Disputes Between Co-Trustees: Adding a Trustee to Break the Deadlock

I am often contacted by one co-executor or co-trustee, who is frustrated with the conduct of the other co-executor or co-trustee. The client feels strongly that they cannot continue to work with the other person. These concerns commonly arise when siblings are asked to work together to administer a trust or estate, most often when there are two co-trustees or co-executors. In those circumstances, if there is a disagreement then there is no majority, resulting in a deadlock.

The concerning conduct expressed by the client falls on a spectrum. There may be concerns about misappropriation of trust assets, which would fall at the more serious end of the spectrum. The co-trustees may simply not like each other and not enjoy working together, which would be at the less serious end of the spectrum.

Usually a client’s concerns fall somewhere in the middle. Often the co-trustees will be critical of one another. They may each have a laundry list of concerns and criticisms. When making recommendations to a client as to how to proceed, the same considerations usually arise.  Has the conduct in a given case reached the point that removal and/or replacement of a co-trustee or co-executor is necessary? Or are the disagreements so trivial that the parties are expected to resolve matters and work together without the assistance of the court? There is also the question of remedy.  Should a trustee be removed (and if so, which one), or should an additional trustee be added to break the deadlock?

The B.C. Supreme Court recently considered these issues in In The Matter of The Estate of Jean Maureen Dahle, Deceased 2021 BCSC 718. The Court considered a dispute regarding the administration of an estate and a trust. In her will, the deceased named two of her six children, Tim and Martin, as co-executors. They were also named as co-trustees of a trust established in the will for the benefit of their brother with developmental disabilities (Nickey).

Tim and Martin both brought applications to have the other removed as executor of the will and trustee of the Nickey trust.

Before judgment (but after submissions), the brothers reached an agreement that a trust company would be appointed as a third trustee of the Nickey Trust, and that a majority of the three trustees will have decision making power. This would break the deadlock between the two brothers.

However, they were unable to reach a similar agreement with respect to administration of the estate. Neither of the brothers had sole decision-making power. They were required to act unanimously.  There was a “significant sense of distrust” between the brothers, which had continued for five years (since the deceased’s death) and had delayed administration of the estate.

Each brother provided a long list of complaints about the other. The Court observed that neither brother had conducted themselves completely appropriately, and they both were critical of the other for behavior that they themselves engaged in.

Much of the animosity between the brothers came from differences of opinion regarding what was in Nickey’s best interests, including living and care arrangements.  Other complaints included dealing with real property without unanimous agreement – dealing with rental monies, handling repairs and maintenance, and entering into tenancy agreements and collecting damage deposits.   There was also a criticism of the “tone” of certain communications. The Court agreed that they were “confrontational”, but did not warrant removal. There were other examples of stubbornness and refusal to communicate property. However, the Court also observed that the brothers were capable of agreeing on matters when required to do so.

The judgment includes a helpful discussion of the law on removal and replacement of executors and trustees. A testator is entitled to choose their executors and trustees. The court should not interfere lightly with this decision. Categories for removal of an executor include (1) endangerment of trust property, (2) want of honesty, (3) want of proper capacity to execute duties, and (4) want of reasonable fidelity. The welfare of the beneficiaries is a key consideration. Unreasonable delay and failure to distribute an estate may be grounds for removal. Executors are not expected to be perfect, and not all acts of misconduct will lead to removal. Animosity among co-executors may be relevant, but will not be determinative. This may be relevant to an ability to carry out their duties effectively and efficiently.

In Dahle, the Court concluded that it was in the best interests of the beneficiaries to add a third party professional trust company as an additional executor of the estate. The Court observed that adding a third trustee, and not removing either of the other two trustees, would respect the deceased’s wish to have her two children involved in decisions relating to admisntration of her estate. This arrangement would also encourage the brothers to act reasonably, failing which the unreasonable brother will be overruled by majority.

Beneficiaries may Demand Early Distribution of Trust Property

The beneficiaries of a trust may be able to compel the trustees to wind up the trust and distribute the assets before the distribution date actually contemplated by the trust.

Many people want to maintain control over their assets and their legacy, even after death. They may have concerns about a child or other beneficiary receiving their bequest immediately or all at once. They may believe the beneficiary is too young to receive their inheritance immediately, or they may have concerns that the beneficiary will spend all of the money inappropriately if they receive it all at once.  There may be concerns about the beneficiary’s lifestyle or mental health.

This control can be maintained through the use of a trust provisions, either as part of a will or as a separate trust. For example, a will may provide that a child’s share of the estate is to be held in trust, with set amounts or percentages of the bequest to be paid out when the child reaches certain ages. A trust may provide that the child’s share cannot be paid out until a given date, but in the meantime the trustee may make distributions in their discretion, or for certain purposes such as education.

The beneficiary may find this frustrating. They may resent that they have to wait until they attain a certain age, or that they have to approach a trustee to request a discretionary distribution from their inheritance. A beneficiary in this position may have a remedy.

If all beneficiaries are of full capacity (i.e. they are independent adults), then they may call for the extinguishment of the trust, notwithstanding the settlor’s expressed wishes. This is referred to as the rule in Saunders v. Vautier.

For example, consider if a settlor established a trust for their child, which provided that the child would not receive the estate until they reached the age of 30. Once the child is an independent adult, they could, under the Rule, demand that the trust be wound up and the assets immediately distributed.

Another example: if a settlor established a trust for their three children, which provided that each child would not receive their share until they reached the age of 30, and if any child did not reach the age of 30 then that child’s share would be divided among the remaining children, then all three children (once they are independent adults), could demand that the trust be wound up and the assets distributed to them.

No court order or approval is technically required when the Rule applies. The beneficiaries may demand that the trustees deliver the trust property, and the trustees must comply. However, in practice most trustees want to ensure that they will not face any liability for winding up the trust early and acting contrary to the express language of the trust, and so they will often seek the direction and approval of the court confirming that they should proceed with the beneficiaries’ request.

The Rule only applies when all of the beneficiaries are adults with capacity. This is often not the case. For example, a trust may be intended to benefit all of the settlor’s grandchildren who have been born by a particular distribution date. If the trust is wound up early, there may be unborn grandchildren who would have benefitted had the trustees waited until the distribution date. Another typical example is a trust to be distributed to a child at some future date, but if the child is not alive on that date then to any children of that child who are alive at that date. There are contingent beneficiaries that may benefit if the trustees wait until the proper distribution date.

In B.C., the Trust and Settlement Variation Act [RSBC 1996] Chapter 463 addresses this situation.   If property is held in trust, the court may approve any arrangement or variation of the trust on behalf of any person having an interest in the trust, whether vested or contingent, who by reason of infancy or other incapacity is incapable of providing consent under the Rule in Saunders v. Vautier. The Act also allows the court to approve an arrangement on behalf of unborn beneficiaries or other persons who may become beneficiaries in the future.

However, the court must not approve an arrangement or variation of the trust on behalf of these classes unless the carrying out of it appears to be for the benefit of that person.

Revisiting one of the examples above: a settlor establishes a trust for their children, which provides that each child will not receive their share until they reached the age of 30, and if any child does not reach the age of 30 then that deceased child’s share would goes to their children (i.e. the settlor’s grandchildren) in equal shares. If the three children want to wind-up the trust before the distribution date (assuming they are all capable adults), they would need the court to approve the wind-up on behalf of their children (born and unborn). The beneficiaries would have to show some reason why the proposed wind-up and distribution would also benefit their children.   This may require creative arguments.

In summary, beneficiaries may not be bound by the timelines for distribution established by the terms of the trust.  They may have remedies to obtain an early distribution.