Fargey v. Fargey

If you want to ensure that your child or grandchild (or any other beneficiary) will not have control over an inheritance from you until he or she attains a more mature age than nineteen, the age of majority in British Columbia, then it is important that your will be drafted to avoid that beneficiary from being able to terminate the trust your create in your will for him or her. One way you may accomplish this is by providing that if the beneficiary dies before the age at which you wish to give the beneficiary control, his or her children will receive the funds held in the trust. But simply saying that a trustee will hold a beneficiary’s share until the beneficiary attains the age of say twenty-five will not do.

I have written before about the rule in Saunders v. Vautier (1841), 41 E.R. 482, allowing a beneficiary with legal capacity to terminate a trust if the beneficiary’s interest has fully vested, but the principle has been applied recently in British Columbia. The case is Fargey v. Fargey, 2015 BCSC 721.

Donald Robert Fargey in his will provided that if, as occurred, his wife and either of his two children died before him, the share of the deceased child, the trustee of his estate would hold the that share for each of that deceased child’s own children (Donald Fargey’s grandchildren) and:

invest and keep invested each such sub-share and to pay the income therefrom or so much thereof as may be necessary or advisable in my Trustee’s discretion for the grandchild’s maintenance, education or benefit during his or her minority, (any income not so paid in any year to be added to the capital of the share) and upon my grandchild attaining the age of twenty-five (25) years to distribute the capital of the sub-share to him or her.

The will did not contain a provision for anyone else if a grandchild died before the age of 25.

Donald Fargey’s son died before him, and his son had two children, Mathew Robert Fargey and Joseph Bartholomew Fargey. Mathew Fargey is an adult, but not yet 25, and Joseph Fargey is still a minor. Both grandchildren applied to court to terminate the trust, with Joseph Fargey’s mother bringing the application as his litigation guardian.

The two grandchildren relied on Saunders v. Vautier. In his reasons for judgment, Mr. Justice McEwan wrote at paragraph 7:

[7]             The authority cited by the petitioner is Saunders v. Vautier (1841), 41 E.R. 482 (Saunders). It was considered in British Columbia in Grieg v. National Trust Co. Ltd. (1997), 47 B.C.L.R. (3d) 42 (B.C.S.C.), where Grist J. observed:

4  Donovan Waters in The Law of Trusts In Canada, 2d Ed. (Toronto: Carswell, 1984) at 962-963, comments on the rule in Saunders v. Vautier (1841), 41 E.R. 482,

If there is only one beneficiary, or if there are several (whether entitled concurrently or successively), and they are all of one mind, and he or they are not under any disability, the specific performance of the trust may be arrested, and the trust modified or extinguished by him or them without reference to the wishes of the settlor or the trustees. (Approved in Re Johnston (1964), 48 D.L.R. (2d) 573 (B.C.S.C.) per Nemetz, J., as he then was).

In finding that Mathew Fargey was entitled to his share outright, Mr. Justice McEwan distinguished a Manitoba Court of Appeal case Fast v. Van Vliet, 49, D.L.R. (2d) 616, in which the court refused an order collapsing the trust where the will provided that a share of the will-maker’s estate would be divided between two named beneficiaries “upon their attaining the age of twenty-five years.” The majority of the Manitoba Court of Appeal held that the interest of each of the beneficiaries had not fully vested, but was contingent on each attaining the age of 25, which is when the division occurs.

In contrast, in Fargey, the division occurred on the date of Donald Fargey, and each of the two grandchildren’s shares vested at that time. The will did not postpone the gift, but rather the enjoyment of the gift.

Mr. Justice McEwan wrote:

[12]         What is clear in that case is that the will [in Fast] provided that the estate was not to be divided into shares for the beneficiaries until they attained the age of 25 years.

[13]         In contrast the shares in Donald Fargey’s will are to be created at the time of his death and the distribution of the share is postponed to the age of 25. It appears that what was anticipated was that equal shares would be created immediately and the income administered as the differing needs of the beneficiaries dictated, until their majority. There is then a gap until each share can be distributed to each brother as each attained the age of 25. The division into shares appears to take place before, not upon the attaining of the age of 25.

Because Joseph Fargey has not attained the age of majority, his share remains held in trust for him until he turns 19. But Mr. Justice McEwan made an order under the Trust and Settlement Variation Act allowing the trustee to use capital from Joseph Fargey’s share for his benefit before he attains the age of 19. This will allow the trustee to use funds to assist with his tuition at his school, which exceeds the income from his share.

The Rule in Saunders v. Vautier and Pension Plans

I have never thought of law as a bunch of isolated rules. It is more of a web. Principles articulated in one context may be applicable in another. Sometimes a rule developed in one situation can be applied in a very different situation, but sometimes the rule doesn’t quite fit.

I wrote a post here about the rule in Saunders v. Vautier, which in British Columbia allows all of the beneficiaries of a trust to terminate the trust and require the trustee to distribute the trust fund to the beneficiaries, provided that all of the beneficiaries including contingent beneficiaries are adults with legal capacity. This is a rule that was developed, and is usually applied, in the context of personal and family trusts. For example, if in my will I say that my estate is to be held in trust for my children until the youngest has reached the age of 45--and there are no gifts to others if a child dies before 45--after my death they can terminate the trust upon the youngest attaining the age of 19 (the age of majority in British Columbia).

What if, instead of a modest family trust for children, we apply the rule in Sanders v. Vautier to a trust set up to hold the assets of a pension fund for the benefit of the employees of a large corporation? The employer made all of the contributions, and in addition to the funds required to pay the retired employees their pension benefits, the fund now has a significant surplus. Can the pension plan members get together to terminate the trust, and demand that the trustee distribute the trust funds to them?

This is one of the questions that the courts have considered in litigation that has been ongoing for ten years between Rogers Communications Incorporated, and 112 members of one of its pension plans. Rogers acquired the plan when they took over another company. The plan has had surplus funds, and Rogers has not made contributions to the plan in many years. In 1984, the plan was closed to future employees. By 2002, the plan had a surplus at about $11 million. A trustee appointed under a trust set up pursuant to the pension plan held these funds.

The pension plan members asked the courts to terminate the trust and get the trustee to distribute the funds to them.

The British Columbia Court of Appeal, in Buschau v. Rogers Communications Inc. (No. 3), 2004 BCCA 282, held that the rule in Saunders v. Vautier applied. The pension plan members could terminate the trust, as long as every beneficiary consented, including those, such as members’ spouses, who would be entitled to survivor benefits under the pension plan on the death of the members. But the Court of Appeal also held that the Trust and Settlement Variation Act, RSBC 1996, c. 463, did not authorize the court to consent to the termination of the trust on behalf of adult beneficiaries who could not be located. Accordingly, the members had to locate and get every beneficiary to agree.

The Supreme Court of Canada in Buschau v. Rogers Communications Inc., 2006 SCC 28, overruled the B.C. Court of Appeal’s decision that the court could apply the rule in Saunders v. Vautier to terminate the trust set up pursuant to this pension plan. The Supreme Court of Canada said that the trust could not be considered in isolation; but that the courts had to look at the trust in the context of the contractual framework of the pension plan agreements, the regulatory framework of pension legislation, and the broad social and economic goals pensions are designed to implement.

Deschamps J. writing the majority judgment said at paragraphs 27 – 32:

27 There are many reasons why the rule is not easily incorporated into the context of employment pension plans.

28 First, pension plans are heavily regulated. The P.B.S.A. [Pension Benefits Standards Act, 1985] regulates the termination of a plan and the distribution of the fund and the trust assets. I accept the following comment of the Court of Appeal (Buschau #2, at para. 47):

It must be acknowledged that the application of the rule in Saunders v. Vautier to pension trusts does involve different and more complicated factors, financial and legal, than an ordinary legacy or gift in trust. As already noted, pension trusts are part of the complex of rights and obligations (not only equitable, but also contractual and statutory) between employers and employees, and obviously serve broad societal and economic purposes.

However, the Court of Appeal’s order (Buschau #3) defies the application of the P.B.S.A. because it allows for the operation of the rule in Saunders v. Vautier without regard to the obligations to report to the Superintendent and to provide for the payment of pension benefits before distribution of the trust fund. The P.B.S.A. deals extensively with the termination of plans and the distribution of assets. It is clear from this explicit legislation that Parliament intended its provisions to displace the common law rule. To the extent that it provides a means to reach the distribution stage, the P.B.S.A. prevails over the traditional rule in Saunders v. Vautier.

29 Second, a family or testamentary trust is generally a stand-alone instrument. It does not usually depend on any other instrument for its operation. No indirect effect results from the application of the rule in Saunders v. Vautier in such cases. In contrast, a pension trust serves only as a vehicle for holding and managing the funds required by the pension plan. In the instant case, the Trust agreement is expressly “made a part of the Plan” (art. I(1)) and the Plan is attached to that agreement (preamble to the Trust agreement). The Trust agreement is therefore dependent on the Plan for which it was created. The Premier Trust cannot be collapsed without regard to the Plan itself. The two instruments are therefore indissociable. This particular situation was not dealt with in Schmidt, which focussed on the distribution of trust assets, not the termination of a trust agreement that had been expressly made part of a Plan. In the case at bar, despite the link between the Plan and the Trust agreement, the judgment of the Court of Appeal purports to authorize the members to resort to the rule in Saunders v. Vautier, but does not provide for termination of the Plan. And yet, termination of the Plan in accordance with the prevailing P.B.S.A. is a condition precedent to distribution. This awkward juridical status illustrates why the common law rule is not an easy fit in the pension law context.

30 Third, employers establish plans because it is in their interest to do so. Under normal circumstances, they have the right not to have their management decisions disturbed. In contrast, the common law trust allows no room for the settlor’s interest. Although the particular circumstances of this case may lead to the conclusion that the employer no longer has a legitimate interest in the continuation of the Plan, a blanket statement that the employer has no interest conflicts with the usual expectations of parties to a pension plan.

31 Fourth, gift or legacy trusts are gratuitous, and accelerating the date of the beneficiaries’ entitlement has no broad social consequences. Pension trusts funds, however, are no longer generally viewed as being gratuitous: either employees contribute directly or their entitlement is regarded as remuneration deferred until the date of their retirement. The capital of the pension trust fund cannot be distributed without defeating the social purpose of preserving the financial security of employees in their retirement by allowing them to receive periodic payments until they die.

The court did leave open the possiblity that the rule in Saunders v. Vautier might apply to some pension plans.

Rogers won this battle, but I doubt that the war is over.

Deschamps J. also wrote that the pension plan members could apply to the Superintendent of of Financial Institutions to wind up the plan and terminate the trust. The pension plan members might still win, but their claims will have to be considered within the pension plan regulatory framework, rather than under purely trust law principles.

The Supreme Court of Canada did not overrule nor discuss the Court of Appeal’s holding that the Trust and Settlement Variation Act did not give the court jurisdiction to consent to a variation or termination of a trust on behalf of capacitated adult beneficiaries.

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.

Trust and Settlement Variation Act

On Saturday, I wrote here that in British Columbia if all of the beneficiaries of a trust were known, adults and of full capacity, they could all agree terminate the trust and require the trustee of a trust to transfer the trust assets to the beneficiaries. This is referred to as the rule in Saunders v. Vautier. On the other hand, if any beneficiary is unborn, a minor or for some other reason does not have the legal capacity to consent, the beneficiaries cannot terminate the trust persuant to the rule in Saunders v. Vautier.

However,the Trust and Settlement Variation Act, RSBC 1996, c. 463, provides that the Supreme Court of British Columbia may approve any arrangement “varying or revoking all or any of the trusts or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts” on behalf of unborn, minor or incapacitated beneficiaries.

Accordingly, it is possible to terminate or vary a trust with minor, unborn, or other incapacitated beneficiaries, but it is necessary to apply to court for approval.

Section 2 of the Trust and Settlement Variation Act provides that the court may only approve an arrangement varying or revoking a trust if the arrangement appears to be for the benefit of those on behalf of whom the court is asked to approve the arrangement.

The Rule in Saunders v. Vautier

A trustee of a trust holds title to and manages the trust assets for the benefit of the beneficiary or beneficiaries of the trust. What if the beneficiaries of a trust do not want the trustee to continue to hold and manage the trust assets, but wish to have control over the assets themselves?

In British Columbia, if all of the beneficiaries of a trust are known, are at least 19 years old, and have full legal capacity, they can compel the trustee to transfer title to the trust assets to the beneficiaries. This is known as the rule in Saunders v. Vautier, based on the 1841 English Chancery Division decision Saunders v. Vautier (1841), 41 E.R. 482.

Let’s take a simple case to illustrate how Saunders v. Vautier may apply to a will. Supposing I leave $10,000 to each of my grandchildren who are alive at my death, but direct my executor and trustee (my “trustee”) to hold on to the money for each grandchild who is under 25 years old until that grandchild reaches 25. (I don’t have any grandchildren yet, but I plan to live for a long time.)

If I have a grandson who is say 17 years old at my death, he may call upon my trustee to pay the money to him when he reaches 19. If my trustee does not pay it, the grandson could sue to compel payment.

However, for the rule to apply, all of the beneficiaries of a trust must be adults with capacity. If I say in my will that my trustee must set aside $10,000 for each grandchild who is under 25 when I die, and then I further say in my will that if a grandchild dies before 25, leaving children who survive that grandchild, those children (my great-grandchildren) take my grandchild's share, then we have to consider each grandchild’s own children.

Let’s go back to the grandson who is 17 at my death. I have revised my will to provide that if a grandchild does not live to 25, the grandchild’s own children will divide the $10,000 gift. If on his 19th birthday, my grandson asks my trustee for the $10,000, my trustee should say, “You are not the only beneficiary of this trust of $10,000. I have to consider the interests of your children, who could inherit this money if you die before your 25th birthday. ” My grandson might say, “But I don’t have any children.” To which my trustee should reply, “Yes, but you may have children before your 25th birthday.” In this example there are unborn contingent beneficiaries (contingent because they would only receive something if their father dies before 25), who do not have legal capacity to agree to a distribution of the $10,000. The rule in Saunders v. Vautier does not apply.

Not all Canadian provinces have maintained the rule in Saunders v. Vautier. I understand that in Alberta and Manitoba, and perhaps other provinces, the provincial legislatures have passed laws abolishing or modifying the rule in Saunders and Vautier.