How to handle a request to encroach on capital

Sometimes a will stipulates that estate assets are to be put into a trust and given to beneficiaries only under certain circumstances or when they reach a certain age.

But what should an executor do if a beneficiary wants access to trust capital before the will says they’re entitled to it?

Lynne Butler, lawyer and owner of Butler Wills and Estates Consulting Services in St. John’s, N.L., says such requests can sometimes defeat the trust’s purpose, reducing the income generated for other beneficiaries and potentially leading to more requests that further drain the trust.

For this reason, Butler says it’s common for wills to have some kind of encroachment clause that provides guidance to executors. If there’s no encroachment clause, the executor is under no obligation to grant requests. “Discretion is only there if it’s given by the will,” she says.

However, even when encroachment clauses exist, the guidelines aren’t always clear. In such cases, executors can follow the even-hand rule: the legal principle that all beneficiaries of an estate or trust should be treated equally.

A typical example is with a so-called blended family, in which a principal residence is left to a spouse for use during their lifetime, after which it passes to the deceased’s children from a previous marriage. What happens if the children want assets from the sale of the residence immediately? Or if the spouse needs capital to pay for living expenses such as a home nurse or long-term care?

Butler says executors need to consider whether the trust’s purpose is to preserve property for the kids or to ensure a good lifestyle for the current beneficiary.

“Sometimes it’s really hard to tell. And when you can’t tell, the executor has to treat beneficiaries equally,” she says.

Executors also need to consider the will’s intent. “Sometimes you can tell from the way the will is written,” Butler says. “Ideally, you shouldn’t have to read between the lines, though. It should be there. But it isn’t always.”

To avoid such conflicts, Butler suggests including specific instructions to prioritize the needs of either the current beneficiary (in this case, the spouse), or the “remaindermen” (those who will eventually receive the asset — in this case, the children).

Jonathan Hooper, associate at Cox & Palmer in Halifax, says the executor’s judgment should be based on whether there’s a “compelling reason” to encroach on trust capital. “It has to be shown why an encroachment is at least consistent with what the testator wanted,” he says.

If a trust was established to provide for healthcare needs but a beneficiary wanted to access trust capital to buy a house, for example, Hooper says that would be “quite far apart.” But if the trust was established to provide for someone’s ongoing quality of life, the purchase of a larger or more accessible house may well be consistent with the will’s overall intention.

Hooper says it’s a good idea for an executor to obtain consent for an encroachment from the beneficiaries who may be affected by it.

“Provided other beneficiaries consent to it, I don’t see a problem,” he says. But if they object, the situation may become more complicated for the executor.

In such cases, beneficiaries could ask the court to overrule the executor and issue an order to distribute estate capital directly. Beneficiaries could also ask the court to vary the terms or scope of a trust. Such variances are not broadly granted, he says — there usually has to be agreement by a majority of beneficiaries for the court to even consider one — and laws governing them are different from province to province. But it does happen.

To avoid such problems, executors can turn to the court for guidance. This can cause delays in distributions and will incur legal fees. An application that’s unopposed generally starts at around $5,000, Hooper says; one that is opposed costs at least $10,000. That cost is typically borne by the estate (the person opposing pays their own legal fees).

Still, Hooper believes the clarity is worth it.

To encroach or not to encroach: how to decide

Look for the encroachment clause: Does the will give the executor discretion over encroachments? If not, the executor is under no obligation to allow them.

Understand the intentions: A close reading of the will can often provide clues about when an encroachment would be consistent with the intentions of the testator.

Remember the even-hand rule: If encroaching upon capital would privilege one beneficiary over another, that could violate the even-hand rule.

Consider seeking consent: In some cases, asking other beneficiaries to allow an encroachment may prevent accusations of uneven treatment.

Ask the court: Executors can ask the court for guidance on an encroachment. However, the decision may take several weeks or even months.