All About Estates

Walters v. Walters: Limits to “Absolute Discretion” and Judicial Intervention by: Yvonne Mazurak

A recent Court of Appeal decision, Walters v Walters, 2022 ONCA 38, addresses a trustee’s requirement to give effect to a testator or settlor’s intentions when exercising discretion with respect to distributions from a discretionary trust. At issue was whether the trustees had improperly relied on extraneous or irrelevant factors when exercising such discretion.

The decision, written by Justice Sarah Pepall for the Court, is a helpful read as it offers an overview of the jurisprudence and academic commentary on the issue. The below is a brief summary.

Factual and Procedural Background

Florence Olive Walters (known as Ollie) died in 2016 and left a Will naming her three children as Trustees.[1] Ollie’s Will provided her husband, Gerald (the respondent), with a life interest in her estate, with her three children named as the capital beneficiaries.  The relevant paragraph reads:

“…my Trustees shall have the right to pay such part or parts of the capital of the residue of my estate as my Trustees in their absolute discretion consider necessary or advisable to or for the benefit of my said husband from time to time. I wish to advise my Trustees that my husband’s comfort and welfare are my first consideration and for this reason, it is my desire that my Trustees exercise their powers to encroach on the capital in a manner which will ensure his comfort and well being.” [emphasis added][2]

Following Gerald issuing a Notice of Application requesting, among others, an order that he be named as the residual beneficiary, in January 2018 the parties attended a mediation where they signed minutes of settlement, subject to a more formal agreement. Numerous efforts were subsequently made to move the matter forward, however, between 2019 and 2021, the dispute “continued as the respondent requested money for living expenses but would not provide enough financial disclosure to satisfy the appellants”. Among the disclosure requested was an invoice for the residence Gerald had moved into. Instead, Gerald’s lawyer provided a note written by Ms. Wainman, the residence’s proprietor, simply stating that he paid $3,000 per month for room and board, which the appellants’ lawyer advised was not sufficient. Searches for Ms. Wainman and the residence on the Province of Ontario’s Retirement Homes Regulatory Authority “revealed no entries”.

Adding to the appellants’ concern, one of them received a voice message, inadvertently, which recorded a discussion between Gerald and Ms. Wainman over the amount Gerald should claim for his living expenses. The message recorded Gerald stating, in reference to the trustees, “I can sucker them in pretty good I think”.

In May 2019, the Trustees sold Ollie and Gerald’s matrimonial home for $458,000 and, according to court documents, “invested the proceeds and started to pay the net income derived from those proceeds to Gerald, paying him $1,972.60 in September and $2,465.75 at the end of December of 2019”. Months later, Gerald sought “an interim and final order that the Estate pay him $25,000 immediately and $5,000 per month retroactive to September 1, 2018, and an order removing the appellants as Estate Trustees”.

The Trustees had stated they would exercise their discretion to provide payments from the interest and capital, if Gerald provided further financial disclosure, and then in January 2020, Justice John McCarthy “granted a consent order that the Trustees pay Gerald $1,500 per month commencing February 1, 2020,” which the Trustees complied with.

Over the next year, both parties swore additional affidavits, with the respondent “reiterating his requests and asking that the payments be made retroactive to August 1, 2018 when he said he moved out of the matrimonial home” and one appellant stating that “Gerald was not being honest and the bank statements did not support the expenses”.

In March 2021, Justice Jill Cameron heard the application and found that the trustees’ decision-making was being influenced “by extraneous matters such as their distrust of the proprietor of the home where their father resided and their dislike and distrust of their father” and “ordered the Trustees to pay Gerald the sum of $3,875 per month commencing May 1, 2021”. She also determined the order should be “retroactive to August 2018 less the $1,500 monthly payments made pursuant to the consent interim order dated January 7, 2020”.

The trustees appealed and, in June 2021, Justice Michael Tulloch ordered the Trustees to “pay Gerald $2,500 monthly commencing July 1, 2021 pending disposition of the appeal and a retroactive payment of $1,000 for June 2021”.

Court of Appeal

At the Court of Appeal, the appellants submitted that the application judge, Justice Cameron, erred in “substituting her discretion for that of the Trustees with respect to the encroachment on capital”, arguing that they exercised their discretion reasonably and complied with their duty to handle income and capital beneficiaries with an even hand”, and that she had erred in “concluding that they relied on extraneous factors, namely their dislike of their father and their distrust of him and Ms. Wainman”.

Judicial Intervention

Justice Pepall begins her analysis by considering “what was Ollie’s intention?” While the trust at issue is discretionary, meaning “the trustees have complete discretion as to the payment of the income, or the capital, or both”, Justice Pepall notes (citing, among other cases and commentary, a paper by our colleague, Corina Weigl) that a court still has a role to play and, because of a trustee’s fiduciary status, may intervene where a trustee has considered extraneous or irrelevant matters beyond the scope and purpose of the trustee’s power, as ascertained from the wording of the trust instrument or Will.

Application Judge’s Order to Encroach

Justice Pepall explains that she reached the “same conclusion” as Justice Cameron that the Trustees should be ordered to encroach on capital, though for different reasons.

Justice Cameron’s analysis was based on three general propositions. Justice Pepall comments that the first—that the courts may interfere with a trustee’s exercise of discretion if the decision is influenced by extraneous matters—“is well supported by the jurisprudence and academic commentary”.

Justice Pepall finds the second—that “in a trust established for the support, care and comfort of a beneficiary, the omission of any mention of the income of the beneficiary in the trust document means that a trustee may not demand that the beneficiary’s own income be called on first and a means test is inappropriate”—to be “more contentious”. Referring to a number of decisions, she concludes that the absence of direction in the Will or trust instrument “simply means that trustees may make some inquiries to satisfy themselves of their mandate and ought not to be criticized for doing so”.

The third was that “in a trust established for the care, comfort and support of a beneficiary, any doubt as to the desirability of encroaching on capital should be resolved in favour of encroaching”. Justice Pepall notes that Ollie’s Will explicitly provides that Gerald’s comfort and welfare were her primary consideration, and therefore concluded that any doubt would favour encroachment by simply interpreting the wording of the document.

Distrust and Dislike of the Respondent

Regarding Justice Cameron’s consideration of the Trustees’ distrust of their father and Ms. Wainman, Justice Pepall held that characterizing it as an extraneous or irrelevant factor in the exercise of discretion was an error, noting “[t]he Trustees needed to know whether the capital encroachment would go towards the proper purpose of Gerald’s comfort and well-being or would go towards the improper purpose of lining the proprietor’s pockets”.

However, Justice Pepall also notes that the Trustees’ dislike of Gerald “was irrelevant to the purpose for which their discretion had been granted”, being his comfort and well-being, and so concludes “the application judge properly identified this factor as extraneous in nature.”

Concluding thoughts

As the decision demonstrates, the words “absolute discretion” do not mean that trustees are free to make decisions with respect to trust property as they wish. Rather, trustees must carefully consider the intentions of the settlor or testator, make any necessary inquiries in order to give effect to those intentions, and not allow their decision-making to be influenced by extraneous matters.

The facts of the case also offer a helpful reminder of the importance of considering the relationship between potential trustees and beneficiaries when making such appointments. When there is foreseeable potential for conflict, clients might be well advised to consider other individuals to take on the trustee role.

Thanks for reading.

[1] Only two of Ollie’s children were appellants. The remaining child was removed as a co-Trustee and was not a party to the litigation.

[2] Walters, at para 8.

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