Assessing Trustee Liability

The Ontario Superior Court case, Hicks v. Hicks, 2003 CanLii 2132 (ON S.C.), presents some interesting issues regarding trustee liability in situations where a trust incurs a loss. Anne Marie Hicks is the widow of Charles Hicks. Charles left an estate valued at approximately $15 million. He left a $9 million spousal trust and a $3 million health expense trust for Anne Marie's day-to-day living and medical expenses.

Anne Marie depleted the spousal trust by $1.8 million, mainly by building various properties. The assets in both trusts were invested in high-technology stocks, which suffered when the market crashed and depleted the spousal and health expense trusts to $650,000 and $520,000 respectively. Anne Marie was 55 and she had a Grade 11 education. She had spent the previous years working at Charles's car and truck rental business.

Although this case does not directly deal with trustee liability resulting from trust losses, it does raise some interesting issues about trustee liability regarding investing and managing trust property.

Prudent investor rule The Trustee Act of Ontario sets out guidelines that a trustee must adhere to when managing and investing trust assets. Previously, the Trustee Act contained what was commonly referred to as the "legal list," which was a list of authorized investments including GICs and government bonds. The rationale behind the authorized investments was that these investments would result in preservation of capital and generate a moderate return. However, on July 1, 1999, the Act was modified significantly and a new standard, known as the Prudent Investor standard, replaced the legal list.

The Prudent Investor Rule states, "In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments."

But interestingly enough, the Trustee Act does not provide a definition for the term "prudent investor." However, it requires a trustee consider the following when investing trust property: general economic conditions; possible effect of inflation or deflation; expected tax consequences of investment decisions or strategies; role that each investment or course of action plays within the overall trust portfolio; expected total return from income and the appreciation of capital; needs for liquidity, regularity of income and preservation or appreciation of capital; and an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

Diversification of trust property The Trustee Act also indicates that a trustee must "diversify the investment of trust property to an extent that is appropriate to: (a) the requirements of the trust; and (b) general economic and investment market conditions."

In assessing trustee liability in Hicks, one of the issues to be determined would be why the trust assets were invested in high-technology stocks and not diversified. The court would certainly consider the economic and investment market conditions of investing in high-technology stocks at the time. Interestingly, Justice Blenus Wright, who presided over Hicks writes:

"I do not believe that Anne Marie should be faulted for the depletion of the spousal trust due to the market crash. Many people were caught in the trap of uncertainty whether or not to sell their technology stocks, believing that the market would stabilize and eventually work its way back up, and never dreaming that the market would crash so far in such a short time. A lot of people like Anne Marie lost a lot of money."

Justice Wright's comments suggest that the court may not have found a trustee in similar circumstances liable for the loss to the trusts. However, the court would likely pay close attention to criterion six.

Given that the trusts were established for Anne Marie's day-to-day living needs and healthcare expenses, the need for regularity of income, and the preservation of the capital would be very high. A court would certainly consider the risk of not selling the stocks given the market instability, and the potential resulting harm to Anne Marie, as a beneficiary of the trust.

To avoid liability, the trustee would have to show that the decision not to diversify the trust property was based on a reasonable assessment of the risk, and that a prudent investor in similar circumstances would have acted in a similar manner.

Reliance on investment advice The Trustee Act also states that a trustee may obtain and rely on investment advice regarding trust property without incurring liability, where there is a loss to the trust, if a prudent investor would have relied on that advice, in similar circumstances.

In Hicks, it appears that Anne Marie may herself have been the trustee of the trusts. If there were other beneficiaries of the trust, she may have been liable to them for the loss. Given her educational background and work experience, it is possible that she would not have had the financial expertise and know-how to make sound decisions about investing the trust property. The importance of consulting with financial advisors in making decisions about investing trust property can be crucial, especially for the financially unsophisticated trustee.

Clearly, the role of a financial advisor in guiding an inexperienced or unknowledgeable trustee managing a trust with significant assets is crucial. The Trustee Act permits a trustee to seek and rely on investment advice.

In a situation such as occurred in Hicks, to avoid trustee liability, an experienced and knowledgeable advisor should be selected, and any investment plan should be carefully considered, documented, and monitored.

A financial advisor in this role should ensure that any investment plan has been well thought out, giving consideration to the purpose of the trust and the beneficiary needs.

The Trustee Act does permit a trustee to delegate investment decisions to an investment manager, and liability could follow for the investment manager if there was a breach of duty.

The Trustee Act now authorizes trustees to invest in a broad range of investments because the prudent investor standard has replaced the legal list. To better avoid liability for losses incurred by a trust, the inexperienced trustee should seek out the services of an experienced financial advisor and/or investment manager. Together, they must be proactive in establishing, documenting, and monitoring the investment plan, so as to demonstrate that a prudent investor in similar circumstances would undertake a similar course of action.

Akua Carmichael is an independent estate lawyer and can be reached at acarmichael@carmichael-law.com

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Akua Carmichael

Tax & Estate

Akua Carmichael, LL.B, J.D., TEP, is director, tax and estate planning services, with Empire Life. Akua.Carmichael@empire.ca