As the calendar year draws to yet another close, and each of us mentally checks off items on our year-end checklists, trustees of a discretionary family trust should take this time to determine whether to make a discretionary distribution of income or capital for the year ending.  Often the terms of a trust will grant the trustees a discretionary power to pay out income or encroach on capital of the trust for the benefit of one or more stipulated beneficiaries.  More often than not, those powers are described as being exercisable by the trustees in their “absolute” discretion.

As a general statement it is correct to say that “absolute” does not mean without any limitations or parameters.  However, it is also correct to say that it is very difficult to interfere with a trustee’s exercise of an absolute power.  Specifically, a court will be loath to intervene with the exercise of an absolute discretion absent evidence that the trustee has acted in “bad faith”.  Bad faith does not require there to be evidence of bad intention.  Rather, it requires the trustee to have taken into account extraneous or irrelevant considerations.

It is the foregoing test that has resulted in there being very little jurisprudence dealing with setting aside a trustee’s exercise of a discretionary power described as absolute.  Even when there is jurisprudence, like the decision in Re Toigo Estate, it is safe to conclude that so long as the trustee has engaged in an appropriate process to reach a decision, it is highly unlikely that the decision will be set aside.  The appropriate process will involve engaging in the following analysis:

1. Does the trustee have the power?
2. Has the trustee acted in good faith? Has s/he taken into account irrelevant or extraneous considerations being those outside the scope or purpose of the power?
3. Is the decision one that a reasonable trustee could have arrived at?
4. Is there an actual or potential conflict of interest?

Ultimately, when faced with a distribution power that is described as “absolute”, the court will review the decision-making process but it will not make the decision for the trustee.  So, as trustees and their advisors bring 2018 to a close, they should make sure that they take the time to engage in the appropriate process when exercising their discretionary distribution powers and then to ultimately document the decision they make.[1]

[1] The decision in (Re) Toigo Estate, 2018 BCSC 936 is an excellent review of the law related to the exercise of discretionary powers.