The Court of Appeal in Walters v. Walters recently considered an appeal involving the interpretation of a will that provided trustees with the right to encroach on capital as they, in their absolute discretion, considered necessary or advisable for the benefit of the income beneficiary. This was to ensure the comfort and well-being of the beneficiary. In this article, we summarize the Court’s decision.
Will names estate trustees
The appellants, Stephen and Janice, were the children of Florence Olive Walters (Ollie) and her husband, the respondent Gerald Walters. Ollie died on May 8, 2016. She left a will naming Stephen, Janice and her third child, Gregory Walters, as Estate Trustees. Gregory was removed as a co-Trustee on consent by court order. Ollie’s will named Gerald as an income beneficiary and left the residence of the Estate to the three children. However, the will also provided the Trustees with an absolute discretion to encroach on capital in a manner that would ensure the “comfort and well-being” of Gerald.
Gerald asked the appellants, who were the remaining Trustees, to encroach on capital to pay his living expenses. The appellants mistrusted their father and the proprietor of the residence in which he resided and were not prepared to pay him the sum he requested. Gerald then applied for an order that the Trustees provide him with financial assistance.
The application judge granted Gerald’s request and ordered the appellant Trustees to pay their respondent father $3,875 per month commencing May 1, 2021, and arrears of $98,750 for the period August 1, 2018, to April 30, 2021. The appellants appealed. The court identified the main issue to address was whether the trustees improperly relied on extraneous factors in the exercise of their discretion.
Consideration of extraneous factors
In her will, Ollie provided her Trustees with an absolute discretion to pay such part or parts of the capital of the residue of her Estate as they considered necessary or advisable to or for the benefit of her husband from time to time. She advised her Trustees that her husband’s comfort and welfare were her first consideration. For this reason, she desired that her Trustees exercise their powers to encroach on the capital in a manner that would ensure his comfort and well-being.
In starting its analysis, the court noted that effect must be given to the testator’s intentions as ascertained from the language of the will and surrounding circumstances. Trustees must therefore carefully examine the wording of the will or trust instrument.
A testator’s intention is ascertained from a consideration of the will and the surrounding circumstances. The do this, the court puts itself in the position of the testator at the time the will was made.
As this case involves a discretionary trust, the court noted that it could not “substitute its discretion for that of a trustee clothed with a discretionary power.”
Courts, however, may interfere with an executor’s discretion where there is a breach of its fiduciary duty. Like executors, trustees are fiduciaries. The court noted though that “the question of the degree of control which the court can and should exercise over a trustee who holds an absolute discretion is filled with difficulty.” Noting the historical jurisprudence, the court found that a court should not interfere with the exercise of a trustee’s absolute discretion unless the trustee exercised that discretion with mala fides. Intervention based on mala fides could extend to circumstances where the trustee’s decision was influenced by extraneous matters.
As the Court has previously stated:
There is ample authority for the proposition that extraneous motives or purposes will vitiate an attempt to exercise discretion if they form part of the basis upon which the trustee’s decision was reached.
Applying this framework to this appeal, the focus of the appeal was the application judge’s intervention on the basis of the Trustees’ consideration of extraneous or irrelevant matters.
The application judge held that the Trustees were being influenced in their decision-making by extraneous matters such as (i) their distrust of their father and the proprietor of the home and (ii) their obvious dislike of their father.
The Court of Appeal found the application judge’s intervention to be fully justified.
The Court viewed that the application judge erred in characterizing the trustees’ distrust as extraneous or as irrelevant to the exercise of the Trustees’ discretion. It was reasonable for the trustees to make inquiries to determine if the capital encroachment would go towards the proper purpose of Gerald’s comfort and well-being or would go towards an improper purpose. These factors legitimately raised a spectre of distrust; it was a palpable and overriding error to characterize the distrust as an irrelevant or extraneous matter.
The Court found that the trustees’ dislike of Gerald had nothing to do with his comfort and well-being, and the application judge properly identified this as an extraneous factor. The Trustees’ exercise of discretionary power for this purpose was an abuse of discretion and judicial intervention was warranted.
Given the specific facts of this case, the court concluded that it was reasonable based on the evidence for the application judge to conclude that the Trustees’ discretion was improperly influenced by an extraneous factor, namely, their dislike of their father.
The Court concluded by replacing the sum of $98,750 with the sum of $51,125 relating to the arrears. In addition, the Trustees were ordered to pay arrears of $9,625 for the period July 1, 2021, to and including January 1, 2022.
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