Saturday, June 03, 2006

Disclaimers and Acceleration of Trusts

I wrote in my May 20th post here that under British Columbia law if all of the beneficiaries of a trust are adults with legal capacity, they may, if all agree, terminate the trust, and call on the trustees to distribute the trust property. As I wrote on May 23 here, if there are infant, unborn or other beneficiaries who do not have legal capacity to agree to terminate the trust, the Trust and Settlement Variation Act, RSBC 1996, c. 463, authorizes the court to consent to a variation or termination of the trust. In some cases, it is also possible to terminate a trust if some beneficiaries disclaim their interests to allow other beneficiaries to receive their shares earlier.

This point is illustrated in a Supreme Court of British Columbia decision last month.

In Re: Estate of Alexander Lippe Creighton, 2006 BCSC 705, the testator, Alexander Creighton, provided in his will that most of his estate would be held in a trust during the lives of his two children, Maureen Sawatzky and Barclay Creighton. He gave the trustee the discretion to pay income and capital out of the trusts to the children to meet “special or unusual circumstances”. The trustees also had discretion to make payments of the income or capital of the trust to any grandchild. The will further provided that when both of the testator’s children died, the trust would be divided equally among Alexander Creighton’s grandchildren, but if a grandchild died before the division date, that grandchild’s own children would received the deceased grandchild’s share.

When Alexander Creighton died, his children were in their late 60s, and their own children were all adults, many with their own children.

Both children wished to disclaim their interests in the trust—in other words, give up any opportunity to receive funds out of the trust—in order to terminate the trust so that the grandchildren could receive their shares of the trust funds.

The executor of Alexander Creighton’s will made an application to the Supreme Court of British Columbia, asking the court whether, the grandchildren’s interests would be accelerated if the children disclaimed, thereby terminating the trust.

The Public Guardian and Trustee of British Columbia argued, on behalf of the minor great-grandchildren, and any unborn beneficiaries, that if the children disclaim their interests, the interests of the grandchildren should not accelerate. It is possible that one or more of Alexander Creighton’s grandchildren could die before the children. In that case, under the will, the deceased grandchild’s own children would receive the grandchild’s share. But if the trust is accelerated, and the trust is distributed now, the great-grandchildren will lose the possibility of receiving trust funds from the trust when the two children have both passed away.

To determine if the interests of the grandchildren accelerated if Alexander Creighton’s two children disclaimed their own interests, allowing the grandchildren to receive their shares immediately, the court had to interpret the testator’s intentions. If the children disclaimed, did Alexander Creighton intend for the grandchildren to wait until both Maureen Sawatzky and Barclay Creighton passed away, in order to give something to any great-grandchildren who take if their parents do not survive both of Alexander Creighton’s children?

Madam Justice Humphries found that Alexander Creighton’s overriding intention was to benefit his grandchildren. It was apparent from the language of the will that he did not wish for his children to receive a significant benefit out of the trusts, but wanted to have funds available to them in case of they had an unforeseen need in the future. The trust also permitted the trustee to pay out capital from the trust to the grandchildren during the children’s lives, which would reduce the funds available to any great-grandchild who might receive a distribution if his or her parent died before Alexander Creighton’s children. Because of these factors, the court was persuaded that the testator likely put the gift over to the grandchildren’s own children if a grandchild died before both Maureen Sawatzky and Barclay Creighton to avoid a partial intestacy (otherwise the will would not have disposed of the deceased grandchild’s share of the trust)

Accordingly, the court held that if the children disclaimed, the interests of the grandchildren would be accelerated, and the grandchildren would be entitled to receive their share at the time of the disclaimer, instead of having to waiting for both children to pass away.

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