Passive Trustee Equally Responsible With Dishonest, Wrongful Trustee
If you are named as an estate trustee along with another more sophisticated, experienced individual you may not sit back and rely on their experience and expertise in administering and distributing the estate according to the terms of the will. Doing so will likely make you equally liable for any wrongful conduct of your co-trustee as a recent Superior Court decision illustrates.
The deceased named two of his children Kevin and Sheila as estate trustees. Among their responsibilities under the will, they were to establish a trust in the amount of $100,000 for their brother Patrick. According to the instructions, Patrick was to receive $500.00 a month until either the trust until he died or until the trust funds were exhausted. There were gift over provisions if Patrick died before the trust funds were exhausted. Importantly, only Kevin was named as trustee of the trust and was given sole discretion over the management of the trust.
Proceeds for the trust were to come from the sale of the deceased's house. When that sale occurred, the trustees signed a direction transferring the funds to an account in Kevin's name at London Life. Initially things went smoothly with Patrick receiving just over $10,000 in monthly paymentsest. Then checks started to bounce. Patrick sued both Sheila and Kevin in order to get his inheritance.
During the course of the litigation, Patrick discovered that Kevin had used the funds for a commercial property that he bought for his business. The business failed and the bank, who held a mortgage on the property, realized the property leaving nothing.
Since litigation tends to target those who are capable of paying any damages award, the case shifted to focus on Sheila (after all, if Patrick couldn't recover his losses from Kevin, who else was responsible). Sheila defended her actions claiming that she had relied on Kevin's knowledge and expertise in establishing the trust. She stated that Kevin had repeatedly assured her that everything was okay with setting up the account. She further argued that since Kevin was the only trustee of the trust she was not responsible for the loss.
The court rejected these arguments. It stated that case law did not distinguish between a sophisticated and an unsophisticated trustee. Both have the same responsibility to ensure that the deceased's instructions are carried out. Both the sophisticated and unsophisticated trustee must manage the administration of the estate the same way a responsibly prudent person would conduct his or her own affairs. Sheila had failed to do so.
When the money was transferred from the estate to the account in Kevin's name, the transfer failed to signify that the monies were trust monies, who the funds were held for or the terms of the trust. There was nothing to inform the financial institution that a trust was being created. Similarly the application to the financial institution failed to make any reference to the trust or its terms. Sheila's failure to ensure that the monies were properly placed in a trust was a failure to ensure that the deceased's wishes in setting up the trust were carried out. It was insufficient for her to rely on Kevin's assurances that things were being done. She had a responsibility to make sure herself.
The court also ruled that Kevin's actions in using the monies for his personal business was self-dealing and a wrongful and deliberate misappropriation of the funds. Even with this determination, Sheila's passivity was not excused.
The Lesson: If a trustee is unsure how to conduct the administration of an estate they must either seek guidance or renounce his or her role. It is a breach of their obligations to passively sit back and defer to the expertise or experience of another trustee. If you are not sure whether you can fulfill your obligations, seek advice and guidance early. If not, you might bear the responsibility for the wrongful conduct of a co-trustee.
Cahill v Cahill, 2016 ONSC 1385 https://www.canlii.org/en/on/onsc/doc/2016/2016onsc1385/2016onsc1385.pdf
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