Can You Trust that Transfer?

The Court of Queen’s Bench of Alberta (ABQB) has brought new clarity to variation of trusts and trust-to-trust transfers under section 42 of the Trustee Act, RSA 2000, c T-8 [Trustee Act].

In the unusually named case of Twinn v Trustee Act, 2022 ABQB 107, the ABQB was asked to decide what the effect of a prior order of the court was. The prior order found a transfer of all assets from one trust to another by the trustees was retroactively approved. The order did not say whether only the legal title transferred or whether the beneficial interest of the original beneficiaries also transferred. This was a problem since the class of beneficiaries under the original trust was different from the class of beneficiaries under the new trust. To complicate matters, the state of the law was unclear as to when resettlement of trusts via trust-to-trust transfers was allowable.

In examining the caselaw from other provinces and the United Kingdom, the ABQB found a trust-to-trust transfer was only allowed “in very narrow circumstances”. To be permissible, the transfer must be:

• Within the discretionary powers of the trustees as conferred by the trust instrument,
• Consistent with the fiduciary obligations of the trustees, and
• For the benefit of the beneficiaries.

Additionally, the resettlement of a trust is necessarily a variation or revocation of that trust as contemplated by the Trustee Act. A variation or revocation requires court approval unless the trust instrument reserves the power of the trustee to do so. The Trustee Act has no consequences for not seeking court approval for variation or revocation of a trust other than to say it is prohibited. The ABQB interpreted the Legislature’s intention in creating this provision and found the effect of not seeking required approval was to invoke the common law doctrine of illegality.

In this case, the original trustees did not seek court approval to vary or revoke the original trust. They were aware of the need to obtain approval, as they had done so once before, and were aware of the terms of the original trust’s provisions. Therefore, the doctrine of illegality had the effect of voiding the transfer.

The prior court order had already approved the transfer, however. To reconcile the approval of the transfer with the voiding of the transfer, the ABQB found the order had the effect of merely recognizing the status quo. A transfer of title had occurred, but this did not eliminate the beneficial interest the original beneficiaries had to the original trust’s assets. Therefore, the new trustees merely held the original assets for the benefit of the original beneficiaries. The new trustees held the remaining assets of the new trust, if any, for the benefit of the new beneficiaries.