This Blog was written by: Alicia Mossington (Godin), Estate and Trust Consultant, Scotia Wealth Management 

What happens if a beneficiary believes that a trustee is acting improperly, or refuses to distribute funds?

United States Senator Dianne Feinstein is suing the trustees of a fund set up by her late husband, accusing them of committing “financial elder abuse.” Sen. Feinstein’s late husband reportedly established a marital trust to provide for her. The suit alleges that the trustees have failed to fund the trust and complete a required $1.5 million annual payment to reimburse her for her medical expenses. There is also an allegation that the trustees have failed to provide an accounting of estate funds.[1]

A trustee is responsible for carrying out the terms of the trust. The trustee is legally accountable to the beneficiary and is bound by several fiduciary duties. Fiduciary duties include: a duty of care, a duty of loyalty and a duty to account to the beneficiaries.

If a trustee fails to discharge their duties, either by commission or omission, they may be found liable for breach of trust. It is extremely important to select a trustee that will uphold their duties, act impartially, and who has the time and willingness to do the job. This might be a person or a trust company like The Bank of Nova Scotia Trust Company.

“Comfort and Well-Being”

Testamentary trusts are trusts established in the Will of a deceased testator. A common type of trust in Ontario is known as a “spousal trust” and can be used to support a surviving spouse during their lifetime. The trustee or trustees are responsible for administering the trust in accordance with the instructions in the Will or trust deed. Trustees may have broad discretion in exercising their powers but are bound by the core fiduciary duties noted above, as well as other responsibilities.

Trustees might be instructed to make fixed distributions from income or capital or may have broad discretion to make (or not make) distributions. The terms of the trust instruct the trustees.

Discretionary trusts often include language to the effect that a trustee provide for the “comfort and well-being” or “general health and wellbeing” of the surviving spouse. Trustees must reconcile this discretion with their underlying duty of care – a trustee must act prudently and with reasonable care. In a recent Ontario Court of Appeal decision Walters v Walters 2022 ONCA 38, the court offered some insight into when a court can intervene with the absolute discretion given the estate trustees, but instructions like “comfort and well-being” are qualitative in nature and provide the trustee with a broad spectrum of decision making.

Duty of Loyalty

On Sen. Feinstein’s death, the balance of the marital trust will reportedly pass to her late husband’s three daughters. The suit alleges that the trustees are stalling “to help Blum’s children (…).”

Trustees owe a duty of loyalty and impartiality to the beneficiaries for whom they act, although when a trustee is also the residual beneficiary of the trust, it can place them in a challenging position and strain impartial decision making.

A trustee may not allow personal interests to conflict with the duties they owe to the beneficiary. However, when the duty of loyalty is combined with broad discretionary powers such as the instruction to provide for “comfort and well-being” … there is increased potential for conflict. This is especially so when a trustee will ultimately benefit from not making distributions.

The disputes that have given rise to Sen. Feinstein’s case, the Walters case and many other proceedings could likely have been avoided by selecting a neutral trustee or professional trust company, or by providing clear and unambiguous instructions to the trustee, for example, directing that a fixed amount be distributed.

[1] See the full article here: https://www.nbcnews.com/politics/congress/sen-dianne-feinstein-sues-husbands-estate-claiming-financial-elder-abu-rcna100203.