Trustees Take Note – Context is Key when Interpreting a Settlor’s Intention; Broad Discretion is Not a Shield

In July of this year, the B.C. Court of Appeal released its decision in Miles v. Vince, 2014 BCCA 289. The court removed and replaced a lay trustee for failing to meet the “prudent investor” standard set out in s. 15.2 of B.C.’s Trustee Act, and at common law. The court was critical of the trustee’s failure to adequately consider the interests of the beneficiaries in light of the circumstances in which the trust was settled, and also found her to be in a conflict of interest. The courts are often reluctant to remove an appointed trustee, particularly where the trustee has been granted broad discretion under the trust deed, making this a decision of interest.

The facts of the case were not in dispute at trial. William Vince, the settlor, settled two trusts prior to his death. The first, the “Family Trust” was settled in 2006 for the benefit of Mr. Vince’s children. The trust property consisted of shares in real estate holding companies. The second, the “Insurance Trust” was settled in 2007 for the benefit of the children and Mr. Vince’s spouse, and was made up of proceeds from Mr. Vince’s life insurance policies. Notably, Mr. Vince settled the second trust after he was diagnosed with cancer. Mr. Vince named his sister, Marilynne Vince, as trustee. Mr. Vince died in June 2008.

The trust deeds were written with broad discretion to the trustees. Mr. Vince’s intentions were not stated. Ms. Vince relied on Mr. Vince’s intention expressed to her personally that the trusts should be used for developing the real estate held by the Family Trust. To this end, Ms. Vince directed the Insurance Trust to loan the Family Trust $1.17 million, using the Family Trust real estate as security. She also directed that the Family Trust obtain financing from the B.C. Housing Management Commission, a provincial government agency, in the amount of $5.3 million. To secure this financing, the Insurance Trust granted a first mortgage to B.C. Housing. The financing terms included a priority agreement in favour of B.C. Housing under which the Family Trust’s right to enforce was subject to B.C. Housing’s prior approval. Further, a second provincial agency had an option to purchase the property, and if this option was exercised the Family Trust would discharge the mortgage without requiring payment.

Cynthia Miles, Mr. Vince’s wife, filed a petition after these transactions occurred and Ms. Miles stopped receiving income from the Insurance Trust. Ms. Vince took the position that the Insurance Trust was not required to pay the beneficiaries anything, based on Mr. Vince’s expressed intention.

At trial, the judge accepted Ms. Vince’s evidence of Mr. Vince’s intentions, noting that they were consistent with his prior land development activities. He commented that the loan and financing agreement were risky endeavours, but that the risk was “highly speculative” and would only become a problem if certain “unlikely events” occurred. He did not find that the transactions placed Ms. Vince in a conflict of interest, as she was not required at that time to call in the loan and did not otherwise personally benefit from the transactions.

The Court of Appeal wholly overruled the trial judge’s decision. Ms. Vince had not met the “prudent investor” standard. She based her decision to make the loan on a report she commissioned to assess the profitability of the Family Trust properties and the recommendations made therein, rather than assessing whether the risk of the loan was appropriate for the Insurance Trust.

Further, it was clear that the loan from the Insurance Trust was in default. Ms. Vince was already in the “difficult situation” of being the only one who could make a demand on the loan. Doing so would put the property development project, and thus the Family Trust, at risk. The priority agreement also presented a serious risk to both trusts. Although the conditions under which the agreement may be exercised had not occurred and were “highly speculative”, this did not lessen the risk presented by the terms of the agreement, and consequently the circumstances of the loan.

Finally, Ms. Vince failed to consider the interests of the beneficiaries in light of the circumstances in which the Insurance Trust was settled, specifically that Mr. Vince settled the trust for the benefit of his wife and children after he knew he was ill. Mr. Vince’s intention to develop real estate bore “little relation to the creation of the Insurance Trust.” The court agreed with Ms. Miles that the separate trusts indicated separate intentions on the part of Mr. Vince.

The court concluded that removing Ms. Vince as trustee was the appropriate course of action, stating:

“In this case, the respondent, in her capacity as the trustee of the Insurance Trust, failed to protect the interests of all of the beneficiaries of that trust. By investing all of the trust property in the Loan, she put the trust property at risk, put herself in a conflict of interest, and failed to act with an even hand among the beneficiaries. Her continuation as trustee jeopardizes the proper and efficient administration of the trust.”

There are several lessons to take from Miles v. Vince. Trustees must act thoughtfully when executing their duties. Broad discretion in the trust instrument will not protect a trustee, particularly one who makes risky investments at the expense of some or all of the beneficiaries. The decision in Miles also indicates that trustees must look beyond the four corners of the trust deed and think of the context in which a trust was settled in order to determine the settlor’s intention. Although Ms. Miles’ removal was the result of the combination of factors arising in this case, the decision demonstrates that the courts continue to remain vigilant in their role as ultimate protectors of the interests of trust beneficiaries.

If you have questions about estate planning or estate litigation, please feel free to contact one of the lawyers in our Wealth Preservation + Estate Litigation Practice Group.

*Author’s note, October 4, 2014: This post was originally posted October 1, 2014, with the names of the parties reversed. We apologize for the error, which has now been corrected.