Sunday, September 11, 2011

Easingwood v. Cockroft (Part 1)

The Supreme Court of British Columbia upheld a trust that was created by two children for their father using a power of attorney in a recent decision, Easingwood v. Cockroft, 2011 BCSC 1154. The trust was challenged by their father’s widow, Kathleen Easingwood, after his death. She argued that the power of attorney did not give them the authority to transfer his assets into a trust, and that the transfer was a fraudulent conveyance intended to defeat her potential claims under the Family Relations Act and the Wills Variation Act. The question of whether the transfer of assets to the trust was valid had important implications for Ms. Easingwood. If not, then the assets would fall into her husband’s estate, and would be subject to her Wills Variation Act claim.

In this post, I will discuss the issue of whether the children could validly set up a trust for their father using an enduring power of attorney. In a later post, I intend to discuss the issue of whether the transfer was a fraudulent conveyance.

Reginald Henry Easingwood was married to Kathleen Easingwood. They were married in 1983. He had four children with his first wife, who died in 1976. Two of his children died before him.

Before their marriage, Reginald Easingwood and Kathleen Easingwood had signed a marriage agreement, in which each gave up any claim to the other’s assets other than in accordance with the agreement or with their wills.

On April 18, 2001, Reginald Easingwood signed an enduring power of attorney, appointing two of his children, Lauren Cockroft and Hank Easingwood as his attorneys. The power of attorney provided that they must act together. This means that if either died, the other could not act under it.

On March 4, 2004, Mr. Easingwood signed his will naming the same two children as his executors. In the will he provided for a fund for his wife of $525,000 plus an adjustment for each year between the date of his will and his death, or 15 percent of his estate (whichever is greater). She would receive the income from the fund during her lifetime, and on her death, the fund would be divided among his then living children, the children of his deceased children, and his wife’s children. In the will, he also gave his wife a life interest in his house, and set aside $100,000 to pay for expenses for his house. He provided that the residue of his estate would go to his children and some of his grandchildren.

In 2007, Lauren Cockroft and Hank Easingwood were managing their father’s financial affairs. He was suffering from dementia and was no longer able to look after his own finances. Hank Easingwood was diagnosed with cancer, and he and Lauren Cockroft were concerned that if Hank Easingwood died before their father, Lauren Cockroft would not be able to act on her own under the terms of the power of attorney. Accordingly, she or someone else would have to apply to court to be appointed his committee (adult guardian). They were concerned that there could be a dispute over who would become their father’s committee.

In order to allow for the continued management of their father’s finances without having to make a court application, Lauren Cockroft and Hank Easingwood, used the power of attorney from their father to settle an alter ego trust on his behalf in 2008. They transferred substantially all of his wealth into the trust, except for his house, which remained in his name, subject to a life estate in favour of his wife. They were appointed as the first trustees, but the trust provided for the appointment of a successor trustee on Hank Easingwood’s death. The assets of the trust could only be used for Reginald Easingwood’s benefit during his lifetime. On his death, the terms of the trust mirrored his will. The trust provided for a fund for his wife, and for the house, and the residue of the trust funds would be divided in the same way as set out in his will.

Reginald Easingwood died September 12, 2009, after his son Hank Easingwood’s death.

The first question is whether an attorney appointed under a general enduring power of attorney had any authority at common law to settle a trust, without specific authorization in the power of attorney. Madam Justice Dillon held that there is no outright prohibition against attorney’s settling a trust. The issue is whether the attorneys were acting in breach of their duties of loyalty to their father in settling the trust in the manner they did. She wrote at paragraphs 36 through 38:

[36] It is undisputed that when the Trust was created in 2008, Reg lacked mental capacity to deal with his property. In this situation, the attorneys under the 2001 Power of Attorney held a continuing power without specific instructions from the donor except as set out in the instrument conferring the power (Banton v. Banton, 1998 CanLII 14926 at para. 183 (Ont.C.J.) [Banton]; Egli v. Egli, 2004 BCSC 529 at paras. 81-82). The power here was stated to “act together to be my attorney in accordance with the Power of Attorney Act and to do on my behalf anything that I can lawfully do by power of attorney”. As attorneys for Reg, Hank and Lauren had fiduciary obligations towards Reg as the donor, but not obligations as a general trustee for the benefit of others (Banton at para. 185). As such, they owed duties of loyalty, prudence, and good faith to Reg (Banton at para. 184). This is similar to the duties that a committee owes to a patient (O’Hagan v. O’Hagan, 2000 BCCA 79; British Columbia (Public Trustee) v. Bradley Estate, 2000 BCCA 78 at para. 16 [Bradley Estate]).

[37] As stated in Bradley Estate at paras. 16-17, there is not a clear rule against certain types of transactions and the question in all cases is whether a reasonable and prudent businessman would think that the proposal in question would be of benefit to the patient and to his family in light of the circumstances known at the time and that might arise in the future. Planning opportunities considered after obtaining tax or other professional advice are not to be denied a committee. There is no prohibition against transactions because they are not necessary. The goal is the proper management and administration of the patient’s estate.

[38] A power of attorney with the generalized power as here includes the power to settle an irrevocable inter vivos trust (Banton at para. 188). It follows that the question is not whether the terms of the power were wide enough for this purpose, but whether the trust should be set aside because, in exercising the power, the trustees were in breach of fiduciary duty to the donor (Banton at para. 188).

Madam Justice Dillon found that Lauren Cockroft and Hank Easingwood were legitimately concerned about the management of their father’s affairs after Hank Easingwood’s death. The trust mirrored his will. Accordingly, it reflected his wishes. The attorneys were entitled to establish a trust as an estate planning tool. She found that “it was reasonable and proper to create the Trust to effectively manage Reg’s affairs because the Trust did not go beyond what Reg himself had contemplated.”

The trust was validly settled.

 This decision is a significant decision concerning the authority of an attorney acting under an enduring power of attorney.

But I urge caution to those considering using an enduring power of attorney to settle a trust especially if the power of attorney document does not have an express authorization. I have three main concerns.

First, I don’t know whether this decision will be appealed. Madam Justice Dillon relied to some extent on two decisions of the Court of Appeal, Bradley and O’Hagan, in which the British Columbia Court of Appeal held that in some circumstances a court appointed committee may engage in sophisticated corporate reorganizations to save the patient and his family income tax. (In O’Hagan, the court authorized the proposed transactions; in Bradley the court did not.) Although there are similarities between the duties of a committee and of an attorney under a power of attorney, the analogy is not a perfect one. Section 18 of the Patients Property Act provides that the committee must exercise its powers “for the benefit of the patient and the patient's family.” This may allow a committee greater latitude than an attorney under a power of attorney to consider the interest of other family members in, for example, creating an estate plan to save taxes.

Secondly, this decision considered the duties of an attorney under a power of attorney before the recent amendments to the Power of Attorney Act came into effect on September 1, 2011. The changes will likely have some implications to an attorney’s ability to engage in estate planning. For example, there are provisions which I wrote about here, setting out and limiting an attorney’s authority to use the power of attorney to make gifts. Would a transfer of assets into a trust that provides for beneficiaries on the death of the person who granted the attorney be gifts? If so, they must either come within the limitations of the Power of Attorney Act and Regulation, or be authorized by the power of attorney document.

Thirdly, it’s important to keep in mind that Madam Justice Dillon found that the attorney’s were acting for a valid reason, and that the estate plan perfectly mirrored the will. If the estate plan were designed to benefit some family members over others in a manner inconsistent with the will, I doubt the trust would have been upheld.

If you are giving someone an enduring power of attorney, consider whether you want to give the person you appoint the authority in the power of attorney to settle trusts for you or engage in corporate reorganizations on you behalf. Most powers of attorney don’t have these types of clauses, but you can have one inserted when you have the power of attorney made.

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