Trustees meant well, but were penalized for failing in their fiduciary duty

Benjamin Cochrane Trust (Re), 2023 ONCA 546, is a Court of Appeal decision that dealt with a passing of accounts by the parent trustees of their minor child. The main problem was that, despite being loving parents, they could not account for a good portion of the money. The Court of Appeal affirmed the trial judgment and the parents’ personal liability to their son.

Background:

 Benjamin Cochrane was 12 years old when he was hit by a car while riding his bicycle. He suffered a serious brain injury and required intensive physical and neurological rehabilitation. Benjamin’s parents brought an accident benefits claim against Co-operators General Insurance on their son’s behalf. The lawsuit settled when Benjamin was 16 years old, in the year 2000, for $475,000. The settlement money was invested in an annuity that would make monthly payments for Benjamin’s benefit for the rest of his life. The Court ordered that the annuity payments be made out to Benjamin’s parents in trust for his benefit.

Trial Decision:

 At trial, it was agreed that the trust received $418,675.25 between September 2000 (when the trust was established) and March 2017. By March 2017, however, when the parents applied to pass their accounts for the first time, there was no money left in the trust.

After a 14-day trial at the Superior Court and reviewing over 2,000 disbursements spanning 17 years, the trial judge found that the parents had failed to perform their duties as trustees. The judge noted that the parents spent a significant amount of time administering the trust and attending to their son. However, this did not excuse the fact that they had misused or misappropriated the trust funds. Even though the judge found they had fabricated evidence, she stated that it was not to conceal wrongdoing, but was due to the fact that they fundamentally misunderstood their obligations.

In particular, the trial judge noted:

• the parents were unable to account for almost 40% of the trust fund or $165,531.14. Ultimately, they were ordered to repay $150,531.14 plus pre-judgment interest of $53,649.64;
• the trustee compensation claimed in the amount of $131,038.42 was excessive in light of how poorly the trust was managed and they were awarded $15,000.00 only in compensation; and
• the parents were not entitled to their legal costs to pass their accounts because they had failed to keep proper records. Instead, they were ordered to pay their son’s legal fees at a partial indemnity level of $90,000.00.

The parents and Benjamin appealed the trial judge’s decision.

At the Court of Appeal:

The Court noted that there was a serious lack of documentation available for review and that the parents had created fictitious loans and falsified receipts and were misleading as to the true nature of the statement of accounts they provided. The trial judge was not only tasked with the impossible job of determining whether the expenses had actually been incurred but whether they were incurred by the parents in their role as trustees. The Court of Appeal found that the trial judge fully understood that the parents’ position was, that they had supplied unpaid services for which they did not seek reimbursement, only if they were not going to be ordered to make any actual repayments to the trust. To this end, they had created fictional “unpaid disbursements” that they intended to use as a mechanism to set off any penalties.

While the appeal was dismissed, the Court provided some clarity about passing of accounts in general, and on the role of trustees:

• If a lengthy and expensive hearing is required because the trustee failed to properly keep accounts, the Court can deny the trustee of compensation and can order the trustee to pay some or all of the costs associated with the passing of accounts personally.
• It would be unfair to require the beneficiary of a trust to cover the trustee’s legal fees to sort out what happened to their money because a trustee did not keep proper records.
• Being loving, supportive parents is not the same as being responsible, prudent trustees.
• Even if a trustee commits a breach of trust, it does not mean that a court must refuse to pass the accounts at large.

Being loving parents is not enough when dealing with a child’s trust fund. A parent/child relationship does not allow the trustee to opt out of the usual trustee obligations of keeping proper records and being able to account for the money.

The importance of knowing what is required to be a trustee before taking on the role cannot be overstated. Keeping proper contemporaneous records is one of the main duties of trustees, but there are many others that any person nominated to act as a trustee, guardian, or attorney should know before accepting a fiduciary role that carries personal financial consequences.

At Dickson Appell LLP we have experienced estates and trusts lawyers who offer sage and thoughtful counsel to trustees, guardians and attorneys for property. Contact us at hello@dicksonappell.com