You’ve likely heard of someone “acting as a trustee.” You may have been asked to act as trustee for a friend or loved one. You may be considering creating a trust and thinking about who to appoint as trustee to manage your property. Or you may be the beneficiary of a trust and unsure of the trustee’s role and obligations to you.
Trusts can be used for many purposes and the odds are that you will come across a trust at some point in your life. For that reason, its important to understand the role and obligations of a trustee.
What powers do trustees have under the Act? Can a trustee be removed, and if so, how? These are important questions. In British Columbia, many questions about trust law are answered in the Trustee Act. Let’s have a look at some trust basics and the legal duties and powers of trustees as set out in the Trustee Act BC.
A trust is a relationship in which one person holds title to assets or property for the benefit of a designated person. The person who holds legal title to the property or assets is called the “trustee.” The person for whose benefit the property is being held is called the “beneficiary.”
There can be more than one trustee and more than one beneficiary of a given trust. The trustee can be a layperson such as a friend or family member, a professional trustee (e.g., a lawyer), an institution such as a bank or a trust company, or the Public Guardian and Trustee of British Columbia.
A trust is established when the owner of property gives the property to a trustee to hold and manage for the benefit of the beneficiary. The owner of property that is transferred into the trust is called the “settlor.”
The settlor creates the trust by naming a trustee(s), specifying the property to be set aside for the trust, and naming the beneficiary (or beneficiaries). In the trust document, the settlor sets out written terms describing how the appointed trustee is to manage the property and how the trustee is to confer benefits on the beneficiary. The trust beneficiary has the right to enforce the terms of the trust.
Trustees can be given discretion. For example, the trust document may specify that the trustee has discretion to decide how beneficiaries receive trust income (“income” with regard to trusts is made up of revenue earned from the use or investment of trust property and can include interest, rent, stock dividends). Alternatively, the trust document may specify that the trustee does not have discretionary powers with respect to payment of trust income. That is called a non-discretionary trust and can be used to guarantee fixed payment of income to a beneficiary.
A trust is either created during the settlors lifetime (called an “inter vivos trust”), or in a person’s Last Will and Testament to take effect when the will-maker dies (called a “testamentary trust”). When a trust is established in a Will, the executor is the trustee unless a different person is appointed.
Common examples of testamentary trusts are ones created to benefit a minor child until they reach a certain age, and one created to benefit a person who is not able to manage their own finances.
Trusts can be used for many purposes. We just mentioned the use of trusts in a Will to control how and when a beneficiary receives their inheritance.
Other purposes of trusts include tax planning, incapacity planning, pooling investments or investing for someone else’s benefit, and gifting property while maintaining some control over the property. Trusts can also be used to benefit charitable organizations, or to provide property or assets to a disabled person while protecting their eligibility to receive disability benefits.
The Trustee Act BC affects almost every estate and trust in our province. The statute focuses on the administration of trusts. It covers a range of trust law issues, including a trustee’s duties and powers, the courts involvement with the management of trusts, and trustee remuneration.
Before reviewing the key provisions of the legislation, its worth noting that common law principles also inform a trustee’s duties and powers. These principles are developed by the courts when deciding trust disputes. The courts draw on these previous trust cases to interpret how the Trustee Act applies and how a trustee should govern themselves.
A trustee can invest trust property to bring about an increase in the overall value of the trust, or to protect the trust “capital” (the original trust property), provided that the investment is consistent with the terms of the trust and the guidelines in the Trustee Act.
The guidelines for investments by a trustee are contained in sections 15.1-15.6 of the Trustee Act. The key rule is that a trustee may invest property in any form of property or security in which a prudent investor might invest, including a security issued by an investment fund as defined in the Securities Act.
It’s important to note, however, that the powers conferred by the Trustee Act relating to trustee investments must accord with the powers conferred by the instrument creating the trust. Nothing in the Trustee Act authorizes a trustee to do anything the trustee is in express terms forbidden to do, and nothing in the Act allows a trustee to omit to do anything the trustee is in express terms directed to do by the instrument creating the trust (i.e., the Trust Deed, the Last Will and Testament).
In other words: it is necessary to carefully review both the Trustee Act and the document that created the trust to determine the trustee’s powers of investment to ensure that any investments are consistent with the written terms of the trust. What is the trustee expressly authorized to do? Are any types of investments expressly forbidden?
Trustees have significant responsibilities when investing trust property. They must meet a certain standard of care when making investments decisions. The standard of care is set out in section 15.2 of the Trustee Act:
15.2 In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
The Trustee Act is clear that a trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a “prudent investor” would adopt under comparable circumstances (see section 15.3).
BC court decisions have fleshed out what “prudent investor” means in practice. It includes developing an investment strategy that is reasonable given the nature and context of the trust, making investments that a prudent investor would make to protect trust capital and provide income, ensuring reasonable diversification of the types of investments, and only incurring costs that are reasonable and appropriate.
A trustee can delegate investment responsibility to an agent such as an investment advisor or broker if doing so is reasonable and prudent. The power to delegate investment responsibility to an agent is contained in section 15.5 of the Act.
A trustee can be personally liable for breach of the “prudent investor” standard. If the trust suffers a loss arising from the investment of trust property, the question of liability will focus on the trustee’s conduct, from an objective standpoint. Was the investment plan or strategy a reasonable one that a prudent investor would adopt under similar circumstances? If the answer is no, the trustee can be sued for breach of trust, and may be found personally liable to answer for the losses.
There are some limits to a trustee’s personal liability. The express terms of the trust may limit a trustee’s liability, for example, by making them personally liable only if they were grossly negligent or in willful default. The Trustee Act also contains some protections for trustees. Section 96 gives the Supreme Court jurisdiction to relieve a trustee of personal liability for breach of trust if the trustee acted honestly and reasonably.
A trustee can be removed and replaced at any time on application to the Supreme Court by any trust beneficiary who is not under legal disability, with the consent and approval of a majority in interest and number of the trust beneficiaries who are also not under legal disability.
The power to remove a trustee is set out in section 30 of the Trustee Act. A trustee or executor can be removed for a number of reasons, in addition to failure to meet the prudent investor standard. See here for justified reasons to remove executors/trustees.
How is the Trustee Act different in British Columbia compared to other Canadian provinces?
Like its counterparts in other provinces and territories, British Columbia’s Trustee Act is largely a re‐enactment of English trustee legislation passed in the nineteenth century. Historically, the Trustee Acts in each province or territory have been largely concerned with trusts under Wills, and with giving trustees powers with respect to land and mortgages of land. That reflected the fact that in former times, trusts were chiefly used to preserve wealth in the form of land.
Does BC need a more modern Trustee Act?
In modern times, forms of wealth other than land have taken on greater significance. Trusts requiring the active investment of capital, rather than passive preservation of fixed assets/land, have become increasingly common. Trustees require new and different powers to properly manage these other forms of wealth. For that reason, the British Columbia Law Institute has been calling on the BC government to radically update the Trustee Act so that trustees are no longer constrained by outdated investment rules.
The British Columbia Law Institute formed a Trustee Act committee and issued a report that contains detailed reform recommendations. The recommendations include a proposal to allow trustees to apply modern portfolio theory and thus deal effectively and productively in the investment market. Modern portfolio theory allows investors to assemble an asset portfolio that maximizes expected return for a given level of risk. The current Trustee Act requires a trustee’s performance to be evaluated using an asset‐by‐asset assessment as opposed to the overall portfolio.
The report also recommends that a modern Trustee Act should facilitate total return investing. We talked above about trust income vs. trust capital. Current rules of trust law require trustees to distinguish between returns on investment as either “income” or “capital,” which sometimes results in trustees having to invest inefficiently. For trustees to obtain the maximum advantage for the trust, “total return” investment is necessary.
Some provinces are moving toward a more modern Trustee Act. For example, Ontario’s Trustee Act now sets out a list of criteria that trustees are required to consider when investing trust property. British Columbia’s Trustee Act does not include a similar list. It remains to be seen whether the BC government will take steps to incorporate the British Columbia Law Institute’s detail reform recommendations.
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