Re Richards, 2022 ONCA 216
1. Introduction
The decision of the Ontario Court of Appeal gives reasons for concern. There are two aspects to it: (1) the interpretation of the trust in question; and (2) the dictum in paragraph 13 of the reasons to the effect that the provision of the trust would offend the public policy underlying the Bankruptcy and Insolvency Act.[1] Moreover, the court did not consider whether the trust created a protective trust.
2. Facts and Decisions
Michael Richards’s father created a Trust of a house in Toronto. The trustees had to hold the property in trust for Michael’s parents for life, with the intent that they could live in the house. Clause 5.2.2 of the trust provided that when the last of the parents died, the trustee was to distribute the trust fund (including the property and any chattels) to Michael if he was then alive. The father died in 2010 and the mother in 2020. However, the trustees sold the house before the mother’s death, and they held the proceeds in trust.
Michael was an undischarged bankrupt. He owed a large sum of money to Royal Bank of Canada (‘RBC’), and it filed a bankruptcy application against Michael in 2019. In 2020 RBC took an assignment of the rights of the Trustee in Bankruptcy. It moved to recover the sale proceeds up to the amount owed by Michael and argued that the proceeds constituted property of the bankrupt.
Michael pleaded clause 4.2 of the Trust. It provides:
Any right of a Beneficiary to receive any income or capital of the Trust Fund as a result of a mandatory direction to the Trustees to make such a distribution, including, for greater certainty, a mandatory entitlement of a Beneficiary to the exclusive use, occupation and enjoyment of the Real Property and the Chattels . . . . shall be enforceable only until such Beneficiary shall become bankrupt . . . whereupon and so long as the effect or operation thereof shall continue, the Beneficiary’s Interest shall cease until the cause of the Beneficiary’s Interest becoming vested in or belonging to or being payable to a person other than such Beneficiary shall have ceased to exist . . . and then the Beneficiary’s Interest shall again be allocated to such Beneficiary as aforesaid unless and until a like or similar event shall happen whereupon the Beneficiary’s Interest of such Beneficiary shall again cease and so on from time to time.
Michael argued that his interest in the property could not vest in the Trustee in Bankruptcy since he had no rights to the property under clause 4.2 until he was discharged from bankruptcy. Until then his rights were suspended. And only on his discharge would the property vest in him under clause 5.2.2.
The bankruptcy judge disagreed. She held that the mandatory distribution provision in clause 5.2.2 overrode clause 4.2. In particular, she held that Part IV of the Trust, which contained clause 4.2, applied during the lives of the parents, whereas Part V, which contained clause 5.2.2, applied after they died. Thus, she held that the property constituted property of the appellant and therefore the proceeds of sale vested in the Trustee in Bankruptcy.
The Court of Appeal agreed with the bankruptcy judge.
This conclusion may well be correct, but it is impossible to determine that because the reasons do not reproduce enough of the Trust to confirm that conclusion. And the reasons of the bankruptcy judge do not seem to be available. I shall therefore have to proceed on the assumption that the decisions of the bankruptcy judge and the Court of Appeal are correct on this issue.
3. Dictum
But that does not end the matter. The Court of Appeal’s reasons contain the following dictum:
13 We would also observe that, if the interpretation of the Trust is as contended by the appellant, it would offend the public policy that underlies the BIA by allowing persons to place assets out of the reach of their creditors. As Rowe J. said in Chandos Construction Ltd. v Deloitte Restructuring Inc,[2] “the anti-deprivation rule renders void contractual provisions that, upon insolvency, remove value that would otherwise have been available to an insolvent person’s creditors from their reach.”
But with the greatest respect, the Chandos case is not authority for the point the court is making. It was a contract case (as is clear from the quotation) and in a contract situation the anti-deprivation rule applies. However, Richards was not a contract case but a unilateral act by a settlor and different considerations apply in that case, as I shall now explain.
4. Protective Trust
It is of course quite true that you cannot settle property upon yourself until bankruptcy. Such a disposition is regarded as a fraud on your creditors.[3] And that rule dates back to early statutes that avoided fraudulent conveyances. The issue arose in Re Knechtel Furniture Ltd.[4] The company established a pension plan for its employees under a trust agreement. Both the company and the employees contributed to the plan. The plan provided that on dissolution of the plan any surplus was to be paid to the company, but that if the company was then bankrupt the surplus should be used to increase the benefits of the employees. The company made an assignment in bankruptcy and the court held that insofar as the surplus consisted of contributions made by the company that provision was void as against the trustee in bankruptcy.
What happened in Chandos was different but nonetheless similar. A general contractor entered into a contract with a subcontractor under which it would pay 10 percent of the contract price to the general contractor if the subcontractor filed an assignment into bankruptcy, which it did. The general contractor sought to offset the amount it owed the subcontractor against the fee the subcontractor owed to it under the contract. That would eliminate the debt and give the general contractor a provable claim in the bankruptcy. However, the court held that this was contrary to public policy because it would place value out of the reach of the subcontractor’s creditors.
But the matter is different if the owner of property leaves the income and capital in trust for someone else, such as a child, until the child’s bankruptcy. That constitutes a protective trust. And the common law has long recognized the validity of the protective trust device.
The protective trust is based on the distinction in the doctrine of estates between conveyances upon determinable limitation and upon conditions subsequent. The latter seek to convey an absolute interest that is cut short by a condition subsequent, whereas the former conveys a qualified estate that is or may be shorter in duration than the full estate. Estates upon condition subsequent contain words of condition, whereas estates upon determinable limitation contain words of duration. A condition that cuts an absolute interest short will be held void as a restraint on alienation, whereas a determinable limitation is valid. An old case, Brandon v Robinson,[5] illustrates the difference. A father left part of his estate to his son Thomas for life, but on condition subsequent that if he made an assignment in bankruptcy his interest would end. On Thomas’s death the capital was to be paid to his statutory next of kin. Thomas became bankrupt and Lord Eldon held that the condition was void and that the assignee in bankruptcy was entitled to the future income. However, in dictum his Lordship noted the father could have achieved his purpose if he had made Thomas’ interest determinable upon bankruptcy. In Rochford v Hackman[6] the Vice Chancellor applied that dictum in a situation in which the testator gave a life interest to his son determinable upon his bankruptcy, which was valid. Thus, it is clear from these cases that while a provision for termination of an interest on alienation or bankruptcy by way of a determinable interest is valid, a provision that seeks to prevent a beneficiary from alienating the interest, whether voluntarily or involuntarily as in bankruptcy, by way of a condition subsequent is void as a restraint on alienation.
These rules also apply to personal property. Further, the testator or settlor can provide that on the happening of the determining event the property shall be paid or transferred to others.
Thus, a protective trust is one in which a testator or settlor gives a life interest to one person (the primary beneficiary) with a gift over to others once a determining event has occurred. Indeed, it often happens that the settlor or testator provides that once the determining event occurs the trustees will hold the property upon a discretionary trust in favour of a class of beneficiaries that may include the primary beneficiary.
Of course a settlor or testator can achieve a similar result simply by creating a discretionary trust under which the trustees have a discretion to pay or not to pay money to a wastrel. Alternatively, the trustees can be given a mere power to pay the wastrel
Protective trusts were very common in England and so the legislators enacted a statutory form of the protective trust in the Trustee Act 1925.[7] Jurisdictions in the Antipodes followed suit.[8] In those jurisdictions it is not necessary to spell out the protective trust in detail in the trust. Instead, the statutory form can be included simply by giving the beneficial interest to a named person ‘upon protective trusts’.
There is no similar legislation in Canada, so here we need to spell out the protective trust in detail, which can certainly be done. Re Williams[9] is an older Ontario case in which the Court of Appeal gave effect to a protective trust in a will. The court did not refer to it in Re Richards. The testator left the residue of her estate to pay the income to her daughter Helen for life, subject to the following provisions:
THIRD: I hereby direct and declare that in the case of my said daughter Helen Madeline Peck, the said income payable to her shall be paid to her as aforesaid unless or until she shall become bankrupt or shall assign, charge or encumber the said income or do or suffer something whereby the said income or some part thereof would through her act or default or by operation or process of law if belonging to her absolutely become vested in or become payable to some other person or persons, or in the event that my Trustees in their sole discretion are of the opinion that my said daughter is reckless or improvident in the use of the said income, and upon the occurring of any such event and so long as the effect and operation thereof shall continue and so long as my said Trustees shall deem advisable, her right to receive such income shall cease and the said income shall be no longer payable to her and so until the cause of the said income ceasing to be payable to her shall have ceased to exist or to be effectual or operate and then her right to receive such income shall revive and the said income shall thereafter be payable to her as aforesaid unless or until the like event or any such event as aforesaid shall happen again whereby the said income, or some part thereof, would, if belonging absolutely to her, become vested in or payable to some other person or persons or my said daughter is making improvident use of such income whereupon her right to receive it shall again cease and it shall no longer be payable to her until the cause for the said income ceasing to be payable to her shall have ceased to exist or to be effectual or operate in the manner or to the like effect as above mentioned and then her right to receive the said income shall immediately revive and the said income shall be payable to her as aforesaid and so from time to time if and whenever any of such events shall occur and the effect and operation thereof continue or discontinue as aforesaid. If any such event occurs above mentioned in consequence of it the said income shall not be payable to my said daughter then so long as the right of my said daughter to receive it shall have ceased and be not existing the Trustees herein may in their uncontrolled absolute discretion:
(1) expend such part of the said income, if any, as they shall deem advisable in the maintenance of my said daughter, or
(2) pay the said income or any part thereof to any person or persons for and on behalf of my said daughter for her maintenance or general welfare on such terms and conditions as my Trustees may have power to prescribe, or
(3) retain the said income or any part thereof and add it to the capital of the trust fund or
(4) pay and dispose of the said income in partially one manner and partially the other or others.
The will then went on to leave the capital to two charities on Helen’s death.
Thus this was a typical protective trust that is very similar to the provisions of clause 4.2 in the Richards Trust. Laidlaw JA, who delivered the judgment of the court in Re Williams said at paragraphs 13 and 14:
[The testator] thought that a bequest of money to her daughter might not be used with care and prudence. She wanted to guard against waste and dissipation of any of her money in the hands of her daughter, but, at the same time, wanted her daughter to have the enjoyment of it in a proper way during her lifetime. She intended that there should be a supervision and control exercisable at any and all times as to the manner of spending the money to be provided in her will for her daughter. It was logical and reasonable that the responsibility for seeing to the proper use of that money should be placed upon the trustees of her estate. Therefore, her plan and intention was to give her trustees power to deprive her daughter of the income if, in their opinion, it was being used by her in a reckless and improvident manner. The vesting of such a power in trustees of an estate is not unusual. It may be found in reported cases, and nowhere, so far as I know, has such a provision been rejected by the Courts. In In re Coe’s Trusts[10] it was the testator’s wish that his son should have the whole benefit of certain moneys if he should conduct himself “steadily and to the satisfaction of his trustees”. It was held that this was in effect a trust for the son with the power to the trustees to deprive him of the fund if he should not conduct himself steadily and to their satisfaction. Vice-Chancellor Sir W. Page Wood, says:[11]
The trustees had clearly a discretionary power of depriving the son of the principal moneys in question . . . .
14 In Re Fox[12] it appears that the following provision in a will was in question: “If at any time during the period of five years after my death it appears to my executors . . . that my said son . . . does not remain sober, I give them power to sell and dispose of the said property . . . .” That provision was held to be valid.
Laidlaw JA went on to say:[13]
The words of Boyd C. in Re Fox,[14] are most pertinent in this case. He said:
It would be unfortunate if the Court was obliged to interpose difficulties in giving effect to the intentions of testators so obviously framed for the well-being, and well-doing, of the objects of their bounty, and especially so when these objects are their own children.
Indeed, this has been the approach to protective trusts in England and elsewhere from the outset and they have never been regarded as contrary to public policy.
It is true that in Williams the court focused on the power given to the trustees and held it valid. It did not hold expressly that a protective trust is valid. But it is clear that the court understood that it is valid. And this is understandable, for such trusts have been used for many years and their validity have never been questioned. It is understandable why this is so. The courts have recognized that parents want to limit the gift to a child in some cases and they are entitled to do in accordance with the freedom of testation principle. Moreover, the creditors of such a child cannot complain since the child received a limited interest, subject to termination, rather than an absolute interest.
In my opinion it follows that if clause 4.2 in the Richards Trust had not been held to be overridden by clause 5.2.2, clause 4.2 would have constituted a valid protective trust
It is true that, in its Report on the Law of Trusts, the Ontario Law Reform Commission concluded that the protective trust was not used much in Ontario.[15] For that reason it declined to recommend a protective trust provision in a revised Trustee Act. Indeed, it took the view that just as the law invalidates a restraint on the alienability of a legal fee simple, it should also invalidate a restraint on alienation ‘imposed upon a life estate or other limited interest, where the restraint is introduced by way of limitation, or determinable interest [as in the protective trust]’. The Commission did not recommend the abolition of the protective trust. But it did take the view that creditors of the principal beneficiary should be able to apply to the court for payment of their claims.[16] However, that recommendation has never been enacted. Indeed, the Report itself was never implemented
5. Spendthrift Trust
The protective trust must be distinguished from the comparable American device of the spendthrift trust. Under this device a trust that provides that a beneficiary may not alienate her interest is generally valid. In American law such a provision is regarded as a material purpose of the trust and courts will not invalidate such a purpose. Hence, the spendthrift trust is not restricted to the determinable life interest of a beneficiary under a protective trust but has a broader reach. The spendthrift trust is recognized in most American states either by case law or by statute, but its terms vary across the country. In some cases it is regarded as absolute, whereas in others creditors are sometimes allowed to reach the property.[17]
—
[1] RSC 1985, c B-3.
[2] 2020 SCC 25, 449 DLR 4th 293, para. 31.
[3] Re Burroughs-Fowler, [1916] 2 Ch 251.
[4] (1985), 20 ETR 217 (Ont SC).
[5] (1811), 18 Ves Jun 429, 34 ER 379.
[6] *1852), 9 Hare 475, 68 ER 597.
[7] C 19, s 33(1).
[8] See, e.g., Trustee Act 1925 (ACT), s 45; Trustee Act 1925 (NSW), s 45, Trustee Act 1973 (Qld). s. 64; Trustee Act 1898 (Tas), s 30; Trustee Act 1958 (Vic), s 39; Trustee Act 1962 (WA), s 61; Trustee Act 1961 (NZ), s 42.
[9] 1946 CarswellOnt 84, [1947] OR 11 (CA).
[10] (1858), 4 K & J 199, 70 ER 83.
[11] Ibid., at p 203.
[12] (1885), 8 O.R. 489.
[13] Re Williams, paragraph 15.
[14] Re Fox, supra, p 492.
[15] Ontario Law Reform Commission, Report on the Law of Trusts (Toronto: Ministry of the Attorney General, 1984).
[16] Ibid, Volume 2, pp 362ff.
[17] See generally AW Scott, WF Fratcher, and ML Ascher, Scott and Ascher on Trusts 5th ed (New York: Aspen Publishers, 2006ff) §§15.2ff.
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Written by: Albert Oosterhoff
Posted on: December 30, 2022
Categories: Commentary, WEL Newsletter
Re Richards, 2022 ONCA 216
1. Introduction
The decision of the Ontario Court of Appeal gives reasons for concern. There are two aspects to it: (1) the interpretation of the trust in question; and (2) the dictum in paragraph 13 of the reasons to the effect that the provision of the trust would offend the public policy underlying the Bankruptcy and Insolvency Act.[1] Moreover, the court did not consider whether the trust created a protective trust.
2. Facts and Decisions
Michael Richards’s father created a Trust of a house in Toronto. The trustees had to hold the property in trust for Michael’s parents for life, with the intent that they could live in the house. Clause 5.2.2 of the trust provided that when the last of the parents died, the trustee was to distribute the trust fund (including the property and any chattels) to Michael if he was then alive. The father died in 2010 and the mother in 2020. However, the trustees sold the house before the mother’s death, and they held the proceeds in trust.
Michael was an undischarged bankrupt. He owed a large sum of money to Royal Bank of Canada (‘RBC’), and it filed a bankruptcy application against Michael in 2019. In 2020 RBC took an assignment of the rights of the Trustee in Bankruptcy. It moved to recover the sale proceeds up to the amount owed by Michael and argued that the proceeds constituted property of the bankrupt.
Michael pleaded clause 4.2 of the Trust. It provides:
Any right of a Beneficiary to receive any income or capital of the Trust Fund as a result of a mandatory direction to the Trustees to make such a distribution, including, for greater certainty, a mandatory entitlement of a Beneficiary to the exclusive use, occupation and enjoyment of the Real Property and the Chattels . . . . shall be enforceable only until such Beneficiary shall become bankrupt . . . whereupon and so long as the effect or operation thereof shall continue, the Beneficiary’s Interest shall cease until the cause of the Beneficiary’s Interest becoming vested in or belonging to or being payable to a person other than such Beneficiary shall have ceased to exist . . . and then the Beneficiary’s Interest shall again be allocated to such Beneficiary as aforesaid unless and until a like or similar event shall happen whereupon the Beneficiary’s Interest of such Beneficiary shall again cease and so on from time to time.
Michael argued that his interest in the property could not vest in the Trustee in Bankruptcy since he had no rights to the property under clause 4.2 until he was discharged from bankruptcy. Until then his rights were suspended. And only on his discharge would the property vest in him under clause 5.2.2.
The bankruptcy judge disagreed. She held that the mandatory distribution provision in clause 5.2.2 overrode clause 4.2. In particular, she held that Part IV of the Trust, which contained clause 4.2, applied during the lives of the parents, whereas Part V, which contained clause 5.2.2, applied after they died. Thus, she held that the property constituted property of the appellant and therefore the proceeds of sale vested in the Trustee in Bankruptcy.
The Court of Appeal agreed with the bankruptcy judge.
This conclusion may well be correct, but it is impossible to determine that because the reasons do not reproduce enough of the Trust to confirm that conclusion. And the reasons of the bankruptcy judge do not seem to be available. I shall therefore have to proceed on the assumption that the decisions of the bankruptcy judge and the Court of Appeal are correct on this issue.
3. Dictum
But that does not end the matter. The Court of Appeal’s reasons contain the following dictum:
13 We would also observe that, if the interpretation of the Trust is as contended by the appellant, it would offend the public policy that underlies the BIA by allowing persons to place assets out of the reach of their creditors. As Rowe J. said in Chandos Construction Ltd. v Deloitte Restructuring Inc,[2] “the anti-deprivation rule renders void contractual provisions that, upon insolvency, remove value that would otherwise have been available to an insolvent person’s creditors from their reach.”
But with the greatest respect, the Chandos case is not authority for the point the court is making. It was a contract case (as is clear from the quotation) and in a contract situation the anti-deprivation rule applies. However, Richards was not a contract case but a unilateral act by a settlor and different considerations apply in that case, as I shall now explain.
4. Protective Trust
It is of course quite true that you cannot settle property upon yourself until bankruptcy. Such a disposition is regarded as a fraud on your creditors.[3] And that rule dates back to early statutes that avoided fraudulent conveyances. The issue arose in Re Knechtel Furniture Ltd.[4] The company established a pension plan for its employees under a trust agreement. Both the company and the employees contributed to the plan. The plan provided that on dissolution of the plan any surplus was to be paid to the company, but that if the company was then bankrupt the surplus should be used to increase the benefits of the employees. The company made an assignment in bankruptcy and the court held that insofar as the surplus consisted of contributions made by the company that provision was void as against the trustee in bankruptcy.
What happened in Chandos was different but nonetheless similar. A general contractor entered into a contract with a subcontractor under which it would pay 10 percent of the contract price to the general contractor if the subcontractor filed an assignment into bankruptcy, which it did. The general contractor sought to offset the amount it owed the subcontractor against the fee the subcontractor owed to it under the contract. That would eliminate the debt and give the general contractor a provable claim in the bankruptcy. However, the court held that this was contrary to public policy because it would place value out of the reach of the subcontractor’s creditors.
But the matter is different if the owner of property leaves the income and capital in trust for someone else, such as a child, until the child’s bankruptcy. That constitutes a protective trust. And the common law has long recognized the validity of the protective trust device.
The protective trust is based on the distinction in the doctrine of estates between conveyances upon determinable limitation and upon conditions subsequent. The latter seek to convey an absolute interest that is cut short by a condition subsequent, whereas the former conveys a qualified estate that is or may be shorter in duration than the full estate. Estates upon condition subsequent contain words of condition, whereas estates upon determinable limitation contain words of duration. A condition that cuts an absolute interest short will be held void as a restraint on alienation, whereas a determinable limitation is valid. An old case, Brandon v Robinson,[5] illustrates the difference. A father left part of his estate to his son Thomas for life, but on condition subsequent that if he made an assignment in bankruptcy his interest would end. On Thomas’s death the capital was to be paid to his statutory next of kin. Thomas became bankrupt and Lord Eldon held that the condition was void and that the assignee in bankruptcy was entitled to the future income. However, in dictum his Lordship noted the father could have achieved his purpose if he had made Thomas’ interest determinable upon bankruptcy. In Rochford v Hackman[6] the Vice Chancellor applied that dictum in a situation in which the testator gave a life interest to his son determinable upon his bankruptcy, which was valid. Thus, it is clear from these cases that while a provision for termination of an interest on alienation or bankruptcy by way of a determinable interest is valid, a provision that seeks to prevent a beneficiary from alienating the interest, whether voluntarily or involuntarily as in bankruptcy, by way of a condition subsequent is void as a restraint on alienation.
These rules also apply to personal property. Further, the testator or settlor can provide that on the happening of the determining event the property shall be paid or transferred to others.
Thus, a protective trust is one in which a testator or settlor gives a life interest to one person (the primary beneficiary) with a gift over to others once a determining event has occurred. Indeed, it often happens that the settlor or testator provides that once the determining event occurs the trustees will hold the property upon a discretionary trust in favour of a class of beneficiaries that may include the primary beneficiary.
Of course a settlor or testator can achieve a similar result simply by creating a discretionary trust under which the trustees have a discretion to pay or not to pay money to a wastrel. Alternatively, the trustees can be given a mere power to pay the wastrel
Protective trusts were very common in England and so the legislators enacted a statutory form of the protective trust in the Trustee Act 1925.[7] Jurisdictions in the Antipodes followed suit.[8] In those jurisdictions it is not necessary to spell out the protective trust in detail in the trust. Instead, the statutory form can be included simply by giving the beneficial interest to a named person ‘upon protective trusts’.
There is no similar legislation in Canada, so here we need to spell out the protective trust in detail, which can certainly be done. Re Williams[9] is an older Ontario case in which the Court of Appeal gave effect to a protective trust in a will. The court did not refer to it in Re Richards. The testator left the residue of her estate to pay the income to her daughter Helen for life, subject to the following provisions:
THIRD: I hereby direct and declare that in the case of my said daughter Helen Madeline Peck, the said income payable to her shall be paid to her as aforesaid unless or until she shall become bankrupt or shall assign, charge or encumber the said income or do or suffer something whereby the said income or some part thereof would through her act or default or by operation or process of law if belonging to her absolutely become vested in or become payable to some other person or persons, or in the event that my Trustees in their sole discretion are of the opinion that my said daughter is reckless or improvident in the use of the said income, and upon the occurring of any such event and so long as the effect and operation thereof shall continue and so long as my said Trustees shall deem advisable, her right to receive such income shall cease and the said income shall be no longer payable to her and so until the cause of the said income ceasing to be payable to her shall have ceased to exist or to be effectual or operate and then her right to receive such income shall revive and the said income shall thereafter be payable to her as aforesaid unless or until the like event or any such event as aforesaid shall happen again whereby the said income, or some part thereof, would, if belonging absolutely to her, become vested in or payable to some other person or persons or my said daughter is making improvident use of such income whereupon her right to receive it shall again cease and it shall no longer be payable to her until the cause for the said income ceasing to be payable to her shall have ceased to exist or to be effectual or operate in the manner or to the like effect as above mentioned and then her right to receive the said income shall immediately revive and the said income shall be payable to her as aforesaid and so from time to time if and whenever any of such events shall occur and the effect and operation thereof continue or discontinue as aforesaid. If any such event occurs above mentioned in consequence of it the said income shall not be payable to my said daughter then so long as the right of my said daughter to receive it shall have ceased and be not existing the Trustees herein may in their uncontrolled absolute discretion:
(1) expend such part of the said income, if any, as they shall deem advisable in the maintenance of my said daughter, or
(2) pay the said income or any part thereof to any person or persons for and on behalf of my said daughter for her maintenance or general welfare on such terms and conditions as my Trustees may have power to prescribe, or
(3) retain the said income or any part thereof and add it to the capital of the trust fund or
(4) pay and dispose of the said income in partially one manner and partially the other or others.
The will then went on to leave the capital to two charities on Helen’s death.
Thus this was a typical protective trust that is very similar to the provisions of clause 4.2 in the Richards Trust. Laidlaw JA, who delivered the judgment of the court in Re Williams said at paragraphs 13 and 14:
[The testator] thought that a bequest of money to her daughter might not be used with care and prudence. She wanted to guard against waste and dissipation of any of her money in the hands of her daughter, but, at the same time, wanted her daughter to have the enjoyment of it in a proper way during her lifetime. She intended that there should be a supervision and control exercisable at any and all times as to the manner of spending the money to be provided in her will for her daughter. It was logical and reasonable that the responsibility for seeing to the proper use of that money should be placed upon the trustees of her estate. Therefore, her plan and intention was to give her trustees power to deprive her daughter of the income if, in their opinion, it was being used by her in a reckless and improvident manner. The vesting of such a power in trustees of an estate is not unusual. It may be found in reported cases, and nowhere, so far as I know, has such a provision been rejected by the Courts. In In re Coe’s Trusts[10] it was the testator’s wish that his son should have the whole benefit of certain moneys if he should conduct himself “steadily and to the satisfaction of his trustees”. It was held that this was in effect a trust for the son with the power to the trustees to deprive him of the fund if he should not conduct himself steadily and to their satisfaction. Vice-Chancellor Sir W. Page Wood, says:[11]
The trustees had clearly a discretionary power of depriving the son of the principal moneys in question . . . .
14 In Re Fox[12] it appears that the following provision in a will was in question: “If at any time during the period of five years after my death it appears to my executors . . . that my said son . . . does not remain sober, I give them power to sell and dispose of the said property . . . .” That provision was held to be valid.
Laidlaw JA went on to say:[13]
The words of Boyd C. in Re Fox,[14] are most pertinent in this case. He said:
It would be unfortunate if the Court was obliged to interpose difficulties in giving effect to the intentions of testators so obviously framed for the well-being, and well-doing, of the objects of their bounty, and especially so when these objects are their own children.
Indeed, this has been the approach to protective trusts in England and elsewhere from the outset and they have never been regarded as contrary to public policy.
It is true that in Williams the court focused on the power given to the trustees and held it valid. It did not hold expressly that a protective trust is valid. But it is clear that the court understood that it is valid. And this is understandable, for such trusts have been used for many years and their validity have never been questioned. It is understandable why this is so. The courts have recognized that parents want to limit the gift to a child in some cases and they are entitled to do in accordance with the freedom of testation principle. Moreover, the creditors of such a child cannot complain since the child received a limited interest, subject to termination, rather than an absolute interest.
In my opinion it follows that if clause 4.2 in the Richards Trust had not been held to be overridden by clause 5.2.2, clause 4.2 would have constituted a valid protective trust
It is true that, in its Report on the Law of Trusts, the Ontario Law Reform Commission concluded that the protective trust was not used much in Ontario.[15] For that reason it declined to recommend a protective trust provision in a revised Trustee Act. Indeed, it took the view that just as the law invalidates a restraint on the alienability of a legal fee simple, it should also invalidate a restraint on alienation ‘imposed upon a life estate or other limited interest, where the restraint is introduced by way of limitation, or determinable interest [as in the protective trust]’. The Commission did not recommend the abolition of the protective trust. But it did take the view that creditors of the principal beneficiary should be able to apply to the court for payment of their claims.[16] However, that recommendation has never been enacted. Indeed, the Report itself was never implemented
5. Spendthrift Trust
The protective trust must be distinguished from the comparable American device of the spendthrift trust. Under this device a trust that provides that a beneficiary may not alienate her interest is generally valid. In American law such a provision is regarded as a material purpose of the trust and courts will not invalidate such a purpose. Hence, the spendthrift trust is not restricted to the determinable life interest of a beneficiary under a protective trust but has a broader reach. The spendthrift trust is recognized in most American states either by case law or by statute, but its terms vary across the country. In some cases it is regarded as absolute, whereas in others creditors are sometimes allowed to reach the property.[17]
—
[1] RSC 1985, c B-3.
[2] 2020 SCC 25, 449 DLR 4th 293, para. 31.
[3] Re Burroughs-Fowler, [1916] 2 Ch 251.
[4] (1985), 20 ETR 217 (Ont SC).
[5] (1811), 18 Ves Jun 429, 34 ER 379.
[6] *1852), 9 Hare 475, 68 ER 597.
[7] C 19, s 33(1).
[8] See, e.g., Trustee Act 1925 (ACT), s 45; Trustee Act 1925 (NSW), s 45, Trustee Act 1973 (Qld). s. 64; Trustee Act 1898 (Tas), s 30; Trustee Act 1958 (Vic), s 39; Trustee Act 1962 (WA), s 61; Trustee Act 1961 (NZ), s 42.
[9] 1946 CarswellOnt 84, [1947] OR 11 (CA).
[10] (1858), 4 K & J 199, 70 ER 83.
[11] Ibid., at p 203.
[12] (1885), 8 O.R. 489.
[13] Re Williams, paragraph 15.
[14] Re Fox, supra, p 492.
[15] Ontario Law Reform Commission, Report on the Law of Trusts (Toronto: Ministry of the Attorney General, 1984).
[16] Ibid, Volume 2, pp 362ff.
[17] See generally AW Scott, WF Fratcher, and ML Ascher, Scott and Ascher on Trusts 5th ed (New York: Aspen Publishers, 2006ff) §§15.2ff.
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