While it will likely never be the subject of a hit play like "Death of a Salesman", the death or incapacity of a trustee can have serious practical and financial implications for a trust, and by extension, the beneficiaries of the trust. All too often, the practical and legal requirements for the transfer of assets from a deceased trustee to a successor trustee do not result in a seamless transfer (please note that the requirements for executors are different and are not addressed in this blog).
The role of trustee is necessary because a trust separates legal
ownership, or the title to assets, from beneficial ownership, or
the right to benefit from the assets. A trustee acts as the legal
owner of the trust's assets and manages them for the benefit of
the beneficiaries of the trust.
To ensure continuity of management and succession of the
trusteeship, it is prudent to name successor trustees who will
manage the trust should the original trustee(s) be unable to do so
and to provide a mechanism for replacement of trustees under the
terms of the trust. When the original trustee can no longer act for
whatever reason, his or her named successor can manage the trust
and take over as legal owner of the trust's assets. However,
there may be certain requirements to be completed in order for the
trustee to replace the previous trustee(s) on title to
assets.
If a successor or further successor is not named, the Trustee Act
(Ontario) has two provisions which may assist. Until the
appointment of a new trustee, the personal representative (such as
an executor or attorney for property) of a sole or last surviving
trustee may act in his or her place and manage the trust. Further,
unless otherwise stated in the trust terms, a sole or last
surviving trustee may by his or her Will appoint a replacement for
him or herself to act after his or her death.
As noted above, there may be certain requirements for a successor
trustee to arrange for his or her name to be on title to assets.
These requirements can lead to practical problems despite prudent
planning and careful drafting. For example, if a trustee becomes
incapable, it may be difficult for the successor trustee to prove
it to a financial institution to gain access to the trust's
financial accounts. The successor trustee may not be able to obtain
a capacity assessment or other documentation to provide this proof.
A trustee may have diminished capacity, which leaves the trust
management in limbo should the trustee be unwilling to resign, and
gives the successor trustee few options to move the trust
management to him or herself.
Real estate can also present a significant problem for a successor
trustee. Currently, if a sole trustee of a trust dies and real
property is an asset of the trust, under the Ontario Land Titles
rules, only the deceased trustee's executor, who is a complete
stranger to the trust, and not the successor trustee named in the
trust, can deal with any real property in the deceased
trustee's name. Transferring title to the successor trustee may
prove extremely difficult, as the deceased's trustee's
executor may be uncooperative or probate of the deceased
trustee's Will may be necessary for the executor to be able to
transfer title.
For example, assume Mr. Smith is the sole trustee of a trust which
holds a cottage property located in Ontario. Mr. Smith dies, and
the trust names his daughter from a prior marriage, Ms. Jones, as
his successor trustee. Mr. Smith's executor, his current spouse
Mrs. Smith, does not want to probate his Will as she does not need
to do so to administer his estate assets and would incur
significant Ontario Estate Administration Tax (probate fees) if she
does so. Ms. Jones cannot require Mrs. Smith to probate Mr.
Smith's Will, and may have to seek a court order, at
significant expense to the trust, to transfer the cottage to
herself as successor trustee.
What can be done to avoid or mitigate these problems? The Ontario
Bar Association has a small working group, of which I am a member,
which is attempting to find a legislative fix for the problem of
transferring title to real property to successor trustees, but this
is a long-term project with uncertain chances of success and
relates only to real property.
Unfortunately, these types of issues are often not considered of
significant public interest and therefore do not rise high on the
legislative agenda as a result. In the meantime, experienced
counsel can guide around these pitfalls in many situations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.