All About Estates

Channelling Your Inner J.K. Rowling in Drafting Trustee Resolutions

Today’s blog has been collaboratively written by Corina Weigl and Tamar Silverbrook.

The fast paced, (often) time sensitive and adrenaline rushing nature of ‘estate freezes’[1] helps captivate us in the world of trust work.  What is, however, particularly appealing is the ability to be creative. The trust and estate documents involved in estate freezes, such as trust deeds, trustee resolutions and, if relevant, letters of wishes, allow the drafter to tell a story (for the purposes of this blog, references to estate freezes are to those where family trusts holding common shares in private family businesses are freezing such common shares. Please note that this is distinct from freezes wherein a trust is established when the founder of a family business does a freeze of his or her common shares). The story includes the history of the family business and character development in the sense of understanding and balancing (a) who put blood sweat, and tears into growing such business into the success story that is leading to the freeze, (b) who currently has an interest in the relevant business, and (c) these different characters’ personalities and motivations (meaning, who are each of the characters hoping to benefit and how are they hoping such benefits are realized through the freeze).

These stories often are best told through trustee resolutions. This blog focuses on high-level considerations in drafting trustee resolutions in circumstances involving family trusts that, pre-freeze, own common shares in family corporations and are choosing to engage in a freeze in respect of such common shares. As a reminder, if a trust is involved in a freeze, for example, if a trust is exchanging the common shares it holds for fixed value preference shares, consider drafting a trustee resolution to document the trustees’ decision to engage in such freeze. [2]

We find, like drafting most documents, the best place to start is considering why you’re drafting your document (i.e. the resolution). Why is it that the trustees are documenting this transaction and what is it exactly that they are documenting? Put another way, this can be broken down into a three-step process. First, do the trustees have the power (by trust deed or law) to engage in the freeze and cause the outcomes resulting from the freeze? Second, should the trustees exercise such power? Have they had regard to all relevant considerations, such as the initial purpose of setting up the trust, and ensured there aren’t any irrelevant considerations motivating their decisions? Third, given the implications of an estate freeze transaction, are there other actions the trustees ought to be engaged in to ensure their decision to participate in the freeze transaction can later withstand the scrutiny of the beneficiaries or potentially a court, in the event their decision is called into question?

With respect to the first step, you may wish to consider laying out in the resolution where the trustees’ power is coming from. For example, perhaps pinpoint the provisions of the trust deed and include quotes of the provisions.

With respect to the second step, the first decision of the trustees is to decide to engage in the freeze and that is generally how we start to frame the resolution. It will undoubtedly become apparent that there is generally no template trustee resolution. While there may be considerations that are commonly relevant to all planning where an estate freeze is being considered, such as freezing the tax liability that may arise on the 21st anniversary of a trust in order to be able to plan for the satisfaction of such liability, how those considerations are impacted by the business owned by the trust, the beneficiary structure and the overall purposes of the trust, will differ.  For example, the background of the relevant business, how and who developed the business, why an initial trust was settled, who the trust is intended to benefit, the ages and stages in life of the beneficiaries, and the list goes on.

The second step usually involves a consideration of the economic analysis by the trustees – ‘If we pay the tax (i.e. the trustees do not engage in the freeze, triggering tax on the growth in value of the relevant shares either on the 21st anniversary of the trust or when a beneficiary dies if such shares are distributed to such beneficiary), what will that cost the family in future growth compared to deferring such tax event through the freeze?’

With respect to the third step, consider the process the trustees are engaging in to reach and then ultimately implement the decision to participate in the estate freeze transaction.  Are the trustees working with appropriate advisors?  Is the process to determine the value of the common shares supportable and fair?  Are there any conflicts of interest? If so, how are they being managed?  Is the class of beneficiaries one where consideration should be given to engaging with the beneficiaries in the overall purpose of the estate freeze?  Should releases and indemnities be sought?  How will matters related to tax compliance be addressed?

 

 

[1]      The term “estate freeze” essentially describes a transaction whereby the owner of common – or participating – shares in a corporation takes steps to exchange those shares for another class of shares in the corporation where the value is “fixed” or “frozen”.

[2]      There are a myriad of issues to be considered when a trust engages in an estate freeze.  For a thorough analysis of those issues we encourage readers to turn to The Estate Freeze From Hell Redux, Parts 1 and 2, presented at STEP Canada’s 21st National Conference (June 6-7, 2019), Moderators Brian Cohen and Corina Weigl.

About Tamar Silverbrook
Tamar Silverbrook is an associate in the Trusts, Wills, Estates and Charities group at Fasken. Tamar’s practice is focused on domestic and international trusts, as well as wills and estate planning. Tamar works closely with clients and/or clients’ advisors to draft the appropriate documents to facilitate estate and business succession plans that fulfill clients’ unique objectives. This includes providing advice on probate planning, disability planning, charitable gifting, asset protection strategies, cross-border estates and tax issues, personal privacy, family law matters and the interpretation of trusts’ provisions and the corresponding scope of authority provided to trustees. Tamar also advises trustees in administrating a range of complex trust matters.

0 Comments

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.