All About Estates

Clients’ Reign And The Associated Difficulties In Drafting Their Inter Vivos Trusts

Imagine being retained to draft an inter vivos trust for the queen, Cersei Lannister, of Game of Thrones.  Cercei is a protective mother dedicated to maintaining power for herself and her family, which dedication includes succession planning for her power and wealth.  Cercei’s instructions may include drafting the trust so that she retains as much control as possible.  Cercei likely is unaware that pushing the control button too far can put the goals of using a trust at risk.

Overview

While clients may see controlling their family trusts as being (very marginally) analogous to fighting to control the Seven Kingdoms, they, of course, will not take Cercei’s extreme measures.  However, circumstances do arise where a discretionary family trust is being established and the client provides you with instructions designed to maintain control over several powers in the trust.  In addition, such client often will want the ability (or their successors’ ability) to exercise powers in their personal capacity.  This circumstance particularly may arise where there are tensions and complicated relationships among family members.  As part of a succession plan, such client’s instructions may indicate to whom control should be given when the client no longer has capacity.  For the purposes of this discussion, assume the client (and their successor(s)) is the trustee (or one of the trustees) and a beneficiary of the trust.

This circumstance creates problems for the drafting solicitor.  Ignoring the tax issues, authorizing the exercise of discretion without such exercise being subject to fiduciary duties, raises the question of ‘what is a trust’ and ‘how far can the solicitor push boundaries without leaving a mere shell of a trust, or one which is invalid’?   This blog will review one way in which the client may retain control, issues raised, and tips for the drafting solicitor.

As you read this blog, consider, what is a trust if there are no obligations owed by trustees to the beneficiaries and thus no obligations to be enforced by a court?  Recall that an important reason that non-charitable purpose trusts often are not valid is because of the “beneficiary principle”, which stands for the notion that “having a legally enforceable trust obligation is the essence of a legally valid trust.”[1]  Further, consider that an effect of a validly constituted trust is that the beneficiaries may enforce it, meaning that they may commence a proceeding against the trustees for non-compliance with the trust’s obligations.

Powers Granted To The Client, In Their Personal Capacity

First, the client may wish to retain control by having powers granted to them in the trust, which powers may be exercised by them, not only in their absolute discretion, but in their personal capacity.  For example, the client may wish to include a provision providing that during their lifetime, the power of appointing additional or substitute trustees, which may include the power to appoint any person as a trustee to fill a vacancy, shall vest in such client, in their personal capacity.  Retaining a power in their personal capacity means that the exercise of the client’s discretion may be made on a whim, likely without having to employ fiduciary duties in exercising their discretion.

An issue arises when, with respect to a given decision for which a power is being exercised in the client’s personal capacity (the “decision”), the client will not owe obligations to the beneficiaries, particularly the duty to consider relevant factors and ignore irrelevant factors.  Thus, the client may act mala fides.  Another issue is that because the trust instrument gives the client authority to exercise a particular power in their personal capacity, the beneficiaries may be unable to enforce typical obligations owed by trustees to such beneficiaries.  This is due to the first issue noted, being that in this circumstance, what obligations are owed by the client to the beneficiaries with respect to the decision?  None.  The trustee client was given authority to act in any manner of their choosing, without check.

Drafting Tips

The drafting solicitor may choose to carefully draft the trust to balance the client’s powers with enough of an obligation to the beneficiaries to protect the validity of the trust.  This choice may be made after getting to know your client and deciding that for them and their succession planning, this choice is best.   However, in making this choice, it is prudent for drafting solicitors to explain the above-noted issues to the client.  In addition, I would alert the client to the risks associated, including the fact that a disgruntled beneficiary could use such issues to attack the validity of the trust.

Rather than engaging in this difficult balance, it may be better, in a particular circumstance, to provide that when the trustees exercise powers in their absolute discretion, a relevant factor is the client’s letter of wishes. You would then draft your client’s letter of wishes to provide the trustees (who may be your client and/or others, including successor trustees) with guidance as to, for example, how to fill vacancies in the office of the trustee. While this letter of wishes is not legally binding and the trustees, exercising their absolute discretion, may choose not to follow the guidance provided in such letter if it, for example, proves not relevant to the decision being made, at least such guidance will be considered.  This concept of a letter of wishes also is relevant to future exercises of discretion, meaning that when the client is no longer able to exercise their powers as a trustee, their wishes as expressed as guidance, will remain a relevant consideration to the trustees’ exercise of discretion.

[1] Law of Trusts, materials released by the Society of Trust and Estate Practitioners (2020), at 9-5.

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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.

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