Cottage Life-When the Capital Account Runs Dry

Written on December 12, 2012 – 8:43 am | by Diane Vieira

In Grafton Estate v. The Canada Trust Company, the applicant brought an application to have a trust company removed as her co-executor and trustee of her mother’s estate.  The applicant, who was 92 years old, was a co-trustee along with Canada Trust for her mother’s estate.  Under her mother’s will, the applicant along with her sister (now deceased) received a life interest in the family cottage.  The cottage described as “quite idyllic, the foundation of family memories and happy times” was to be maintained by the applicant and her sister during their lives and a capital account was established by their mother to cover the costs of capital expenditures.  Unfortunately, the capital account ran out of funds by 1999.

Without a fund to cover capital expenditures, the cottage fell into disrepair.  The applicant also ran into arrears in respect of the maintenance of the cottage.  In fact, the applicant could not enjoy her life interest in the cottage as the cottage had been without electricity since 2009 partly due to unpaid hydro bills.  The applicant proposed placing a reverse mortgage on the cottage property that would cover the maintenance costs of the cottage and also provide funds for capital repairs that would in theory add to the value of the cottage.  Canada Trust would not agree to put a private mortgage on the cottage property and the applicant sought their removal for lack of cooperation.  The residuary beneficiaries of the estate were the applicant’s four children and three out of the four opposed their mother’s suggestion of a reverse mortgage on the property.

While sympathetic to the applicant’s plight, the court found that Canada Trust should not be removed as a trustee.  Referencing the court’s hesitation to interfere with the discretion of a testator, the court considered the relevant factors and found Canada Trust was acting in the best interest of all beneficiaries. The proposed reverse mortgage put the trust’s asset at risk.  Burdening the cottage with a mortgage would likely not benefit the residuary beneficiaries in the long run.

The court also noted that it was the applicant who was in a conflict of position as she sought to protect her life interest at the expense of preserving the trust’s asset.  There were too many unknowns in respect of how much the mortgage would cost the estate and no guarantees the residual beneficiaries would benefit from it.

The case illustrates how difficult it is to plan for the succession of a cottage.  In the 1970s, the testator did not anticipate that the capital account would run out of funds two decades later and her daughter’s life interest in the cottage jeopardized.  Families often disagree on who should pay the cottage expenses and a source of happiness becomes a source of conflict.

Thanks for reading,

Diane Vieira

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