Re Mulgave School Foundation

If you make a large gift to a charity, you may have a specific purpose in mind, such as buying equipment for a hospital, building a new church, or funding scholarships in the Faculty of Engineering. Whatever you have in mind, consider whether you wish to make your gift to charity conditional on the funds being used for the specific purpose, or whether you want to give the charity some flexibility.

The advantage of making the gift conditional is that the charity will be required to use the gift for the purpose you have specified. The disadvantage is that the charity will lose flexibility in using the funds in accordance with its needs, which may change over time.

This point is illustrated by a Supreme Court of British Columbia decision, Re Mulgrave School Foundation, 2014 BCSC 1900.

Bjorn and Rochelle Moller, and Donald Kirkwood and Penny Levitt gave substantial gifts to the Mulgave School Foundation. When they made their contributions, the conditions of the gifs as set out in endowment letters were that the funds were to be used to create an endowment, and the income used for scholarships for students. The Foundation was set up to provide scholarships and bursaries as well as operating grants for the Mulgave School.

In 2011, after the gifts were made, the Mulgave School, the Mulgave School began a fundraising campaign to buy land and build a Seniors School. If the Mulgave School could use the funds given to them by the Mollers, Mr. Kirkwood, and Ms. Levitt to fund the new building, the Mulgave School would save an estimated $200,000 in borrowing costs.

The Mulgave School Foundation applied to court for an order permitting the Foundation to apply the donations to the construction of the new school. All four of the donors agreed to the order sought allowing the funds they had donated to be used for the construction.

The application was opposed by the Attorney General of British Columbia.

Mr. Justice Masuhara held that the Foundation could not use the funds for the construction of the Senior School. The Charitable Purposes Preservation Act requires a charity that is given funds for a “discrete purpose” use those funds for that purpose.

He considered section 3(4) of the Charitable Purposes Preservation Act, which provides that if a charity is unwilling or unable to use funds for the discrete purpose, the Court

may make whatever orders, including arrangements, it considers appropriate, including transferring the property to a new charity, so that the property is kept, administered and used to
(a)        advance the discrete purpose, or
(b)        advance another charitable purpose that the court considers is consistent with the discrete purpose.

Mr. Justice Masuhara also considered the common law doctrine of cy-pres, which allows the Court to apply donated funds in a different manner if the purpose for which they were provide is “impossible” or “impractical.”

In this case, there was no evidence that the Foundation was unwilling or unable to use the funds for an endowment to funds scholarships, nor that the original purpose was impossible or impractical.

Although the donors were in agreement with the proposal to use the funds they donated for the construction they had not retained any power to change the purpose of the donations. Once they donated the funds, they had no further control.

In dismissing the application, Mr. Justice Masuhara wrote:

[32]         Unfortunately, as laudable as the Foundation’s initiative and intent is, the petitioner has not met the necessary conditions to obtain the relief sought. 

Milne Estate v. Milne

Separation Agreements or court orders following marriage breakdown may include a clause requiring one former spouse to maintain a life insurance policy on his or her life, naming the other as the beneficiary. Life insurance is a good way to either secure spousal or child support payments, or to replace the payments, in case the former spouse required to pay support dies. But what happens if, contrary to the agreement or court order, the party required to maintain the life insurance cancels the policy or changes the beneficiary?

The Supreme Court of British Columbia recently considered this issue in Milne Estate v. Milne 2014 BCSC 2112. Following the breakdown of their relationship, Scott Milne agreed to maintain his $500,000 life insurance with Sherry Milne as the beneficiary for so long as he was required to pay child or spousal support to Ms. Milne. Mr. and Ms. Milne agreed to include this term in a consent court order. In breach of the order, Mr. Milne changed the beneficiary to his new partner, Albertina Vincente. Mr. Milne died on August 4, 2013, while still obligated to pay child support to Ms. Milne for their son.

Ms. Milne claimed that she was entitled to the insurance proceeds because Mr. Milne was in breach of the consent order. If she wasn’t entitled to the proceeds, then she claimed that she was entitled to the $500,000 she would have received if Mr. Milne had not changed the beneficiary out of his estate.

Madam Justice Fleming held that Ms.Vincente was entitled to retain the insurance proceeds, but that Ms. Milne was entitled to receive the $500,000 from Mr. Milne’s estate.

In denying Ms. Milne’s claim to the insurance proceeds, Madam Justice Fleming rejected her argument that because Mr. Milne was in breach of the consent order when he made Ms. Vincente his beneficiary, it would be against good conscience for Ms. Vincente to retain the proceeds, and that the court may impose a remedial constructive trust on the proceeds in favour of Ms. Milne.

Madam Justice Fleming found that the conditions set out by the Supreme Court of Canada in Soulos v. Korkontzilas, [1997] 2 S.C.R. 217, for a court to impose a constructive trust on the basis that it would be against good conscience to allow a party to retain property were not met. Those conditions are set out by Madam Justice McLachlin (now Chief Justice) at paragraph 45 of the judgment:

(1)   The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;

(2)   The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;

(3)   The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties and;

(4)   There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.

Madam Justice Fleming found that Mr. Milne’s relationship with Ms. Milne following the consent order was not of such a nature that the law imposes a high duty of loyalty on Mr. Milne to protect Ms. Milne. He was not a trustee or other fiduciary. That being the case, there was no basis for the Court to impose a good conscience constructive trust on the insurance proceeds.

Ms. Milne was successful in her claim against Mr. Milne’s estate, and Madam Justice Fleming awarded her $500,000 out of the estate to compensate her for Mr. Milne’s breach of the consent court order.

Although the reasons for judgment do not state the value of Mr. Milne’s estate, it appears that there will likely be substantial assets for Ms. Milne to recover the $500,000 judgement. But in other circumstances, a former spouse relying on support payments or life insurance proceeds in lieu of support if the payor former spouse dies, could be left with nothing if the courts will not impose a constructive trust on insurance proceeds. This will happen if the former spouse whose obligation it was to keep the other former spouse as the beneficiary dies leaving little or no estate from which to pay any judgement for failing to maintain the life insurance beneficiary designation. This may occur even if the now deceased had substantial assets, but structured his or her affairs so that they pass outside of the estate, such as by holding a residence and investment accounts in joint tenancies with a new partner.

Madam Justice Fleming was careful to leave open the possibility that the court might find that a separated or divorced spouse may have fiduciary duties to the other, but she found that the facts in this case did not warrant such a finding.

This decision is consistent with the Court of Appeal decision in Ladner v. Wolfson, 2011 BCCA 370, which Madam Justice Fleming applied in reaching her decision. But are British Columbia courts taking too narrow of a view when a constructive trust is available as a remedy?

The context in which the remedy of constructive trust s most often applied is unjust enrichment, which involves one party being enriched to another’s detriment, without any requirement that the enriched party had fiduciary duties to the other. In a case where there are insufficient assets in the estate to compensate the former spouse for the deceased’s wrongful conduct in changing a beneficiary of the life insurance, it seems to me that as between the wronged former spouse and the new beneficiary, the equities favour the former spouse. Settlements are the product of negotiations and trade-offs. Almost invariably the spouse for whose benefit the life insurance is to be maintained has given up something in return, while the proceeds are likely to be a pure gift to the new beneficiary. It may be that the former spouse has a claim in unjust enrichment, but even if not, surely the law is flexible enough for the courts to impose a constructive trust in these cases by analogy to both unjust enrichment and good conscience constructive trusts.

In practice, a separated spouse might own the life insurance on the other’s life and pay the premiums so that she or he can ensure that the life insurance is maintained for her or his benefit. Any spousal support or division of property could be adjusted to reflect the costs of the insurance.

Uniform Trustee Act Provisions for Remuneration

The British Columbia Government appears to be considering passing new legislation modeled on the Uniform Conference of Canada, Uniform Trustee Act. As I wrote before, the Ministry of Justice was requesting comments on the Uniform Trustee Act.

Among the changes that may be brought by new legislations are changes relating to remuneration for personal representatives of estate, and trustees.

Currently, under section 88 of the Trustee Act, there is a statutory ceiling for the fees that personal representatives (executors of wills and administrators of estates) and trustees may charge of 5 per cent of the aggregate value of an estate or trust, including income and capital and a care and management fee of 0.4% of the average market value of the assets. This is a ceiling and in many cases the courts awards lower percentage based on the Judge’s or Registrar’s assessment of what amount is reasonable in all of the circumstances. It should also be noted that you can allow your personal representative or trustee to charge a higher percentage by sayings so in your will or trust or in a separate contract.

In contrast, the Uniform Trustee Act would not set a statutory ceiling on remuneration that a court may award. Instead, the Uniform Trustee Act sets out the factors that the Judge or Registrar may consider. The Uniform Trustee Act would preserve the right of a will-maker or settlor of a trust to determine the amount of compensation by will, by the trust agreement, or by contract.

The Uniform Trustee Act would permit a personal representative or trustee who is a profession to charge fees for professional services in addition to remuneration for acting as the personal representative or trustee. This would change the law in British Columbia. Currently unless expressly permitted in the will or trust, a lawyer or other professional acting as a personal representative or trustee may not charge professional fees in addition to remuneration for acting as a personal represent or trustee unless the will or trust expressly authorizes professional fees.

Section 64 of the Uniform Trustee Act reads as follows:

64 (1) A person is entitled to fair and reasonable compensation to be paid out of the trust property for services rendered as trustee of the trust.

(2) As part of the compensation to which a trustee is entitled under subsection (1), a trustee who

(a) has professional skills, and
(b) has rendered services to the trust, apart from those generally associated
with the office of trustee, that required the exercise of those professional
skills

is entitled to charge fees at reasonable rates for those services that are reasonably necessary for the purpose of carrying out the trust.

(3) The trustees of a trust are not presumed to be entitled to equal compensation under subsection (1).

(4) On application by a trustee during the administration of the trust or on the passing of accounts, the court may determine the amount of compensation to which the trustee is entitled under subsection (1).

(5) In determining a trustee’s compensation, the court may consider the following:

(a) the gross value of the trust property at the time compensation is claimed;
(b) any change in the gross value of the trust property since compensation was last claimed or the trust was created and the portion of that change attributable to decisions of the trustee;
(c) the amount of revenue received and expenditures incurred in administering the trust;
(d) the complexity of the work involved in administering the trust, including whether or not any difficult or unusual questions were raised;
(e) any unusual difficulties or situations encountered in administering the trust;
(f) whether or not the trustee had to instruct on litigation relating to the trust;
(g) whether or not the trustee was required to manage a business, be the director of a corporation or perform other additional roles in administering the trust;
(h) the amount of skill, labour, responsibility, technological support and specialized knowledge required in administering the trust;
(i) the number and complexity of tasks relating to the administration of the trust that were delegated to others;
(j) the time expended in administering the trust;
(k) the number of trustees.

 (6) A trustee may make an application under subsection (4) even if the trust instrument provides for the determination of the amount of compensation.

(7) Subsection (4) does not authorize the variation of a contract, with respect to compensation between a settlor and a trustee, that is not part of the trust instrument, whether or not the contract is incorporated by reference in the trust instrument.

Section 65 would allow a personal representative or trustee to receive interim remuneration before the amount is approved by the beneficiaries or the court provided that at least one beneficiary is a capacitated adult. The personal representative or trustee must give notice to “qualified beneficiaries,” which means beneficiaries with a vested interest in the estate and trust, and any contingent beneficiaries who have given notice that they wish to be included as qualified beneficiaries. If the Court ultimately approves a lower amount of remuneration, then the personal representative or trustee must repay the difference (section 68).

Are Future Payments from a Trust Created by Will Available to the Creditors of a Bankrupt?

If you make a will leaving your estate to your child, and after your death, your child is assigned into bankruptcy, then your child’s inheritance from you will be available to his or her creditors. That’s not too surprising.

But what if the will provides that your child is to receive her inheritance in stages, with so much payable when she reaches a certain age, more payable and a later age, and all of it payable at a later age still? After your death, but before she has reached the age to receive the full amount of her inheritance, she is assigned into bankruptcy. Will her trustee in bankruptcy be entitled to the future payments for the benefit of her creditors?

This issue was considered by Master Baker in re Bolt Estate, 2014 BCSC 2095.

Vesta Bolt died in 1994. In her will, which she made in the year of her death, she left most of her estate in trust for her daughter, Jody Bolt. The terms of the trust provided that her daughter would receive income from the trust, one-quarter of the capital when she attained the age of 26, one-quarter at the age of 35 and the balance at the age of 45. If she died before attaining the age of 45, whatever was left in the trust would go to her descendants per stirpes (equally among her children, and if a child died before her, the children of that deceased child would receive the deceased child’s share).

In January 2014, before attaining the age of 45, Ms. Jody Bolt made an assignment in bankruptcy. There remains a little over $96,000 in the trust created by her mother’s will She argued that future payments from the trust were not property available to her creditors.

Her trustee in bankruptcy took the contrary position that the future payments were available to her creditors, pointing to the definition of property in section 2 of the Bankruptcy and Insolvency Act:

“property” means any type of property, whether situated in Canada or elsewhere, and includes …every description of property, whether real or person­al, legal or equitable, as well as …every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property….

Master Baker agreed with the trustee in bankruptcy’s submissions. Ms. Bolt as a beneficiary of her mother’s will has a contingent interest in the remaining assets of the trust, which falls within the above-quoted definition of property available to her creditors.

The future payments were not exempted in either the Bankruptcy and Insolvency Act, or the Court Order Enforcement Act.

However, because her interest in the remaining capital of the trust is contingent on her attaining the age of 45, the trustee in bankruptcy will also have to wait until she attains that age before the trustee in bankruptcy can receive those funds to distribute to the creditors. The trustee in bankruptcy can have no greater right to the funds than she. If she died before attaining the age of 45, the remaining capital of the trust would go to her children pursuant to her mother’s will.

In this case, it is very doubtful that the will-maker would have contemplated her daughter’s bankruptcy twenty years after the will-maker’s death. But what can you do if you have a child, or other person you wish to benefit, who is either in bankruptcy or in such financial difficulty that you can see a significant risk that after your death, he will be bankrupt?

One option is to create a discretionary trust in your will for your child and his family. You select a trustee for your child’s trust, and the terms of the trust provide that your trustee can decide if an when to make payments to your child, his spouse, his children and other descendants, and whoever else you wish to include among the potential beneficiaries. In these circumstances, you would not select your child as the trustee. If, after your death, your child is assigned into bankruptcy, your trustee need not make payments to your child, but instead can assist his family by making payments to or for the benefit of his spouse or children. Even if your child’s interest is considered “property” under the Bankruptcy and Insolvency Act, it is arguably of little or no value, your child’s interest being subject to the exercise of your trustee’s discretion.