332-1338 CCQ) (see 2.2.10.3 Duty Not to Delegate; Chapter 9 Compensation and Expenses and CETA 2); o presumed sound investments (the investment rules that apply to simple administration) (arts. 1339 – 1344 CCQ) (see CETA 2); o apportionment of profit and expenditure (arts. 1345 – 1350 CCQ) (see Chapter 10 Estate and Trusts Accounts); o annual accounts (arts. 1351-1354 CCQ) (see Chapter 10 Estate and Trusts Accounts); and o termination of administration, including final accounts; resignation, death, and replacement of an administrator; liability; administration expenses; and delivery of property (arts. 1355-1370 CCQ) (see Chapter 6 Estate Liabilities and Claims 2-7  Trustees, Personal Representatives, and Substitute Decision-makers Against the Estate, Chapter 7 Estate Beneficiaries, Chapter 10 Estate and Trusts Accounts and CETA 2). 2.2 TRUSTEES 2.2.1 Common Law Only: What Is a Trust? 2.2.1.1 Definition The trust is unique to the common law. Many have attempted to define it. A definition frequently cited with judicial approval is, [A] trust is an equitable obligation, binding a person (called a trustee) to deal with property over which he has control (which is called the trust property, being distinguished from his private property) for the benefit of persons (who are called the beneficiaries or, in old cases, cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation. 2 2.2.1.2 Three Essential Features of the Common Law Trust At the core, there are three essential features or characteristics of a trust that are fundamental to understanding the unique nature of the common law trust. The three essential features of a trust identified by Waters are: 1. A fiduciary relationship: Unlike a company, a trust is not a legal entity. Although many professionals speak of “a trust” as if it is an entity, in fact, a trust is a fiduciary relationship where one party (the settlor) transfers property to another (the trustee) to hold title to and manage that property for the benefit of a third party (the beneficiary) who has the exclusive enjoyment of the property.3 It is this relationship between the trustee and beneficiaries that gives rise to the trustee’s duties discussed below (see 2.2.9 Accepting the Appointment as Trustee). 2. Dual ownership: A trust divides the legal ownership (title) and beneficial ownership (enjoyment). The trustee holds the legal title and is the only party able to deal with the assets in the trust (e.g. sell, transfer, collect income). The beneficiary holds the equitable (or beneficial) title. Only the beneficiary is entitled to enjoy the benefits of the property. The benefits or interests may include receiving income such as interest, dividends or rents; having the right to live in a home; or receiving the capital or assets at some future time. Different beneficiaries may be entitled to one or more rights to the enjoyment of the property. Historically, the beneficiary’s rights were protected by the courts of 2 D.J. Hayton, P. Matthews and C. Mitchell, Underhill and Hayton: Law Relating to Trusts and Trustees, 18th ed. (London: LexisNexis Butterworths, 2010) at p. 2 as cited in Waters, at p. 4. 3 Waters at p. 9. 2-8  Trustees, Personal Representatives, and Substitute Decision-makers equity.4 The duty to account (see 2.2.10.6 Duty to Account (Provide Information)) assists the beneficiary to learn about the trust and the decisions of the trustee so that the beneficiary can enforce his or her rights. 3. Separation of title from trustee’s own assets: Separation of title ensures that the assets of the trust are not available to the trustee’s personal creditors to satisfy a personal debt of the trustee.5 It is for this reason that a trustee is required to keep assets separate and to not mingle the trust assets with his or her own. Example: Benjamin transfers a house and a portfolio of stocks and bonds to David as trustee. David is instructed to allow Benjamin’s only daughter, Maria, to live in the house and to pay Maria the interest and dividends from the investments. When Maria dies, David is to sell the assets and distribute the cash to Maria’s two children. The house and the investment accounts are transferred into David’s name as trustee. David holds legal title and is the only one able to sell or transfer the assets, and to collect the income. Maria and her children are the beneficiaries and have the equitable or beneficial ownership in the assets. In the example above, only David, as legal owner, may deal with the assets. Maria, as a beneficial owner, is entitled to enjoy the use of the house and to receive the income earned from the investments. Different terms are used to describe Maria’s interest and they are used interchangeably in this course. “Revenue beneficiary” is most common in Quebec, and is also used in the common law jurisdictions. Another term used in the common law, and in the Income Tax Act, and sometimes in Quebec as well is “income beneficiary”. The term “life tenant” is sometimes used in common law jurisdictions, particularly when the beneficiary’s interest involves the use of a property such as living in the home. In this case Maria would have a “life interest” in the home. Maria’s children also have a beneficial interest. However, it is limited to the capital or residue of the trust and is postponed to a future date. Terms to describe their interest include “capital beneficiaries” or “residual beneficiaries”. These terms are used interchangeably in this course. 2.2.1.3 A Trust Continues Although a trust is not a legal entity, if a trustee dies, becomes incapable, or can no longer act, the trust does not come to an end. If an alternate trustee is identified in the trust document, the alternate assumes control. Legislation also provides a mechanism for replacing a trustee.6 4 For a full discussion of the evolution of the trust and the beneficiary’s equitable rights, see Waters at pp. 9-14. 5 Waters at p. 13. 6 “[N]o trust fails for want of a trustee … the court will appoint a trustee rather than see the trust fail.” See Waters at p. 9. Replacement of a trustee is addressed in CETA 2. 2-9  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.1.4 A Trust Is Irrevocable When the legal title of assets are transferred to a trustee, the transferor (or settlor) no longer owns or controls the assets. It is for this reason that the terms of the trust must address the trustee’s duties and powers, and provide guidance on who is to be a beneficiary and when. A trust is irrevocable (e.g. the settlor cannot undo or revoke the transfer) unless the settlor specifically includes a provision in the document that states the trust is revocable.7 2.2.1.5 A Settlor May Be a Trustee or a Beneficiary and/or Reserve Powers When establishing an inter vivos trust, the settlor may:  reserve certain powers,  be appointed as a trustee, and/or  be named as a beneficiary. Reserved powers might include the power to change or replace a trustee, decide beneficiaries, or deal with specified administration decisions. There can be important tax consequences if the settlor of an inter vivos trust retains control or receives benefits from the trust. They are dealt with in the third course in the Certificate to Estate and Trust Administration program.8 2.2.1.6 Who Can Be A Settlor or a Trustee? Any adult with legal capacity can be a settlor. A corporation, as a legal entity, may also settle a trust. In some situations more than one person or corporation may be able to contribute to a trust. Individuals may be appointed as trustees. However, the individual must be an adult before he or she can start acting. Regulated trust companies may also offer services to the public as trustees. Non- regulated companies may be permitted in some provinces to be a trustee, but they may not offer services to the public. Note: If there is more than one trustee, decisions must be made unanimously unless the trust document provides otherwise or the governing law permits majority rule. (See CETA 2 for a review of the relevant law.) 7 A revocable trust can have unintended tax consequences. Therefore, they are only used in certain circumstances. Revocable trusts are not permitted in Quebec. 8 Estate and Trust Taxation (CETA 3). Hereafter referred to as CETA 3. 2-10  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.1.7 The Quebec (Civil Code) Trust9 For purposes of trust administration, the Quebec trust under the CCQ is similar to a common law trust. The trustee must administer the property in the trust, according to the terms of the trust and the applicable law for the beneficiaries. However, the legal basis for the CCQ trust is based on a legal concept more familiar to the civil law. 2.2.1.8 Establishing a Trust Under the CCQ The civil law does not recognize the common law concept of dual ownership, an essential feature of the common law trust. The CCQ 1991 came into force on January 1, 1994. Among other changes to the law it introduces a new law governing trusts.10 The new CCQ provides that a trust is established when:  the settlor transfers property to another patrimony constituted (or established) by the settlor and that is appropriated to a particular purpose (e.g. for the benefit of persons or a charitable or other purpose) and  the trustee agrees to hold and administer the patrimony.11 The trustee has the control and exclusive administration of the property and titles to the property are drawn up in the trustee’s name.12 Neither the settlor, trustee, nor beneficiary is an owner of the property. The trustee is considered an administrator of the property of others and the property held in the patrimony is to be administered for the purpose for which the trust was established. Unlike common law trusts, a Quebec trust may not be set up as a revocable trust. Other similarities and differences between the common law and Quebec civil law trust are noted throughout this course. 2.2.2 Quebec Only: What Is a Trust? The rules for establishing, administering and terminating a trust are found in articles 1260-1298 CCQ. Articles 1266-1273 CCQ describe the classification of the different kinds of trusts that can be established, how they may be established, their purpose and duration. These rules were introduced January 1, 1994, as part of the new Civil Code of Quebec.13 9 Common law students are only responsible for this short discussion of the Quebec Trust. 10 This course only deals with the new laws. Generally, the CCQ applies to all existing and new trusts from January 1, 1994. If a trust existed prior to January 1, 1994, and does not comply with the new law, legal advice should be obtained. 11 See CCQ, art. 1260 which came into force in 1994. See also 2.2.2 Quebec Only: What Is a Trust? for more information about the concept of the patrimony. 12 See art. 1278 CCQ. 13 The CCQ came into force on January 1, 1994. It was a substantial reform of the law. For purposes of this course we study the current law. Generally, the CCQ applies to existing and new trusts from January 1, 1994. If a trust existed prior to January 1, 1994 and does not comply with the law, legal advice should be obtained. 2-11  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.2.1 The Patrimony In order to understand the unique nature of the trust within the civil law context, it is helpful to first explain the concept of the patrimony. “Patrimony” has been defined as “the whole of the rights and obligations of a person having economic or pecuniary value.”14 Example: Pierre has assets worth $1milllion. His obligations to creditors are $200,000. This is Pierre’s patrimony. He cannot separate the assets and the obligations. The assets are available to satisfy the debts owed. Article 2 of the CCQ provides that “every person is the holder of a patrimony. However the article goes on to say that the patrimony “may be the subject of a division or of an appropriation to a purpose, but only to the extent provided by law.” A person’s patrimony can therefore be divided,15 or part of the patrimony can be appropriated to a purpose (for example, transferred to a trust) as long as it is in accordance with the law. Importantly for purposes of understanding the legal status of a CCQ trust, a patrimony may be established and recognized without attaching itself to any physical or legal person and without having its own juridical personality.16 2.2.2.2 Definition Article 1260 CCQ provides that “a trust results from an act whereby a person, the settlor, transfers property from his patrimony to another patrimony constituted by him which he appropriates to a particular purpose and which a trustee undertakes, by his acceptance, to hold and administer.” Although the trust has a patrimony, it is not a “person” in law. 2.2.2.3 Four Essential Elements of a Quebec Trust Articles 1260 and 1261 CCQ set out the four essential elements of the trust. 1. A transfer of property: The transfer may arise as a result of a contract, a will, or in some cases by law, including by judgment of the court (see art. 1262 CCQ). 2. The transfer is to a distinct patrimony: The trust patrimony that consists of the property transferred to the trust, constitutes a “patrimony by appropriation”. The patrimony is autonomous and distinct from the patrimony of the settlor, the trustee, and the beneficiary. None of them have any real right in the patrimony (art. 1261 14 Paul-André Crépeau Center for private and comparative Law, Private Law Dictionaries Online, (Montreal: McGill University, 2014), see https://nimbus.mcgill.ca/pld-ddp/dictionary/search “Patrimony”. See also Professor Lionel Smith, “Trust and Patrimony” 28 ETPJ 332 at 335. 15 For example, a legal person (art. 302 CCQ) and during the liquidation of a succession (art. 780 CCQ). For the purposes of the family patrimony in the case of liquidation of a succession, the term has a different nuanced meaning and not the classical meaning. 16 M Piccini Roy, Trusts in Some Civil Law Jurisdictions: The Quebec Experience, p 4, STEP Global Congress, Nov 6-7, 2014, Miami, USA. 2-12  Trustees, Personal Representatives, and Substitute Decision-makers CCQ). For administration purposes, however, title to the property is in the trustee’s name (art. 1278 CCQ). 3. The patrimony is appropriated to a particular purpose: The CCQ recognizes three purposes: personal trusts for the purpose of securing a benefit for a person (art. 1267 CCQ); private trusts for the erection, maintenance, or preservation of a thing or the use of property appropriated to a specific use, whether for the indirect benefit of a person or in his or her memory, or for some other private purpose (art. 1268 CCQ); and social trusts for a purpose of general interest, such as a cultural, educational, philanthropic, religious, or scientific purpose and that does not have the making of profit or the operation of an enterprise as its main object (art. 1269 CCQ). These purposes are discussed further (see 2.2.4.2 Quebec Only: Introduction (under Types of Trusts) and 2.2.5.4 Quebec Only: Purpose of the Trust). 4. The trustee’s acceptance is an undertaking to hold and administer the patrimony: In accepting this undertaking, the trustee is bound to the law and the terms of the document or judgement that create the trust. Article 1264 CCQ provides that a trust is constituted upon the acceptance of the trustee or of one of the trustees if there are several. The trust is constituted by the trustee’s acceptance of the mission or office of trustee, not strictly speaking of the property transferred to the trust patrimony. In the case of a testamentary trust, the effects of the trustee's acceptance are retroactive to the date of death. Article 1265 CCQ provides that “acceptance of the trust divests the settlor of the property, charges the trustee with seeing to the appropriation of the property and the administration of the trust patrimony and is sufficient to establish the right of the beneficiary with certainty.” Example: Benjamin transfers a house and a portfolio of stocks and bonds to David as trustee. David is instructed to allow Benjamin’s only daughter, Maria, to live in the house and to pay Maria the interest and dividends from the investments. When Maria dies, David is to sell the assets and distribute the cash to Maria’s two children. The house and the investment accounts are transferred into David’s name as trustee. David is the holder of the trust property and is the only one able to sell or transfer the assets, and to collect the income. Maria and her children are the beneficiaries. In the example above, only David, as administrator of the trust property, may deal with the assets (art. 1278 CCQ). He has control and possession of the property. Maria is a beneficiary. She has a personal right to enforce the enjoyment of the property granted to her by her father (art. 1284 CCQ) (she is entitled to live in the house) and to receive the income earned from the investments. Different terms are used to describe Maria’s interest. “Revenue beneficiary” is most common in Quebec. Another term used in the common law, as well as in the Income Tax Act, is “income beneficiary”. These terms are used interchangeably in this course. 2-13  Trustees, Personal Representatives, and Substitute Decision-makers In Quebec, this use of the home would constitute a right of use and habitation and the rules of usufruct would apply. Maria would be referred to as a usufructary. Usufructs are not discussed in this course.17 Maria’s children also have an interest in the trust. However, it is limited to the capital of the trust and is postponed to a future date. The term to describe their interest is “capital beneficiaries”. 2.2.2.4 If a Settlor or Beneficiary Is the Trustee of a CCQ Trust When establishing a trust, if the settlor or beneficiary is also the trustee, there must be another trustee who is neither the settlor nor a beneficiary (art. 1275 CCQ). This is an imperative provision of the law. Infringing this rule could cause the trust to be null. If there is no replacement mechanism in the trust agreement to remedy this, an application should be made to the court (art. 1277 CCQ). When establishing a trust, the CCQ permits the settlor to be a beneficiary (art. 1281 CCQ) or to reserve a power to make decisions about who should be a beneficiary and/or their shares (art. 1282 CCQ). There can be important tax consequences if the settlor of an inter vivos trust retains control or receives benefits from the trust. They are dealt with in CETA 3. 2.2.2.5 A CCQ Trust Continues and May Not be Revoked If a trustee dies, becomes incapable, or can no longer act, the trust does not come to an end. If a replacement is identified in the trust document, the replacement assumes control. The CCQ provides a mechanism to obtain judicial appointment of a replacement trustee (art. 1277 CCQ).18 Unlike a common law trust, a CCQ trust cannot include a provision that gives the settlor’s authority to later revoke the trust.19 However, the settlor can reserve the right to receive the fruits and revenues, and/or the capital as a beneficiary (art. 1281 CCQ). 2.2.2.6 Who Can Be a Settlor or a Trustee of a CCQ Trust? A settlor can be a natural person or a legal person (art. 1260 CCQ). A “person” means a natural person (art. 1 CCQ) or a legal person (art. 298 CCQ). In some situations, it may be possible for more than one person to contribute to the trust patrimony. A trustee can be a natural person who has full exercise of his or her civil rights (e.g. capacity), or any legal person authorized by law (only a trust company licensed to carry on business in Quebec).20 More than one person may be appointed. 17 Usufructs are addressed in arts. 1120-1136 of the CCQ. Usufructs in place before the CCQ 1991 are governed by the old code (arts. 1426-1433) 18 Replacement of a trustee is addressed in CETA 2. 19 Although it is possible for the settlor of a common law trust to reserve a power to later revoke the trust, a revocable trust can have unintended tax consequences. Therefore, they are only used in certain circumstances. 2-14  Trustees, Personal Representatives, and Substitute Decision-makers Note: Where there are more than two trustees, a majority can act unless the trust or the law requires them to act jointly or provides another rule (art. 1332). Further discussion on the rule and how to deal with disputes is addressed in CETA 2. 2.2.2.7 The Common Law Trust21 The Quebec trust, as introduced in 1994, finds its roots in the civil law and the concept of the patrimony. Trusts have a long history in the common law. The common law approach differs from Quebec’s approach in that ownership of property is divided between the legal and beneficial ownership. The trustee has legal ownership (including title to the property) that allows the trustee to deal with the property and collect income from it. The beneficiary has the beneficial ownership that is the right to enjoy the use and benefit of the property. Although this course and texts refer to “the trust” as if it is a legal entity, the common law trust is not a legal entity and neither is the civil law trust. Rather, the common law trust is described as a relationship where the trustee is responsible for administering the assets held by the trustee for the benefit of the beneficiaries or other purposes, any one of whom may enforce the trustee’s obligation. The civil law trust has also been similarly described. Although legal title and ownership of the property held in the trust is transferred to the trustee, the trustee holds the property in trust and, similar to a CCQ trust, the property is not available to the trustee’s personal creditors. 2.2.3 Common Law Trusts and Quebec Trusts Compared In the foregoing sections, students have been introduced to the nature of a common law trust and trust under the CCQ, depending on the jurisdiction in which they live. A brief description of the other legal system is offered. Although the legal underpinnings of the nature of a trust under each system of law are very different, for administration purposes, there are many similarities. These include those listed below.  Property is transferred from the settlor to the trustee.  The settlor no longer has ownership rights in the property in the trust.  The trustee’s creditors have no rights to satisfy their claims out of the trust property.  The trust property is a separate or segregated fund.22  The trustee has a duty to administer the trust property for the benefit of the beneficiaries.  The beneficiaries have legal rights to require the trustee to comply with the duties set out in the law and in the trust. 20 Art. 1274 CCQ and An Act Respecting Trust Companies and Savings Companies, CQLR c. S-29.01. 21 Quebec students are only responsible for this section of the materials. For further reading, see 2.2.1 Common Law Only: What Is a Trust? 22 Some also refer to it as a “ring fenced fund”. 2-15  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.4 Types of Trusts 2.2.4.1 Common Law Only: Introduction Trusts are established for a variety of purposes and can be created in a number of ways. Trusts are created to benefit individuals (personal trusts) or charitable purposes (purpose trusts). These trusts are usually evidenced by a trust document that identifies the trustee, the property to be held, and the beneficiary(ies) or purpose. The terms of the trust provide for what each beneficiary is or may be entitled to and when. The terms of the trust also set out when a trust will come to an end. Personal trusts may not continue in perpetuity. Charitable purpose trusts can be perpetual. These rules are discussed in CETA 2. Trusts may be used to achieve non-personal objectives. Examples of non-personal trusts that may be familiar to students include pension funds and mutual funds. These non- personal uses of trusts are outside the scope of this course. Trusts can also arise by operation of law. There are two kinds of trusts in this category – resulting trusts and constructive trusts. Trusts that arise by operation of law are enforced by the courts. This course is concerned with personal trusts and purpose trusts. Resulting trusts are discussed briefly. 2.2.4.2 Quebec Only: Introduction As set out in article 1262, trusts are established in a number of ways:  by contract by onerous title (e.g. an investment trust where there is an exchange between the parties);  by contract by gratuitous title (e.g. a trust constituted by a settlor while living is a gift. There is no exchange or payment to the settlor in return for constituting the trust.);  by will (e.g. the liquidator administers the estate and the residue is held in trust);  by operation of law; or  when established by an order of the court (e.g. for payment of alimony). The CCQ recognizes three kinds of trusts (art. 1266 CCQ). 1. Personal Purposes (a personal trust): Personal trusts are constituted gratuitously in order to procure a benefit for one or more persons (determinate or determinable) (art. 1267 CCQ). They may also be established in a will. Personal trusts cannot continue in perpetuity. There can only be two ranks of revenue beneficiaries, exclusive of the capital beneficiary (art. 1271 CCQ), the right of the first rank must open within 100 years after the trust is constituted and a legal person cannot be a beneficiary for longer than 100 years (art. 1272). These rules are discussed in CETA 2. 2-16  Trustees, Personal Representatives, and Substitute Decision-makers 2. Social Utility Purposes (a social trust): Social trusts are constituted gratuitously and are defined as a trust for a purpose of general interest, such as a cultural, educational, philanthropic, religious, or scientific purpose (art. 1270 CCQ).23 Social purpose trusts can be perpetual (art. 1273 CCQ). A foundation may be established as a social purpose trust or as a corporation. 3. Private Purposes (a private trust): Examples of private trusts include trusts for purposes such as erecting, maintaining, or preserving a thing or for a specific use, whether for the indirect purpose of a person or in his memory, or for some other private purpose (art. 1268 CCQ).These trusts are essentially non-charitable purpose trusts. Such trusts may be established by gratuitous title, or by will. Private trusts include trusts established by onerous title such as for making profits from investments, providing for retirement or procuring a benefit for the settlor, others designated by the settlor, members of a partnership, company or association, or for employees or shareholders (art. 1269 CCQ). Examples of private trusts that may be familiar to students include pension funds and mutual funds. Private trusts may also be perpetual (art. 1273 CCQ). Each kind of trust, unless arising by operation of law or when established by the court, is evidenced by a trust document that identifies the trustee, the property to be held, and the beneficiary(ies) or purpose. The terms of the trust provide for what each beneficiary is or may be entitled to and when. The terms of the trust also set out when a trust will come to an end. An order by the court will establish similar details. This course is concerned with personal and social trusts, whether established by a person while alive, in a will, or by the court. 2.2.5 Classifications Used to Describe Trusts Trusts are often referred to by special names or classifications. These names and classifications provide a vocabulary for fiduciaries and their advisors to quickly identify, one or more of the following: how the trust was created, when the trust was created, the purpose of the trust, the type of interest or interests one or more beneficiary will have, and/or specific rules that may apply. 2.2.5.1 How the Trust Was Created: Express Trusts An “express trust” is a trust that is intentionally created, usually in writing. (See 2.2.6 Common Law Only: Four Requirements to Establish a Trust.) For an example of an express inter vivos trust and a will with a testamentary trust, see Student Resources. 23 Note: Social purpose trusts are similar to the common law charitable purpose trust, but they include a broader number of purposes. These will be explore further in CETA 2 and the tax implications will be explored in CETA 3. 2-17  Trustees, Personal Representatives, and Substitute Decision-makers Within this classification, there are a number of sub-classifications that are described briefly below. 2.2.5.2 When the Trust Was Created: Inter Vivos and Testamentary Trusts Trusts can be created when the person establishing the trust is alive or on death. A trust created during the creator’s lifetime is called an “inter vivos trust”. Inter vivos is Latin for “between the living”. The person who creates the trust must transfer or “settle” property on the trust and is called a settlor. Common Law Only: The document that evidences the trust is often called a “trust deed” or “trust settlement”. Quebec Only: The document that evidences the trust is often called a “trust deed” or “trust agreement”. Sometimes inter vivos trusts are called “living trusts”, a term often used in the United States. The assets in an inter vivos no longer belong to the settlor so the trust continues after the settlor’s death. Because the assets are no longer part of the settlor’s assets they do not pass under the settlor’s will. In jurisdictions where probate is required the settlor’s assets that are in the trust are not reported and are not subject to probate fees or taxes. (See Chapter 4 at 4.5 Grant of Probate or Administration.) If permitted in the trust document, assets may be transferred to the trust in the future by the settlor, or others. When a trust is created on death, the terms of the trust are set out in the deceased’s will and the trust is called a “testamentary trust”. When the estate is administered, the residue of the estate or a specified amount or asset is set aside and administered as a trust. In addition to signalling that the trust was created on the death of the testator, this distinction is important for tax purposes because special rules apply to testamentary trusts (see Chapter 8 Personal Tax Returns Due on Death). The Income Tax Act defines a testamentary trust for tax purposes and transfers of additional assets to the trust are not permitted. 2.2.5.3 Common Law Only: Purpose of the Trust Another way to classify a personal trust is by the purpose of the trust. Is the trust established to benefit one or more persons, or is it established to carry out certain purposes? The trust may be an inter vivos or testamentary trust.  A trust for persons or personal trust, whether inter vivos or testamentary, benefits one or more persons. Beneficiaries may also include legal entities such a specific charity or other legal entity. The beneficiaries of the personal trust are entitled to enforce the interest in the trust. Trusts for persons are often created to achieve one or more objectives. As a result many additional classifications and names have evolved to describe the nature of entitlement for one or more beneficiaries. The names may also signal that a trust 2-18  Trustees, Personal Representatives, and Substitute Decision-makers meets specific tax rules and, as a result, attracts certain tax treatment. (For examples, see 2.2.5.5 Interests in the Trust.)  A trust for purposes does not have individuals or specific entities as beneficiaries. Rather, the trust funds are to be held and used for specific purposes. These trusts may be for charitable or non-charitable purpose trusts. The distinction is important because different laws apply to how long the trust can continue and different tax laws apply. These rules will be discussed in the CETA 2 and CETA 3 courses. 2.2.5.4 Quebec Only: Purpose of the Trust Another way to classify a personal trust is by the purpose or objects of the trust. As noted above, the CCQ recognizes three kinds of trusts: personal trusts, private trusts, and social utility trusts. The trust may be inter vivos or testamentary.  A personal trust, whether inter vivos or testamentary, benefits one or more determinate or determinable persons (arts. 1267, 1271, and 1272 CCQ). “Persons” include natural persons and legal persons authorized by law such as a corporation or a charity. The beneficiary is able to enforce his or her personal rights for the provision of a benefit granted to him or her or payment owing to him or her, pursuant to the constituting act (art. 1284 CCQ). Personal trusts are often created to achieve one or more objectives. As a result many additional classifications and names have evolved to describe the nature of entitlement for one or more beneficiaries. The names may also signal that a trust meets specific tax rules and, as a result, attracts certain tax treatment. (For examples, see 2.2.5.5 Interests in the Trust.)  A private trust does not have individuals or specific entities as the direct beneficiaries, but natural or legal persons are indirectly benefitted. Rather, the trust funds are to be held and used for specific uses or purposes (arts. 1268, 1269, and 1273 CCQ).  A social trust also does not have persons as the direct beneficiaries, but natural or legal persons are indirectly benefitted. It must be for a purpose of general interest and may be perpetual (arts. 1270 and 1273 CCQ). The distinctions are important because, as noted above, personal trusts cannot continue in perpetuity and different tax laws apply. These rules will be discussed in the CETA 2 and CETA 3 courses. 2.2.5.5 Interests in the Trust Trusts are often distinguished by the different interests that one or more beneficiary(ies) or groups of beneficiaries may have. These include: 2-19  Trustees, Personal Representatives, and Substitute Decision-makers  An income or revenue interest generally refers to a beneficiary’s entitlement to receive the income earned in the trust for a period of time, often until a certain age or death. Income (or revenue) includes interest, dividends, and rents. (Quebec Only: See also art. 910 CCQ for a definition of fruits and revenues.) o Common Law Only: A life interest refers to a beneficiary’s right to enjoy the use of a property or asset during his lifetime. A common example is the right to live in a residence held in trust. A life interest can include the right to receive the income from the assets during the beneficiary’s lifetime. The term may be used to include an income or revenue interest. o Quebec Only: If a beneficiary has a right to enjoy the use of a property or asset during the beneficiary’s lifetime, the beneficiary is referred to as a usufructuary (arts. 1120 & ff. CCQ).  A capital interest generally refers to a beneficiary’s interest in the property that makes up the trust. Property may include land, a home, investments, private company shares, cash, or other types of property. As assets are sold and the proceeds are reinvested, the gains realized on the sale form part of the capital. Losses will reduce the capital. Capital interests are usually paid or delivered to capital beneficiaries when the trust terminates. However, the trust may provide for a beneficiary to receive payments from the capital throughout the duration of the trust (often called “encroachments on capital”) or it may provide that a percentage or specific amount should be paid at certain points in time (e.g. upon the beneficiary reaching a certain age). (Quebec Only: See also art. 909 CCQ.) 2.2.5.6 Personal Trusts: Further Classifications Often a personal trust will provide for a spouse and then children. Or a parent may provide for children and then grandchildren. Parents may want to provide for a specific child with special needs. Many combinations are possible. The following is a list of the more common classifications and uses of personal trusts with a brief definition. Often these classifications will overlap. One does not preclude the other. For example, a fixed interest trust might also be a life interest trust or a trust for a disabled person may be a fully discretionary trust.  Fixed interest trust: A trust that specifies exactly what a beneficiary is entitled to. For example, the trustee may be directed to pay the net income earned each year or a fixed amount at regular intervals (e.g. $1,000/month) to a beneficiary.  Life interest trust: As discussed above, a life interest trust provides for a beneficiary for that beneficiary’s life. It may include the use of the family home or another property, and/or a right to income. On the beneficiary’s 2-20  Trustees, Personal Representatives, and Substitute Decision-makers death, the settlor provides instructions on where to distribute the funds, or the trust may continue for others.  Discretionary trust: A trust where the trustee has some discretionary powers, within specified guidelines, to distribute income and/or capital to one or more beneficiaries. The discretion may be limited to choosing who is to receive income and/or capital, or it may allow the trustee to decide how much and/or when to distribute. Quebec Only: Note that the class of discretionary beneficiaries for a personal or private trust must be clearly determined in the trust deed (see art. 1282 CCQ).  Fully discretionary trust: Generally, this is a trust where the trustee has full discretion as to when, how much, and to whom income or capital should be distributed. The trust will establish the class or group of individuals who are the beneficiaries who may receive the funds. Quebec Only: Note that the class of discretionary beneficiaries for a personal or private trust must be clearly determined in the trust deed (see art. 1282 CCQ).  Trust for a disabled person (Henson Trust) Common Law Only: A fully discretionary trust created to provide for a beneficiary who has a disability and is entitled to receive certain provincial benefits, which may range from income assistance to access to specialized services.24 Where a trust is fully discretionary, subject to provincial legislation that provides otherwise, benefits will not be discontinued if the distributions from the trust meet provincial criteria.25 Quebec Only: Trusts for the benefit of persons receiving social assistance may be recognized if the intent of the settlor that the beneficiary continue to benefit from government welfare programs is clearly expressed.26  Spousal and common-law partner trusts: Generally, the term “spousal trust” is used when the terms of the trust meet very specific requirements of the Income Tax Act. When these requirements are met, certain tax rules apply. 24 For example, see the Ontario Family Benefits Act, R.S.O. 1990, c. F.2; and the British Columbia, Employment and Assistance for Persons with Disabilities Act, S.B.C. 2002, c. 41. 25 The term “Henson Trust” was adopted in Ontario as a result of the case Ontario (Ministry of Community and Social Services, Income Maintenance Branch) v. Henson (1987), E.T.R.121 (Div. Ct.) affirmed on appeal (1989), 36 E.T.R. 192 (C.A.). The court held that a beneficiary of a fully discretionary trust does not own any of the trust property and is not entitled to receive trust income. As a result, provincial benefits could not be terminated. The Ontario government, and many other governments, now recognize this kind of planning and have developed policies and/or legislation to address what a beneficiary is entitled to receive from a trust (fixed or discretionary) without losing government benefits. The various provincial rules are beyond the scope of this course. 26 See Québec (Curateur public) c. A.N. (Succession de), 2014 QCCS 616. 2-21  Trustees, Personal Representatives, and Substitute Decision-makers These rules are covered in CETA 3. The key characteristics are that a spouse (or common-law partner) of the settlor or deceased is exclusively entitled to the trust income during the spouse’s lifetime and during the spouse’s lifetime capital may only be distributed to the spouse.  Alter ego trusts, joint spousal trusts and joint common- law partner trusts: Similar to spousal trusts, these trusts meet very specific requirements under the Income Tax Act. These trusts are inter vivos trusts and are most often used when the settlor has reasons for ensuring that his or her estate does not pass under a will. The rules for making these trusts and the taxation are covered in CETA 3. The key characteristics of these trusts are that the settlor must be 65 years or older. If it is an alter ego trust, the settlor is the sole beneficiary until the settlor’s death. Like a spousal trust, the settlor is exclusively entitled to the income and is the only beneficiary entitled to capital during the settlor’s lifetime. On the settlor’s death, the trust can be wound up or continue for other beneficiaries. If the trust is a joint spousal or joint common-law partner trust, the spouse or common-law partner is also a beneficiary. The spouse or common-law partner does not need to be 65. The trust can provide that either or both of the spouses are exclusively entitled to receive the income, and either or both are the only beneficiaries entitled to receive capital while they are living. The trust continues until the survivor of the settlor and the spouse or common-law partner dies. Upon the death of the survivor, the trust may be wound up or continues as an inter vivos trust. 2.2.5.7 Common Law Only: Trusts Arising by Operation of Law – Resulting Trusts Trusts can also arise by operation of law. Sometimes they are referred to as implied trusts. These trusts arise when there is no express intention to create a trust. In the common law, there are two categories of trusts that are often identified as arising by operation of law – resulting trusts and constructive trusts. The most common example that arises in the context of an estate or trust administration is the “resulting trust” and they are described here. Constructive trusts are discussed in CETA 2. Resulting trusts arise in situations where it might be said that there is an implied intention to create a trust. Resulting trusts arise when one party (A) has acquired legal title to an asset but the law determines that A is holding title on a resulting trust for the original owner (B) and must return property to B. Resulting trusts arise in one of two ways. 2-22  Trustees, Personal Representatives, and Substitute Decision-makers 1. Automatic resulting trust: An automatic resulting trust is one where property or funds are held by one party and the law requires that the property is held for the original owner. Example: Andrea establishes an express trust and transfers investments to Brian, as trustee, to hold on trust for Andrea’s daughter Carrie until Carrie dies. When Carrie dies, the trust document instructs Brian to divide the remainder among Carrie’s children. When Carrie dies, there are no children and the trust does not give any further instructions. Brian cannot take the property for himself. Rather, Brian holds the property on a resulting trust and must return the property to Andrea if she is alive or to Andrea’s estate if Andrea has died. 2. Presumption of resulting trust: The law also sets out certain situations where A transfers legal title to property to B but the intention of the transfer is not clear. Is it a gift? Is it a trust? Subject to certain exceptions, a transfer that is not a gift or a transaction where B has paid A for the property, the laws presumes that B is holding the property for A on a resulting trust and must return it to A. Example: A common example where the presumption of a resulting trust arises when administering an estate is when a parent (Alfred) has made a bank or investment account joint with right of survivorship with an adult child (Charlie). Unless there is evidence that Alfred’s intention was for Charlie to take the balance of the account on Alfred’s death, Charlie will become the legal owner of the account according to the terms of the account agreement but is deemed to hold the funds on a resulting trust for Alfred’s estate.27 2.2.5.8 Quebec Only: Trust Arising by Operation of Law Although Quebec recognizes that trusts may arise by operation of law, this is outside of the scope of this course. Quebec students should note, however, that the common law recognizes two kinds of trusts that arise by operation of law – the resulting trust and the constructive trust. The CCQ does not recognize either of these concepts. 2.2.5.9 Trust Classification Diagram The diagram (see Figure 2.1 Classification of Trust Diagram) illustrates the classifications discussed above.28 27 Jointly owned accounts and other property are discussed further. See Chapter 3 at 3.7.6 Jointly Owned Property and Chapter 5 at 5.5.1 Assets Owned Jointly. 28 This diagram has been adapted and reproduced from the STEP Canada diploma course Law of Trusts (chapter 2 at II G, at p. 2). Statutory and constructive trusts have been shaded as they are not discussed in the Certificate in Estate and Trust Administration courses. 2-23  Trustees, Personal Representatives, and Substitute Decision-makers Figure 2.1: Classification of Trust Diagram Common Law Jurisdictions Only Trusts Trusts by Express Statutory Operation of Trusts Trusts Law Personal Purpose Resulting Constructive Trusts Trusts Trusts Trusts Non- Automatic Presumed Inter Vivos Testamentary Charitable Charitable Resulting Resulting Trusts Trusts Trusts Trusts Trusts Trusts Fixed Interest Discretionary Fixed Interest Discretionary Trusts Trusts Trusts Trusts Quebec Only 2-24  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.6 Common Law Only: Four Requirements to Establish a Trust In order to have a valid express trust for persons or purposes, there are four requirements. 1. The relevant parties to the trust must have capacity. 2. The three certainties must be present. 3. The trust must be constituted (e.g. property is transferred to the trustee). 4. The relevant formalities must be met. Each of these is reviewed below.29 2.2.6.1 Capacity of the Relevant Parties For purposes of this rule, there are three relevant parties: the settlor, the trustee, and the beneficiary(ies). Each is reviewed below.  The Settlor: Generally, a person who owns property is free to deal with that property and may create an inter vivos or testamentary trust. The settlor must have reached the age of majority and must have the required mental capacity to create the trust.30 Other laws or agreements may prohibit a person from settling some or all of the settlor’s assets on a trust. For example, in some jurisdictions family and/or succession laws may prevent the transfer of certain assets to a trust.  The Trustee: It is not necessary in law for the trustee to have legal capacity. However, a trustee often needs to deal with the trust property and will have limited ability to do so if the trustee does not have legal capacity. Legal capacity refers to being of the age of majority and/or having the mental capacity to manage financial affairs. If a trustee lacks legal capacity it may be necessary to replace the trustee. If the trustee is a corporation, it must be authorized to act as a trustee.31 Companies can be trustees, but companies that offer trustee services to the public are subject to federal and/or provincial legislation. They are referred to in this course as “corporate trustees”.  Beneficiaries: Beneficiaries do not need to be age of majority or mentally capable. Indeed, many trusts are created to provide for minors and incapable 29 For a more in-depth discussion of these requirements see Waters at chapters 4 through 6 and Oosterhoff at chapter 4. 30 When the settlor is making a gift to an inter vivos trust, the settlor will be capable of making the gift if he or she understands the nature and effect of the transaction he or she is entering into. See Royal Trust Co. v. Diamant, 3 D.L.R. 102 (B.C.S.C.) at p. 111. The test for capacity testamentary trust is similar but one must consider the test of capacity to make a will which has additional criteria (for a discussion, see Chapter 3, The Law of Wills). See Ouderkirk v. Ouderkirk, S.C.R. 619, at 621, 2 D.L.R. 417 at p. 418. 31 Note that a company can only be a trustee if authorized to do so by law and in its constating documents and any relevant legislation. Generally, only provincially or federally regulated trust companies are authorized to offer trust services to the public. Some provinces allow private companies to be trustees, but they cannot offer services to the public. Unincorporated associations are not legal entities and accordingly cannot be appointed as a trustee. 2-25  Trustees, Personal Representatives, and Substitute Decision-makers adults. Beneficiaries may also be legal entities. Trusts that are for purposes are subject to special rules.32 2.2.6.2 The Three Certainties In order to have a valid express trust, the three certainties must be satisfied.33 1. Certainty of Intention: There must be sufficient certainty that the settlor intended to create a trust. Intention may be implied by the circumstances or conduct. Often an express trust uses words such as “on trust”. However, the mere use of the words “on trust” may not be sufficient. There must be an intention to transfer property to a trustee, to hold title to and manage that property for the benefit of the beneficiary. And, the beneficiary(ies) must have the exclusive enjoyment of the property. The settlor retains no personal control or enjoyment of the property. 2. Certainty of Subject Matter: There must be sufficient certainty as to the subject matter of the trust. This includes certainty of the property that is to be held on trust and, where the trust is for the benefit of persons, certainty of the interests in that property that the beneficiaries are to receive. Sometimes this is referred to as “certainty of property”. 3. Certainty of Objects: In the case of a trust for the benefit of persons this requires certainty of the beneficiaries. In the case of a trust for purposes it requires that the purposes of the trust be sufficiently certain. If any one or more of the certainties is missing, there is no trust. An example of each follows. Example 1: No certainty of intention: Alice’s will states, “I transfer $50,000 to Brenda, it being my wish that she use the funds to assist her niece Claire with her education.” There appears to be certainty of objects (Claire) as well as subject matter (the sum of $50,000). However, it is not clear whether Brenda is to hold the funds on trust for Claire and use the funds for her education, or if the gift is an outright gift to Brenda with an expression of a wish as to what Brenda will do with the money. A court may be required to determine, based on all of the facts, the terms upon which Brenda has received the property. If Brenda received the funds as a gift, there is no trust and Claire has no enforceable rights. Example 2: No certainty of subject matter: Ali signs a trust document appointing Barack as trustee and identifying Cecil and Des as beneficiaries. However, the trust document does not identify any property to be transferred to the trust. Although it is 32 Trust provisions for certain beneficiaries may also violate legal rules or public policy. These rules, and the rules governing trusts for these purposes, are discussed in the Advanced Topics in Estate and Trust Administration course. 33 Knight v. Knight (1840), 3 Beav. 148, 49 E.R. 58 (Eng. Ch. D.) affirmed (sub nom. Knight v. Boughton) 8 E.R. 1195. 2-26  Trustees, Personal Representatives, and Substitute Decision-makers possible to settle the trust with a nominal sum of money or an asset (including a gold coin) and indicate that additional property will be added at a later time, the trust document must identify the property or subject matter that is to be transferred to the trustee in order to constitute the trust (see below). Barack has received no assets, so there is no trust to enforce. Example 3: No certainty of objects: Arnold transfers his portfolio of stocks at ABC Investment Company to Ben to hold on trust. The words “on trust” suggest a certainty of intention. The subject matter – the stocks and bonds at a specified account – also appear to be certain. However, the objects or purposes are not identified. Therefore, Ben will hold the stocks on a resulting trust for Arnold. (For discussion about resulting trusts, see 22 Common Law Only: Trusts Arising by Operation of Law – Resulting Trusts.) As the examples above illustrate, although the three certainties appear easy to define and recognize on the face, language can be missing. Language can also be unclear and questions can arise. The law in this area that helps interpret whether or not one of the three certainties has been met is beyond the scope of this course. (See CETA 2.) 2.2.6.3 Constituting the Trust – Transferring the Assets Until the assets have been transferred to the trustee, the beneficiary has no right to enforce the trust and the settlor is not obliged to create the trust.34 The trust has not been “constituted”. In order for a trust to exist, the assets must be transferred to the trustee. 2.2.6.4 Compliance with the Formalities Students who work for corporate trustees or who are advising trustees will generally only deal with trustees appointed in an express trust, evidenced in writing. The two most common ways are in a trust deed, or in a will.35 (See sample will and sample trust in Student Resources.) Depending on how a trust is created, different formalities must be met. Generally, for an inter vivos trust these will be met when the settlor and trustee(s) have signed the trust document before witnesses. The settlor and trustee(s) do not need to sign at the same time. When a trust is created in a will, it must comply with the statutory requirements for making a valid will according to the laws of the jurisdiction where it is made.36 2.2.7 Quebec Only: Requirements to Establish a Trust The requirements to establish a trust under the CCQ are set out above (see 2.2.2.3 Four Essential Elements of a Quebec Trust). They are: 34 Oosterhoff at p. 245. 35 Common Law Only: A settlor may also sign a declaration of trust, stating that the settlor is holding property on trust for others, or specified purposes. These are less common in Canada and are not reviewed in this course. 36 See Chapter 3 The Law of Wills for the formal requirements to make a will. 2-27  Trustees, Personal Representatives, and Substitute Decision-makers  the settlor must transfer property from his or her patrimony,  to an autonomous and distinct patrimony constituted by the settlor,  which the settlor appropriated to a particular purpose, and  a trustee undertakes, by his or her acceptance, to hold and administer the property. If these four elements are satisfied, there is a trust. Note that article 1264 CCQ provides that if there is more than one trustee named, only one must accept the appointment for the trust to be constituted. When the trustee accepts the trust, the settlor no longer owns the property and charges the trustee with seeing to the appropriation of the property and the administration of the trust patrimony. Acceptance also establishes the beneficiary’s rights (art. 1265 CCQ). Although the “three certainties” concept is not part of Quebec civil law of trusts, the requirements in the CCQ contain the essence of the three certainty requirements in the common law: 1. certainty of intention to create a trust (e.g. a trustee is to hold the property for a particular purpose; the property is not being transferred to the trustee as an outright gift); 2. certainty of subject matter (e.g. there must be property specifically identified to be transferred); and 3. certainty of objects (e.g. the beneficiaries must be capable of being determined and/or the purpose must be clear). The common law also requires that the settlor constitute the trust by actually transferring the property. However, if the trustee did not accept the property, an alternate could be appointed according to the terms of the trust or if necessary by the court. The CCQ also provides for replacements to be appointed and for the court to appoint trustees as a last resort or default measure (arts. 1276 and 1277 CCQ). 2.2.8 Choosing a Trustee Although any capable adult or authorized legal entity can be appointed as a trustee, the settlor will want to choose someone who has the time and skill required to administer the trust. The settlor can be the trustee or one of the trustees.37 The settlor may also be a beneficiary of the trust. However, the settlor cannot be the only trustee and only beneficiary of the trust. When the settlor is a trustee, all of the duties and responsibilities apply. When the settlor is a beneficiary, the settlor’s rights are as a beneficiary and not as the legal owner prior to the trust’s creation. Quebec Only: As noted above, if the settlor or a beneficiary is the trustee, there must be at least one independent trustee (art. 1275 CCQ). 37 For further discussion on factors to consider see 2.7 Choosing a Fiduciary and Accepting a Fiduciary Appointment. 2-28  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.9 Accepting the Appointment as Trustee A trustee does not have to accept the appointment. A trustee’s appointment is confirmed in a number of ways, depending on how the trust is created. 2.2.9.1 Common Law Only: Accepting the Appointment The acceptance of an express inter vivos trust evidenced in writing occurs when the document is signed and witnessed by the settlor and the trustee and the assets have been transferred to the trustee. (See 2.2.6.3 Constituting the Trust – Transferring the Assets.) A will with a testamentary trust often appoints the same person(s) as executor(s) and trustee(s). Therefore, when the person applies for probate he or she is also accepting the appointment as trustee unless it is renounced at the time of the application. The trustee may also confirm acceptance when the trust property is transferred from the executor to the trustee.38 2.2.9.2 Quebec Only: Accepting the Appointment There is no requirement as to the form of a trustee’s acceptance. However, it is becoming increasingly common for one party to be appointed executor to administer the estate, and for another (e.g. a corporate trustee) to be appointed as trustee. Article 618 CCQ specifically notes that a trustee may receive a legacy intended for a trust or to be used to accomplish the object of the trust. When the liquidation of the estate is over, the liquidator is discharged by rendering an account and publishing a notice of closure of account in the Register of Personal and Movable Real Rights (RDPRM). The liquidator then delivers the property to those entitled (art. 776 CCQ), for example, the trustee (art. 618 CCQ). The rules for rendering accounts are addressed in a later chapter (see Chapter 10 Estate and Trust Accounts). 2.2.10 Trustee Duties 2.2.10.1 Introduction The duties and powers of trustees are central to the administration of a trust. A trust duty is something the trustee is legally obliged to do, or prohibited from doing. A power provides the trustee with the authority required to carry out a duty. A trustee is appointed to carry out a number of duties. This means that the appointment is personal, and subject to certain exceptions, the trustee may not delegate the trustee’s authority to make decisions or administer the trust. In addition, the trustee has a duty to be loyal to the beneficiaries. This requires the trustee to act only in the best interests of the beneficiaries and to not have a conflict of interest. 38 Waters at pp. 883-884. 2-29  Trustees, Personal Representatives, and Substitute Decision-makers When administering the trust and carrying out the trustee’s duties, the trustee has a duty to be impartial and to not favour one beneficiary or group of beneficiaries over another. Finally, a trustee has a duty to provide information about the trust to the beneficiaries or others entitled to enforce the trust. A trust document can modify many of these duties. For example, in a discretionary trust, the trust may explicitly state that the trustee does not need to be impartial and may give specific instruction to give priority to one beneficiary. A trust document may also permit certain conflicts of interest. Legislation in each jurisdiction may have also modified some duties. For example, a trustee can usually delegate investment management where it is appropriate and prudent to do so. Each duty is described briefly below and will be explored further in CETA 2. 2.2.10.2 Overriding Duty of Care Generally, a trustee has a duty to act honestly and in good faith and must comply with the terms of the trust instrument. Common Law Only: When carrying out the trustee’s duties, the trustee must exercise the standard of care that a person of ordinary prudence would use in managing his or her own affairs.39 Quebec Only: Trustee duties are set out in article 1309 CCQ. It states that an administrator shall act with prudence and diligence and that he or she shall act honestly and faithfully in the best interest of the beneficiary or the object pursued. The CCQ also clarifies the obligations when the administrator has simple administration and full administration.  Administrators with simple administration of the property of others (e.g. liquidators and tutors) shall perform the acts necessary to preserve (protect) the property or to maintain the property (art. 1301 CCQ). The administrator must collect the fruits and revenues and collect debts (art. 1302 CCQ) and, unless authorized, the property may not be sold (arts. 1303-1305 CCQ). When investing, the administrator is limited to presumed sound investments (arts. 1305, 1339- 1344 CCQ).  Administrators with full administration of the property of others (e.g. trustees and curators) must preserve the property and make it productive (art. 1306 CCQ). Article 1307 CCQ gives the trustee broad powers to carry out these duties. 39 Fales v. Canada Permanent Trust Co. (1976), 2 S.C.R. 302, 70 D.L.R. (3d) 257. Note that it is beyond the scope of this course to review the legal commentary on how to apply this rule to both lay trustees and professional trustees. For further discussion, see the Advanced Topics in Estate and Trust Administration course and the discussion Waters at pp. 974-980 and Oosterhoff at p. 146. 2-30  Trustees, Personal Representatives, and Substitute Decision-makers 2.2.10.3 Duty Not to Delegate The general rule is that trustees cannot delegate the tasks they are required to perform under the trust. A settlor is assumed to have appointed the particular person as trustee because the settlor trusted that person to do what was required to carry out the terms of the trust. Common Law Only: The rule also applies when there is more than one trustee – one trustee may not delegate to the other(s). There are four exceptions to the prohibition on delegation. 1. The trust document permits delegation. 2. Legislation permits delegation for certain activities. 3. The trustee may delegate tasks to agents where it is normal practice for a reasonably prudent person carrying out the task to do so. 4. The trustee may delegate purely administerial tasks – those tasks that do not require the exercise of the trustee’s judgement. If a trustee decides to delegate a duty or task, a trustee has a duty to delegate prudently. This means that the trustee must select an agent who is qualified and has the expertise to carry out the task(s) required. The trustee must supervise the agent to ensure the agent is carrying out the duties in accordance with the terms of the appointment and the fees charged must be reasonable. Other considerations and precautions may be relevant depending on the circumstances. Quebec Only: Delegati