Trusts and Trustees 101

Professor Albert H. Oosterhoff holds a BA and a JD from Western University, and an LLM from the University of Toronto. He was called to the Ontario bar in 1966 and practiced in London with Shepherd, McKenzie, Plaxton, Little & Jenkins until 1968. He taught at the Faculty of Law, University of Windsor from 1969 until 1972, when he joined the Faculty of Law at Western University. At Western, he held the positions of Associate Dean (Academic), Associate Dean (Administration), and Acting Dean. He was awarded the title “Professor Emeritus” on his retirement in 2005. From 2005 to 2013 he served as an Adjunct Professor at the Faculty of Law, University of Toronto, where he taught about Trusts.

Albert’s research and teaching interests are in Wills and Estates, Trusts, and Property. He has written numerous articles, comments, blogs, and books in those areas, regularly presents papers in Continuing Professional Development programs, and has written several reports and studies for the Ontario Law Reform Commission and the Uniform Law Conference of Canada. He was an Associate Editor of the Dominion Law Reports and Canadian Criminal Cases from 1973 to 2007, and Associate Editor of the Ontario Reports from 1973-1981 and 1983-1990. He also served as Editor-in-Chief of the Estates and Trusts Journal.

His texts include Anger and Honsberger, Law of Real Property, 2nd ed. (with W.B. Rayner) (Canada Law Book, 1985); Oosterhoff on Wills, 9th ed. (with C. David Freedman, Mitchell McInnes, and Adam Parachin) (Thomson Reuters, 2021); and Oosterhoff on Trusts, 9th ed. (with Robert Chambers and Mitchell McInnes) (Thomson Reuters, 2019). Albert’s texts and articles are cited regularly by all levels of the Canadian courts and the Trusts and Wills texts are widely used in Canadian Law Schools.

Albert is counsel to WEL Partners and provides opinions to lawyers and law firms on issues in estates, wills, trusts, and aspects of property law.

In 2019 the Ontario Bar Association presented Albert with a Distinguished Service Award, and the Award for Excellence in Trusts and Estates Law; and the Society of Trust and Estate Practitioners (STEP) named him an honorary member.

In 2021 the Canadian Bar Association presented Albert with the Ramon John Hnatyshyn Award for Law.

In 2022 the Law Society of Ontario awarded the Law Society Medal to Albert for his contributions to the law over many years.

Best Lawyers in Canada (2020-22) included him in the category of Trusts and Estates, and the Canadian Lexpert Directory included him in 2022.

Cindy Radu

Welcome to the Tamarind Learning Podcast. I'm your host, Cindy Radu, Chief Learning Officer for Tamarind Learning Canada. Tamarind Learning is an online wealth education platform that develops practical foundational learning programs for beneficiaries and their advisors to help them prepare for the responsible stewardship of wealth. As part of the Tamarind Learning Platform, I have the privilege to speak with experts on topics relevant to families of wealth and family offices. It's my pleasure today to introduce Professor Albert Oosterhoff as our guest. Albert is a leading authority in Canada on all things related to trusts. He has written and been a major contributor to several textbooks, including Oosterhoff on Trust, which is now in its 9th edition. Albert is the Editor in Chief for the Estates and Trust Journal, and his texts and articles are cited regularly by all levels of Canadian courts. They are also used in law schools and are a go to source for lawyers in Canada. Albert was a law professor, dean and adjunct professor from 1969 to 2013 at various universities in Canada and at the University of Toronto. He was awarded the title Professor Emeritus. In addition to this distinguished title, Albert has also been presented with a Distinguished Service Award and the Award for Excellence in Trust and Estates by the Ontario Bar Association, as well as the Ramon John Natasha Award for Law by the Canadian Bar Association.

Cindy Radu

He's an honorary member of the Society of Trust and Estate Practitioners, has been awarded the Law Society Medal for his contributions to the law over many years by the Law Society of Ontario. He's on the Best Lawyers in Canada list in the category of Trust and estates, as well as the Canadian Expert Directory. So clearly we have probably the best person in Canada to have a conversation, Albert, with our listeners today about trusts and welcome and thank you for being here.

Albert Oosterhoff

Well, thank you very much for the very kind introductions, but yes, let's get on with the questions.

Cindy Radu

I think Albert, the trusts in my experience is a topic that I find both for sure, family members, but also advisors, including many lawyers, often struggle with. So maybe a good place for us to start is if you can help us understand what a trust actually is. In simple terms, get into maybe some different types of trusts as well.

Albert Oosterhoff

Of course, the first point I'd like to make here is that a trust is a relationship. It's created by one person who appoints another person as trustee and then directs that trustee to manage property for one or more other persons whom we call beneficiaries. Now it's a relationship that's created by and between three parties, but to understand how that happens, we have to talk a bit about the kinds of trust that can be created. And there are two kinds. There are the inter vivos trust and the testamentary trust. Well, the second, I think, is pretty straightforward. It means that it's a trust that a testator has put into his will, and it takes effect only when the testator dies, not before. But the end of inter vivos trust may require a bit of explanation because the Latin term may be confusing. It simply means that a person wants to create a trust that will come into effect when it's created, so it becomes effective during the life of the person who creates it. And by the way, we call that person a settlor because the person settles property on trustee for the benefit of the beneficiaries.

Albert Oosterhoff

Now, although there are only two kinds of trust, the listeners have probably heard people talking about all kinds of other trusts, such as a family trust, a charitable trust, a discretionary trust, a marriage settlement, and any number of others. But all of these simply describe what the purpose of the trust is. All of them really are either an inter vivos trust or a testamentary trust.

Cindy Radu

That's really helpful. Albert, when you say, describe the purpose of the trust, can you just give us a little bit more clarity on what you mean by that?

Albert Oosterhoff

Yes. When a person creates a trust, whether testamentary or inter vivos, the testator or the settlor will include in that trust directions to the trustee and will say, I'm putting this property in this trust and you're to hold this property for the benefit of various beneficiaries who are named, of course, by the settlor or by the testator. And then the testator can go on and say, it's my intention that this be used solely for the benefit of my family, current family and future generations. Or it may be that the testator will say, I've got lots of money and some of it will go to the family, but I want to create a trust that will use the money for the benefit of charities, whether education or any number of other charitable purposes and so on.

Cindy Radu

Wonderful. So a trust can have multiple purposes embedded in it, as I think what I'm hearing you say. But there also could be a trust that has, let's just say, a standalone single purpose, like a trust that is set up exclusively for charity.

Albert Oosterhoff

Yes, that's correct.

Cindy Radu

Tell us a bit more about the nature of the trust because it's a little bit different than we think of a company or a partnership, which is a legal entity that exists under statute. So tell us more about the trust and how they come together and what it looks like from a legal perspective.

Albert Oosterhoff

Yes, so I mentioned that the testator or the settlor creates the relationship, but the real relationship thereafter is between the trustee and the beneficiaries. And it is, of course, a relationship with reference to property but it's a relationship that may be foreign to the listeners. That's because as you've already indicated Cindy, a trust is not a legal entity. A legal entity is an individual or is a corporation. But most other devices that we're familiar with, such as partnerships and estates and so on, are not legal entities. The legal entity in the case of a trust is the trustee. So for example, when a trustee deals with creditors of the trust, the creditors can look for payment only to the trustee. They can't sue the trust, but they can, if necessary, sue the trustee if they're not paid. But of course the trustee can recover any legitimate expenses from the trust property.

Cindy Radu

Is that something that needs to be written into the trust document itself to be able to recover those expenses or is that just a given?

Albert Oosterhoff

It's a very good question Cindy. It's really a common law principle that I'm speaking about here. In other words, the law says that if the expenses that the trustee incurred are legitimate and are reasonable emphasis they are unreasonable, then they can be paid out of the trust property.

Cindy Radu

Okay, tell us a bit more about this trustee relationship and even like how do they get titled a property or do they hold title? Because if a trust isn't a thing then we think about real estate... For example, if I buy a house, my name's on land titles. How does that work in the case of a trust?

Albert Oosterhoff

Again, very good question. When the trust is created, the trustee is given title to the trust property. It might be real property, it might be personal property, investments, all kinds of property. They can all be property of the trust. But of course the trustee has to hold that property for the exclusive benefit of the beneficiaries. And that's because the trustee is a fiduciary. And what I mean by that is he is someone on whom the law imposes the burden of absolute fidelity to the trust. So he holds the title but he holds it solely for the beneficiaries. And so he may not enter into a conflict of interest. So for example, he may not purchase property from or sell property to the trust because that would be a breach of his fiduciary duty. Neither can he use confidential information that he learned as trustee for his own benefit. And obviously he can't appropriate trust property for his own use. In other words, he is not allowed to take advantage of any opportunities. He must use the knowledge he gains solely for the benefit of the trust, for the benefit of the beneficiaries. And finally, I should probably add this too that the trustee is accountable to the beneficiaries.

Albert Oosterhoff

There is provision in statute and in the rules that trustees have to account on a regular basis. That is to say they have to in effect open up their accounts to the court and the court will then pass the accounts or say, no, something missing here and you've got to give an explanation.

Cindy Radu

I don't want to go down too much of a rabbit trail here, but this fiduciary concept is really, I think, important. And one thing that of course happens quite often, Albert, is that the trustee is also a beneficiary. So can you just comment on what you've just talked about in terms of their fiduciary role where they're also a beneficiary?

Albert Oosterhoff

This happens very much, very often in a family trust where the trustee may be, shall we say, the older daughter and the family and she's appointed trustee. But there are three other children in that family who are just beneficiaries. Now the trustee then, is both a fiduciary and a beneficiary. She's entitled to the property along with her siblings, but she has to be very careful that she exercises her powers for the benefit of all three of them. In other words, she can't take advantage for her own benefit.

Cindy Radu

Okay, thanks. Well, we'll come back, I think we'll talk about powers a bit later. But let's kind of carry on with this. Some of the principles right at the beginning when we start setting up a trust or creating a trust. And again, this is one of these things that in my experience, I find this notion of creating or settling a trust can feel like a lot of smoke and mirrors for people. It's like gold coins and these massive legal documents. So I'm just going to ask you to sort of demystify this process of how a trust gets created.

Albert Oosterhoff

Sure. As I've indicated, the trust is created when the settlor or the testator declares that she is appointing a trustee to manage property for the benefit of the beneficiaries. Well, it's not difficult to create a trust, but you have to satisfy a few requirements. The first is what we call the three certainties. Those are certainty of intention, certainty of subject matter, which means property, and certainty of objects. That's the beneficiaries. So certainty of intention means that the settlor directs the trustee to do certain things, such as, for example, you must hold the trust property for the benefit of A, B and C. Now, if instead she uses language of wish or desire, there is no certainty of intention. For example, if she says, It's my wish that you hold the property for A, B and C, or I hope you will leave some money to my old elementary school teacher, there's no trust. The second requirement is the certainty of subject matter. And that means that you have to describe the property with sufficient particularity so that it can be identified. So if you say, I settle $100,000 into the trust, that's certain. But if you say, I give some of my property to the trust, it's not because you can't figure out what some of the property means.

Albert Oosterhoff

And lastly, certainty of objects. It means that you must identify the beneficiaries clearly. So the trust for my three children equally is certain, but a trust for all the people in Canada probably would not be. And then there are two other things you have to do to create a valid trust. First, you must constitute the trust. That simply means that you must transfer title to the property, to the trustee. The important thing to note here is the property has to be in existence. For example, you can't settle future properties such as a house that you expect to inherit when your parents die. It's not yet property, it won't be until they die. And in any event they may change their mind and not give it to you at all. And then one final point here is to create a valid trust you need to observe certain formalities. Now it's easy to create a trust of personal property because you can do that orally. It's not advisable, it's much better to put it in writing. But a trust of real property has to be in writing. And so of course, in the case of a testamentary trust of real or personal property, that will be in writing because the will is a document that is in writing.

Albert Oosterhoff

But if it's an inter vivos trust and if it's with respect to real property, it must be in writing.

Cindy Radu

So Albert, I'm wondering, some of the listeners might not be clear what you mean when you say real property versus personal property. So those are kind of legal terms that maybe would be helpful to clarify a little bit.

Albert Oosterhoff

Yes, of course, and I apologize for not explaining that earlier. Real property simply means land and I think it's as simple as that.

Cindy Radu

Okay.

Albert Oosterhoff

Personal property is everything else. It can be cash, it can be investments, it can be money in bank accounts or anything of that sort. Anything other than land.

Cindy Radu

Perfect. That's very helpful. And one other thing that comes up again in my experience is this what do you settle the trust with? Could it be a spoon? Does it have to be a gold coin or silver wafer? And often people use cash, which isn't my favorite approach, but it certainly is commonly done. So just can you tell us a little bit more about that property that needs to be conveyed to the trustees or given to the trustees to establish the trust? Because I think that's a really critical point for people to understand.

Albert Oosterhoff

Yes it is. In the really old days in England, you could settle a trust or create a contract by handing over a peppercorn. And so in the document you could say I, A, give B, the trustee a peppercorn and that would constitute trust. And you can still well, you don't use a peppercorn today, but you could still constitute a trust by transferring $10 or a gold coin to the trustee. And that would constitute the trust. But the important thing to know here is that you can then, provided you make provision for this in the document, you can add further property to the trust at a later stage, so it's not restricted to that gold coin or to the $10 that you've initially put in that simply so that the trust is now in effect.

Cindy Radu

Right. And so it's important in my understanding, and please help clarify if I'm incorrect, but that we keep track of where that property is. That initial settlement property.

Albert Oosterhoff

That's correct. Yes.

Cindy Radu

Okay. So often that's kept in a safe. Or maybe with the lawyer's office that helped you create the trust, but you don't want to lose track of it. Whatever it was,

Albert Oosterhoff

That's right. And remember that it's now the title of the trustee. So the trustee has to keep track of it.

Cindy Radu

The trustee sounds like they have lots of things that they have to do. And we talk about as lawyers, we talk about the distinction between powers and duties, but really this idea of things that the trustees have to do versus what they can do. And I think that's another really interesting distinction that I'd love to get your thoughts and comments on.

Albert Oosterhoff

It is, in fact, a very important distinction. Cindy now, in the context of trust, there are two sources of duties that the trustee is required to carry out. The first are duties imposed by law. And the main one there, of course, is that she must hold the property for the benefit of the beneficiaries and in due course, pay it out to the beneficiaries. But the settlor or the testator may impose additional duties on the trustee. For example, the settler may restrict the trustee and say that he may invest only in certain kinds of securities. Now, if we're talking about what we as lawyers call a fixed trust, that's a trust that says, pay the property equally to my children. It's a fixed trust because you know exactly how many beneficiaries they are and how much each is to get. Well, then the trustee has a duty to distribute the money in equal amounts to the children when each reaches the age of majority. But sometimes a settlor may create a discretionary trust. For example, she says, I direct my trustees to pay the income from the property to my husband until he dies, and then to distribute the capital in such amounts and to such of my children as my trustees, in their absolute discretion, shall decide.

Albert Oosterhoff

So that's a discretionary trust. And in this case, the trustees have a duty to distribute the capital but they also have a power to distribute it among the children and to determine the amounts. So we can draw a distinction between a trust which imposes a duty and a power which does not. But there are two kinds of power. The first is a power that must be exercised as in the previous example, the settlor over there said, you must distribute the capital among my children, but you have a choice as to who gets what. But suppose that that example went on to say, and if my trustees failed to distribute the capital to my children within two years of my death, then interest equally for my children. Now you've got a power that does not have to be exercised because the property will automatically be paid equally to the children if the trustee fails to exercise the power that was given to him.

Cindy Radu

It's really critical, Albert, when people are talking to lawyers and drafting trust to think this through, because those are really important distinctions between a power and a duty.

Albert Oosterhoff

Yes, they are indeed. And that is you're quite right. This is something that lawyers who draft the document have to be very aware of and also should explain what they're doing. And of course what they're doing is on the instructions of the settlor or the testator.

Cindy Radu

I've been in scenarios where a beneficiary, typically a son or daughter finds out that their parents or the trustees have used their capital gains exemption. That because of some property that was in the trust that was sold shares of a private company. So this comes as a surprise to them because they didn't even know that they were a beneficiary of a trust. So how or when do trustees or tell beneficiaries that they are beneficiaries of a trust? Like, is that a duty? Is that a power? Is there some overarching legal requirements with regard to that?

Albert Oosterhoff

Very good question, Cindy. Trustees do indeed have a duty to disclose the existence of the trust to the beneficiaries. Now, this is clearly the case for beneficiaries who are first in line, such as in the example I gave earlier that's my husband and then my three children. But it also applies to more remote beneficiaries. For example, if the trust is in favor of my children equally, but if any of them predeceased me, then that person's share shall be held in trust for his issue that survive him. And on failure of issue, that share shall be paid equally to my other children. Now then, you see, the primary beneficiaries are the children, but their issue also have a contingent interest. They may never receive the property if all of the children survive the testator, but they can possibly inherit if one of them predeceases it. So they are beneficiaries even though they're not first in line. And therefore the trustee has to tell them too that there is this trust and that they have a potential interest under it. It's a contingent interest, we call it. It means a potential interest. Right. They may or may not receive it ultimately.

Cindy Radu

Sorry, Albert, I just want to clarify the meaning of the word issue because again, that's a term that we use as lawyers, but it can be confusing to lay people.

Albert Oosterhoff

Yes, I'm glad you called me out on that because we do that sort of thing all the time. The term issue means another term used for it instead is descendants. So the issue or descendants of a person are all those who descended from her. So it will be their children, their grandchildren, great grandchildren and so on. So that's what issue means.

Cindy Radu

Okay, thank you.

Albert Oosterhoff

Yeah.

Cindy Radu

And is there anything we need to disclose or we don't need to disclose or give trustees some discretion or guidance around this topic?

Albert Oosterhoff

Yes, indeed. There was a case that was decided by the Supreme Court of Canada in 2018. So a very recent case in which the trustee failed to let one of the potential beneficiaries know that there was a trust and that it had a benefit under it. And the court said in that case that a trustee is obligated to take the steps that an honest, prudent, and reasonably skillful trustee would take to notify potential beneficiaries of the existence of the trust and their potential interest under it. So it's very clear that the courts said at the highest level, this is an obligation that trustees have. And by the way, there is similar case law that says that executors have a similar duty to let beneficiaries under will or beneficiaries when the testator dies without a will. They must let all of those beneficiaries know too, of their right to inherit under the intestacy or under the will. So it's a clear duty that trustees and executors have.

Cindy Radu

That's helpful. But it now leads me to another question, Albert. What does happen if a trustee does something wrong? Because it sounds like they've got a lot of responsibility and many trustees are lay people that don't really understand all this stuff. So what happens if something goes, they do something that somebody disagrees with or there's a loss in the trust, or whatever else could go wrong?

Albert Oosterhoff

I'm going to split the answer into two parts, actually, Cindy, if I may.

  Cindy Radu

Sure.

Albert Oosterhoff

Because there are two possible situations in which you may need to remove the trustee. The first is where there's not necessarily a breach of duty. The trustees, in other words, have not necessarily done anything wrong. And here are a couple of examples of that. The trustee and the beneficiaries may be hopelessly at odds with each other so that the trust can no longer function properly. Second example, the trustees are hopelessly at odds between themselves and in a deadlock so that the trust can no longer function. So there's nothing wrong necessarily done by the trustees, but the trust can no longer work. So that's one situation. The other situation is where the trustee did something wrong. So this would be if the trustee has misappropriated assets from the trust or where the trustee has failed to administer the trust, basically has sat back and done nothing. Or of course, if the trustee is in a conflict of interest. So these are all situations in which the trustee perhaps ought to be removed and of course beneficiaries can make an application to the court to say this trustee is not working, is not doing the right job, has made all kinds of errors and so we need to have him removed.

Cindy Radu

So the court is pretty open to removing trustees or is that something that is done well here?

Albert Oosterhoff

It's a good question. The courts are actually loath to remove a trustee because the settlor or testator chose him and presumably trusted him, but also because it affects the trustee's reputation and so minor unintentional infractions will not be sufficient for removal. But the court will remove a trustee if the wrongs are serious. The main criterion that the courts look at when the issue is should we remove a trustee is the welfare of the beneficiaries. So if the continued presence in office of the trustees will be seriously detrimental to the beneficiaries, then the court will remove him. The main thing that the courts will look at is what's best for the beneficiaries.

Cindy Radu

Excellent. Albert, we could probably talk for another hour but I think our time is pretty close to end and I would just ask you if you have any closing thoughts or final takeaways that you'd like to share with our listeners today.

  Albert Oosterhoff

Yes, I do. Cindy. This is really a comment about the relationship between the trustee and the beneficiary. A good relationship between these two happens if both sides are of goodwill and the trustee keeps the beneficiaries informed of what's happening in the trust. She should also tell them that she is legally entitled to compensation for the work that she does and she should tell them what that normally amounts to and what she's entitled to take from the trust for that purpose. She should also tell them about expenses that are going to be incurred, especially if there are significant expenses. And incidentally, on that point, she might want to bring an application to the court for permission, for example, to bring a significant proceeding that would be for the benefit of the trust. But if the trust doesn't have a lot of assets in it, the court may say sorry, don't take that expense on. And finally, the trustee should give the beneficiaries, especially the major ones, opportunity to contact her for information and about the status of the trust. Really what she needs to do is to account the trustees, attorney, beneficiaries on an annual basis.

Albert Oosterhoff

This way I think you have and keep a good relationship with the beneficiaries. And the old saying that you catch more flies with honey than with vinegar also applies here too. If you keep the beneficiaries happy, then the trust is likely to work and the trustee can do her job as the settlor or the testator intended.

Cindy Radu

Albert I love that we've ended on really the concept of communication between trustees and beneficiaries. And I just want to thank you so much for sharing all your wisdom with us today. It's been a great learning experience for me and I'm sure for everybody who listens to the podcast. Thank you very much.

Albert Oosterhoff

It's a great pleasure, Cindy.