All About Estates

When exercising discretion, what factors should a Trustee of a discretionary trust take into account?

Maddi Thomas, Associate Gowling WLG (Canada) LLP

Where a trust holds non-liquid assets that are to be distributed amongst multiple beneficiaries, how can the trustee ensure that their use of discretion was as fair, equitable, and diplomatic as possible? On a related note, when will a court interfere with a trustee’s discretion?

Understanding the Scope of Discretion

First and foremost, it is important that any trustee understands the scope of their discretion:

It is established in [Ontario] that, in the exercise of their powers, trustees must give careful consideration to the scope of the power and the purpose for which it has been conferred. The terms, and the purpose, of the power indicate the facts that are relevant to its exercise. If the trustees ignore relevant factors or give significant weight to irrelevant considerations, they will have abused their discretion and the purported exercise of their power will be set aside by the Court.”[1]

Often a Trust Deed or Will will outline the scope and purpose of a trustee’s discretionary power. The trust deed may provide absolute and unfettered discretion, or it may place some limitations on the trustee’s decision-making ability.

A trustee may also consider a statement of wishes left by the settlor or testator.[2] However, a statement of wishes is not legally binding. Courts have warned against construing precatory language (such as “expectation”, “fervent wish”, “desire”, “firm belief”, or “purpose”) as mandatory.[3] To be a legally binding, the language of the settlor must be imperative. [4]

Guiding Principles: Fairness and Equality

A trustee has a common law duty to act impartially, or “even handedly”, between beneficiaries unless otherwise specified by the trust deed or will. It may be hard to determine what an even hand is in each situation, especially where unique properties and relationships are involved. This analysis will be fact specific and may differ depending on each of the beneficiaries wants or needs.

In exercising their discretion, a trustee should do so based on a principled approach to fairness and equality. These principles should be applied consistently throughout the decision-making process, and the analysis should be logical and easy to comprehend.

When may a court intervene?

Typically, a court will not intervene in a situation where a trustee has absolute discretion unless the trustee exercised that discretion with mala fides (bad faith) or improper consideration of extraneous matters.[5] “The court will intervene, however, if:

  • the decision is so unreasonable that no honest or fair-dealing trustee could have come to that decision;
  • the trustees have taken into account considerations which are irrelevant to the discretionary decision they had to make; or
  • the trustees, in having done nothing, cannot show that they gave proper consideration to whether they ought to exercise the discretion.” [6]

These factors will differ depending on the context and circumstance of each trust. Note that while courts generally defer to trustees’ decision making of a discretionary nature, “[t]he court may still intervene even where the testator has conferred an absolute discretion on the trustee”.[7]

When considering whether a trustee has positively exercised its discretion, in addition to the factors above, the court has looked favorably at the following factors:

  • Considering the beneficiaries’ input: a court found that a trustee demonstrated good faith (and therefore did not require court intervention in their discretionary power) by soliciting input from the beneficiaries, even though the trustee had no obligation to do so.[8]
  • Adhering to specific clauses in a Will or Trust Deed: the court will require trustees to adhere to specific provisions in a trust document if the document is legally binding and has specific instructions with regards to discretion. For example, the trust deed may require the trustee to confer with the beneficiary prior to making any decisions.[9]

Courts have also considered the following to be negative exercises of trustee discretion:

  • Mala fides: the court will intervene if the trustees act in bad faith.[10]
  • Incorrect professional correct advice: the court will examine the legal and tax advice obtained by the trustees and may intervene if the advice is incorrect.[11]
  • Weighing irrelevant factors: the court will intervene where a trustee appears to favour a beneficiary personally. This could occur if it is clear that a trustee’s decision was influenced by the trustee’s like or dislike of a beneficiary.[12]
  • Weighing improper factors: The court will also intervene where improper factors have been considered. For example, this occurred in Lopresti v Valerio: “The parties [siblings jointly acting as estate trustees] are fighting a sibling fight for control of their father’s estate rather than figuring out the economics and mechanics of proceeding fairly as co-owners of a valuable piece of property.”[13]

To conclude, when navigating complex decisions, trustees must diligently consider the scope of their discretion and wield their authority in a fair and equal manner. By adhering to these principles, trustees can ensure their discretionary decisions are just and equitable and limit the possibility that their actions will invite court intervention.

[1] Banton v Banton 1998 CarswellOnt 3423, citing Fox v. Fox Estate (1996), 28 O.R. (3d) 496 (Ont. C.A.).

[2] A “statement of wishes” or “memorandum of wishes” refer to a document made by the testator using words of wish, hope, or desire to convey how executors or trustees might exercise the discretionary powers given to them in a will. See: Kimberly Whaley, “Memoranda of Wishes” (Paper delivered at The Law Society of Upper Canada, The Six Minute Estates Lawyer, 22 March 2006.

[3] D’Onofrio v Riley, 2023 ONSC 4764 at para 51 [D’Onofrio]. See also: Rudaczyk Estate v Ukrainian Evangelical Baptist Assn of Eastern Canada, 1989 CarswellOnt 543; Bennett v Toronto General Trusts Corp, 1958 CarswellMan 66; Re Blow, 1977 CarswellOnt 397.

[4] Ibid. at para 54.

[5] Walters v Walters, 2022 ONCA 38 [Walters], citing D.W.M Waters, Mark R. Gillen & Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012).

[6] Ibid, at paragraph 47 citing p. 989.

[7] Ibid, at para 48.

[8] Allsopp et al v Edgar Graham Estate, 2023 NSSC 249.

[9] Pfisterer Estate v Hoepfinger-Pfistterer, 2022 ONSC 4117, at paragraph 48.

[10] Lopresti v Valerio, 2023 ONSC 6972.

[11] Pfisterer Estate v Hoepfinger-Pfistterer, 2022 ONSC 4117.

[12] Waters, supra, at para 73.

[13] Lopresti v Valerio, 2023 ONSC 6972, at para 68.

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