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Death or Incapacity of a Trustee: Planning Ahead Doesn’t Solve Everything

While it will likely never be the subject of a hit play like “Death of a Salesman”, the death or incapacity of a trustee can have serious practical and financial implications for a trust, and by extension, the beneficiaries of the trust. All too often, the practical and legal requirements for the transfer of assets from a deceased trustee to a successor trustee do not result in a seamless transfer (please note that the requirements for executors are different and are not addressed in this blog).

The The role of trustee is necessary because a trust separates legal ownership, or the title to assets, from beneficial ownership, or the right to benefit from the assets. A trustee acts as the legal owner of the trust’s assets and manages them for the benefit of the beneficiaries of the trust.

To ensure continuity of management and succession of the trusteeship, it is prudent to name successor trustees who will manage the trust should the original trustee(s) be unable to do so and to provide a mechanism for replacement of trustees under the terms of the trust. When the original trustee can no longer act for whatever reason, his or her named successor can manage the trust and take over as legal owner of the trust’s assets. However, there may be certain requirements to be completed in order for the trustee to replace the previous trustee(s) on title to assets.

If a successor or further successor is not named, the Trustee Act (Ontario) has two provisions which may assist. Until the appointment of a new trustee, the personal representative (such as an executor or attorney for property) of a sole or last surviving trustee may act in his or her place and manage the trust. Further, unless otherwise stated in the trust terms, a sole or last surviving trustee may by his or her Will appoint a replacement for him or herself to act after his or her death.

As noted above, there may be certain requirements for a successor trustee to arrange for his or her name to be on title to assets. These requirements can lead to practical problems despite prudent planning and careful drafting. For example, if a trustee becomes incapable, it may be difficult for the successor trustee to prove it to a financial institution to gain access to the trust’s financial accounts. The successor trustee may not be able to obtain a capacity assessment or other documentation to provide this proof. A trustee may have diminished capacity, which leaves the trust management in limbo should the trustee be unwilling to resign, and gives the successor trustee few options to move the trust management to him or herself.

Real estate can also present a significant problem for a successor trustee. Currently, if a sole trustee of a trust dies and real property is an asset of the trust, under the Ontario Land Titles rules, only the deceased trustee’s executor, who is a complete stranger to the trust, and not the successor trustee named in the trust, can deal with any real property in the deceased trustee’s name. Transferring title to the successor trustee may prove extremely difficult, as the deceased’s trustee’s executor may be uncooperative or probate of the deceased trustee’s Will may be necessary for the executor to be able to transfer title.

For example, assume Mr. Smith is the sole trustee of a trust which holds a cottage property located in Ontario. Mr. Smith dies, and the trust names his daughter from a prior marriage, Ms. Jones, as his successor trustee. Mr. Smith’s executor, his current spouse Mrs. Smith, does not want to probate his Will as she does not need to do so to administer his estate assets and would incur significant Ontario Estate Administration Tax (probate fees) if she does so. Ms. Jones cannot require Mrs. Smith to probate Mr. Smith’s Will, and may have to seek a court order, at significant expense to the trust, to transfer the cottage to herself as successor trustee.

What can be done to avoid or mitigate these problems? The Ontario Bar Association has a small working group, of which I am a member, which is attempting to find a legislative fix for the problem of transferring title to real property to successor trustees, but this is a long-term project with uncertain chances of success and relates only to real property.

Unfortunately, these types of issues are often not considered of significant public interest and therefore do not rise high on the legislative agenda as a result. In the meantime, experienced counsel can guide around these pitfalls in many situations.

— O’Sullivan Estate Lawyers

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.