The validity and interpretation of wills often lie at the heart of estate litigation cases. However, disputes often centre upon other testamentary documents such as discretionary trusts. The purposes of this blog is to provide a brief overview of the characteristics of a discretionary trust.
In a discretionary trust, the trust property is vested in the trustees of the trust for the benefit of a class of beneficiaries, but the trustees are given complete discretion concerning distributions of income or capital, or both.[1] The discretion may extend not only to the timing of distributions, but also to the recipients, quantum, and conditions of income or capital distributions.[2] A discretionary trust may also permit the trustees to exclude any one or more of the beneficiaries from distributions. In short, the beneficiary of a discretionary trust is entitled to be considered for distributions but is not entitled to receive a specific distribution.
Although a discretionary power that is expressed to be “absolute” or “uncontrolled” cannot completely oust the inherent jurisdiction of the court with respect to the administration of trusts,[3] trustees are generally entitled to a high degree of deference and a court will not substitute its own decision for that of a trustee merely because, on the facts, the court may have exercised its discretion differently.[4] The court should not consider itself as a trustee of the trust.
The circumstances in which a court will interfere with the exercise of a discretionary power by a trustee have been described in different ways by the courts, but the underlying principle is that a trustee, being a fiduciary, is required to exercise a discretionary power in good faith within the scope and objects of the power. Unless there is male fides (i.e. bad faith), a court will not interfere with the trustee’s exercise of discretion.[5]
The concept of mala fides and the principle of non-interference have been reformulated more recently to state that a court should not interfere with the exercise of a discretionary power by a trustee unless: (a) what the trustee has done is not authorized by the discretionary power; or (b) it is clear that the trustee would not have acted as the trustee did unless: (i) the trustee had not taken into account irrelevant considerations; or (ii) the trustee had not failed to take into account relevant considerations.[6] In other words, the trustee cannot consider irrelevant factors but must consider relevant factors. It is therefore not surprising that the court gives significant deference to a discretionary decision of the trustee and will generally be loath to interfere.
A court may also intervene if a trustee cannot demonstrate that the trustee properly considered whether the discretionary power ought to be exercised.[7] Again, simply put, did the trustee properly consider whether to exercise their discretionary power in the first place.
If a trustee is motivated by an irrelevant consideration, this is an extraneous factor that may constitute mala fides. However, if a trustee exercises their discretion based on a relevant and legitimate motive or purpose, and it is alone a sufficient reason for exercising the discretion, a court should not interfere with the exercise of discretion notwithstanding there may also be an irrelevant or extraneous motive or purpose. Rather, it must be shown that the discretion would not have been exercised in the manner it was unless the extraneous motives or purposes were part of the calculus. [8]
Both trustees and beneficiaries of discretionary trusts should inform themselves as to their respective duties, obligations, and rights when it comes to this unique testamentary instrument.
[1] Waters, DWM, Gillen, M and Smith L, Waters’ Law of Trusts in Canada, 4th Ed., (Scarborough, Ont: Carswell, 2012), at p. 650. (“Waters”).
[2] Waters, at pp. 1201-03.
[3] Waters, at pp. 985-86.
[4] Walters v Walters, 2022 ONCA 38 (CanLII), at paras. 39-40. (“Walters”).
[5] Edell et al. v Sitzer et al., [2001] O.J. No. 2909, at paras. 159, 164. (“Edell”).
[6] Walters, at para. 42, citing Fox v. Fox Estate (1996), 28 O.R. (3d) 496 (C.A.).
[7] Waters, at p. 989.
[8] Edell, at paras. 177-79.
