December 3, 2014

It is common to find a provision in a will which allows the estate trustee to distribute assets in specie – meaning instead of selling all the estate assets and dividing the proceeds between the beneficiaries, the estate trustee may transfer the assets directly to the beneficiaries as payment in kind. Giving the estate trustee the power to distribute assets directly to the beneficiaries may be attractive for a number of different reasons, but can also lead to problems. It will come as no surprise to readers of the blog that one situation where distribution in kind raises difficulties is the transfer of the family cottage.

This difficulty was recently illustrated in Re Retallack. In that case, the estate trustee applied for directions from the court to confirm his intention to distribute a cottage and cabin directly to two of the five residual estate beneficiaries. The two beneficiaries who were to receive the cottage and the cabin objected to the transfer – they did not want the properties, preferring instead to share in the estate’s other main assets: $4.7 million in investments.

The estate trustee was one of five children of the testator, all of whom were to inherit equally under the will. Following his parents’ deaths, the estate trustee canvassed his siblings to find out if any of them were interested in receiving the cottage and cabin. His two sisters each expressed an interest in receiving one of the properties, subject to the determination of certain issues (such as capital gains tax and improvements to the properties).

Between 2012 and 2014, the sisters entered into negotiations with the estate trustee about receiving the cottage and cabin in specie, which would be credited against their ultimate share of the estate. By 2014, they decided they did not want to receive the properties, preferring instead that they be sold and the proceeds form part of the residue of the estate.

The estate trustee took the position that his parent’s will gave him the right to set aside any asset of the estate and distribute it in kind to one of the beneficiaries. He also took the position that he had the discretion to fix the value of any of the estate assets. The portion of the will that he relied on read: “I expressly will and declare that my trustee shall in my trustee’s absolute discretion fix the value of my estate or any part thereof for the purposes of making any such division, setting aside or payment, and the discretion of my trustee shall be final and binding on all such persons concerned.”

The estate trustee chose to fix the value of the cottage and cabin at their assessed value in 2012 (after improvements had been made). He then set off the value of the properties from his sisters’ shares of the estate, also determined as of 2012.

The estate trustee’s proposed distribution scheme had the effect of cutting his sisters off from sharing in the increased value of the estate investments, which had appreciated noticeably between 2012 and 2014. In essence, the estate trustee’s proposed distribution scheme meant that his sisters would receive their 1/5 share of the estate as valued in 2012. This left him and his brothers to enjoy the increase in the value of the estate since 2012, which would be divided equally between them.

The court held that the will did not give the estate trustee the absolute discretion to determine the date of valuation and the value of the property as he alleged. The court found that the discretion granted to the estate trustee in the will had to be interpreted in the context of the testator’s overall intention, and was subject to the principle of even-handedness. It was also subject to the general rule that assets are to be valued at the date of distribution, not a date chosen in the past. The court found that the estate trustee’s proposed distribution plan went against the intentions of the testator, which was to divide the estate equally between the five children. It also breached the estate trustee’s duty to maintain an even hand among beneficiaries.

For these reasons, the court declined to approve of the estate trustee’s proposed distribution plan. The court held that “the applicant’s exercise of discretion has no other effect than to punish his sisters for having indicated an interest in the cottage and the cabin and having chosen not to accept the executor’s terms.” As a result, the court ordered that the estate trustee to sell the cottage and the cabin and to divide the net proceeds from the sale, along with the net residue of the estate, equally between all five beneficiaries.