Brianna Fable-Watson, Articling Student, Gowling WLG (Canada) LLP

When planning your estate, creating a spousal trust is an effective way to ensure that your spouse is financially supported while also protecting the inheritance for your children or other beneficiaries. In a typical spousal trust, your surviving spouse receives the income produced from your assets during their lifetime, while the capital is (potentially) preserved for the next generation after they pass.

At first glance, this arrangement may seem simple enough but managing and administering a spousal trust can be complex. Trustees face several potential conflicts of interests, competing obligations, and a strict duty of loyalty to all beneficiaries. As a result, one of the most important decisions one must make in setting up a spousal trust is choosing the right trustees to manage it.

What does a Trustee Actually Do?

Trustees are the party tasked with managing the trust and carry out the wishes of the settlor/testator. This role is one that comes with significant responsibility to ensure that the settlor’s wishes are met with as much accuracy as possible. At the core of their role, trustees have a fiduciary relationship with the beneficiaries of the trust. This means that they are legally obligated to act in the best interests of the beneficiaries. To meet this duty, trustees must (among other things):

• Act with loyalty and honesty toward all beneficiaries;
• Follow the terms of the trust as written;
• Invest with care and at the standard that a prudent investor would (depending on any legislative requirments); and
• Maintain accurate and complete accounts.

Failure to meet these duties may result in court intervention and can also lead to the removal of trustees in breach of them.

The Even-Hand Rule Explained

Perhaps one of the most important duties of a trustee is to maintain an “even-hand” between all the beneficiaries. In the absence of a waiver of the rule, trustees must make decisions that are fair to everyone entitled to the trust.  In the example of the spousal trust, this would include:

• the surviving spouse who is usually entitled to the income during their lifetime; and
• the remainder beneficiaries, usually the children or their issue who are entitled to the capital after the spouse passes away.

Naturally, the interests of these two groups will, even in the best of families, be subject to some friction. A spouse may want more income now, while the children may prefer that the trust grows for their future inheritance. It is the trustee’s job to balance and manage these interests in a way that is fair.

For example, in Re Smith a son put Imperial Oil shares into a trust for his mother who got the income for her lifetime, and leaving the capital for himself after her death. While the shares went up in value they paid very little income to the mother. The mother requested that the trustee divest of these shares for a more income weighted investment, but the trustee refused. The court in this case ordered the immediate sale of these shares and removed the trustee as the trustee did not maintain an “even-hand” between the son and his mother.  As trustee he was required to find a way to provide adequate income for the mother while ensuring that the capital of the estate was also managed for the benefit of the son.

When Trustees Wear “Multiple Hats”

As hinted at above, a common issue that should also be noted is when trustees of a spousal trust are also the beneficiaries of it. Common situations include:

• Children who are both trustees and heirs: As trustees and heirs, they may be tempted to pay as little income to the surviving spouse to preserve their own inheritance.
• Surviving spouse who is both trustee and income beneficiary: A surviving spouse may be tempted to take more from the trust than is reasonable during their lifetime and ultimately encroach on the inheritance that the children or other heirs are entitled to.
• Trustees who are also shareholders and/or directors of companies owned by the spousal trust: If the trust owns shares in a business, trustees must decide whether profits should be paid out as dividends (which the spouse is entitled to) or retained (for future growth which benefits the heirs). These choices can create tension as well.

Can Fairness Be Set Aside?

Despite obligations like the even-hand rule, the Will or trust deed will, if instructions are contained therein, be the guiding document. If you write your will or trust to clearly favour one group, this wish will be adhered to. The courts will always look to language of the governing document to determine how the will is to be interpreted.  Although it should be noted that a court is usually reluctant to step into the shoes of the trustee unless absolutely necessary. This is why careful drafting of your will and trust documents is so important.

Key Takeaways

If you are considering a spousal trust, there are three main things to keep in mind:

• Choose trustees carefully – ensuring that the trustees appointed are not only trustworthy, but also capable of balancing competing interests (including their own) fairly.
• Be clear in estate documents – whether it is in the Will or trust deed, intent on how the estate will be administered should be clearly stated. Clear wording can prevent disputes down the line.
• Communicate openly – beneficiaries and trustees should be able to communicate as early as possible to manage expectations and mitigate any conflicts in advance.

A spousal trust can be very beneficial for your family’s financial future. But the execution of such a trust requires careful consideration and planning as trustees must balance the current needs of the surviving spouse with the future inheritance of the heirs. With thoughtful planning, spousal trusts allow individuals to continue providing for their families for years to come.

Sources

Donovan W.M. Waters, Mark R. Gillen and Lionel D. Smith, “Waters’ Law of Trusts in Canada”, (2021) 5^th ed, Thomson Reuters Canada, ch 11 R A. 11.II. Web: Westlaw Canada

Paul Dancause, “When the Estate Trustee is Also the Corporate Director: A Two-Headed Beast”, (2014) 20th East Region Solicitors Conference 3D, CanLIIDocs. Web: https://www.canlii.org/en/commentary/doc/2014CanLIIDocs33382#!fragment/zoupio-_Toc3Page9/BQCwhgziBcwMYgK4DsDWszIQewE4BUBTADwBdoAvbRABwEtsBaAfX2zgGYAFMAc0ICcASgA0ybKUIQAiokK4AntADkykREJhcCWfKWr1m7SADKeUgCElAJQCiAGVsA1AIIA5AMK2RpMACNoUnYhISA

Re Smith [1971] 1 O.R. 584

John T. Clark and Mavis Mak, The Law Society of Upper Canada Practice Gems: Probate Essentials 2012 Role of the Estate Trustee: Risks for the Estate Trustee’s Lawyer, 13 September 2012