A trust is created when a person (settlor) transfers property to another person (trustee) to hold for the benefit of a beneficiary. This seems simple enough. However, the legal and taxation rules can be quite complex. Trusts can arise from a Will (testamentary trusts), during the settlor's lifetime (inter vivos trusts), or by operation of law. Trusts are used for a variety of purposes such as privacy, estate planning, tax planning, or transactions.
New Trustee Act: Effective February 1, 2023
The new Trustee Act has been a highly anticipated update to trust law. The new Act provides greater accountability to the beneficiaries while also reducing the administrative burdens on trustees in managing the trust. It also reduces the Court's involvement in the management of trusts.
The new Act applies to most trusts, subject to a few exceptions. It notably does not apply to an Executor who is dealing with matters as an Executor of an estate, but it will apply to the Executor in any matter related to testamentary trusts created under the estate.
Power to Vary or Terminate Trust
If the instrument creating the trust allows the trustees to vary or terminate the trust, they can do so in accordance with the instrument. However, absent this power, a Court Order is required to vary or terminate the trust and previously the consent of all adult beneficiaries was required.
The new Act now allows the Court to vary or terminate the trust without the consent all the beneficiaries, if it considers the variation or termination in the best interests of the trust.
Reducing Administrative Burden
The new Act allows for the following, without the necessity of a Court application:
- the appointment of a temporary trustee if the existing trustee is unable to act or continue to act due to absence or incapacity;1
- appointment of replacement trustees;
- removal of unfit trustees by majority of other trustees through written resolution;
- resignation of a trustee; and
- delegation of trustee powers for a specified time through a Power of Attorney.
It also allows the trustees to act by majority and lessens to burden related to managing investments.
Increasing Accountability and Duties
Although the administrative burdens applicable to the trustees has been reduced, this doesn't mean the beneficiaries will necessarily be left more vulnerable. Instead, the new Act imposes express duties and obligations on the trustees.
These protections include:
- trustees must provide annual reporting of the trust accounting to qualified beneficiaries, which is in addition to the general duty that trustees must provide information to beneficiaries;2
- if required by a Court Order, trustees must disclose information related to the terms, administration, assets, and liabilities of the trust to the beneficiaries; and
- trustees owe a duty of care, including the requirement to exercise the care, diligence, and skill that a person of ordinary prudence would exercise.3
It is important for trustees to be aware of their new duties, especially the duty to report on an annual basis. There are specific details that must be set out in the annual report and the report must be delivered within 2 months of the fiscal period end.
Overall, the new Trustee Act is a welcome update to the area of trust law. It provides trustees the powers and flexibility to better manage and administer trusts, while also increasing the transparency and protections available to the beneficiaries. Trustees must inform themselves of both sides of these changes, in addition to the incoming tax reporting rules (see here and here), to ensure they are acting appropriately in their roles.
1 This is done through the use of a "designated person" who is designated based on priorities set out in Division 1.
2 Qualified beneficiaries are all beneficiaries with a vested interest in the trust and any beneficiary who has given written notice to the trustees that they wish to be a qualified beneficiary.
3 If the trustee is in is in a profession, occupation or business where they possess or should possess certain skills related to the administration of a trust that is greater than what is expected of an "ordinary person", then their duty of care also increases as a result.
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.