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A Trustee Is Not Entitled To Use Trust Property For His Own Benefit

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Justice Strathy of the Superior Court of Justice ordered that Mr. Zimmerman repay nearly $500,000 in compensation he took as an attorney for property. The judge also ordered that he personally pay the legal costs of the other side amounting to $284,362.19. What happened?

Let me first introduce you to Robert and Signe McMichael. During their lives they collected Canadian art from artists like Tom Thomson and the Group of Seven members. In 1964 they donated their art collection to the province of Ontario and by 1981 the Collection had grown to include more than 2,000 artworks. This Collection is truly a Canadian national treasure.

In 2001 Robert and Signe McMichael made mirror wills. Both husband and wife left everything to each other. Signe’s will (like her husband’s) said that if her spouse predeceased her, then when she died, Signe’s assets would be donated to the Collection. Mr. McMichael died in 2003 and his assets were inherited by his wife.

After her husband’s death, Mrs. McMichael signed a power of attorney appointing Mr. Zimmerman as her sole attorney for property. In early 2004 Mr. Zimmerman’s lawyers prepared a trust document appointing Mr. Zimmerman as the trustee. Mr. Zimmerman then transferred virtually all of Mrs. McMichael’s assets including the art collection into the trust so that there was virtually nothing left in her estate.

Under this new trust, Mr. Zimmerman had sole and unfettered discretion to decide which art related organization would receive Signe’s assets years after her death. Effectively, the new trust rendered the will meaningless. Instead of inheriting everything immediately after Signe’s death, the Collection would get nothing. If the new trust went unchallenged it was totally up to Mr. Zimmerman to decide whether the Collection would receive any of Signe’s assets.

When Mrs. McMichael died in 2007 her niece and husband, the executors under the will, commenced a legal proceeding. They asked the court to declare that the Power of Attorney and the Trust were void on the ground that Signe lacked capacity. They also wanted Mr. Zimmerman to pass his accounts in a separate proceeding.

The only issue before Justice Strathy was Mr. Zimmerman’s passing of accounts. To pass his accounts Mr. Zimmerman had to show what assets of Signe’s he received and how the money under his control was spent. As an attorney for property it was Mr. Zimmerman’s statutory and common law duty to keep proper accounting records and proof vouchers to demonstrate that the money spent was for the benefit of Mrs. McMichael. This duty is imposed on trustees because it is a basic fundamental principle of trust law that Mr. Zimmerman, as a trustee, was not entitled use the trust property for his own personal benefit. If Mr. Zimmerman did use Signe’s assets for his own personal benefit or if he could not account or explain to the court how he spent the money then he would be liable to return it.

When Mr. Zimmerman tried to pass his accounts the fireworks started.

Whatever accounting that was provided was incomplete. Mr. Zimmerman could not or would not provide proper explanations about how he spent the money. The court found that Mr. Zimmerman breached his fiduciary duties and failed to exercise his powers and duties diligently, with honesty and integrity and in good faith, for the incapable person’s benefit. Mr. Zimmerman did not comply with his obligation to keep proper accounts and was not in a position to prove that he administered the trust prudently and honestly. He did not have the accounts ready and was not able to give full information when required.

Mr. Zimmerman infuriated the court because he failed to respond to appropriate objections to his accounts. The judge drew an adverse inference that by failing to respond properly to the questions raised by the Collection and the estate trustees Mr. Zimmerman was guilty of taking the money for himself and would be required to reimburse the estate for those disbursements and expenses.

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Read the original article.

Charles Wagner

The author of this blog is Charles B. Wagner. Charles is a Certified Specialist in Estates and Trusts and partner at Wagner Sidlofsky LLP.

This Toronto office is a boutique litigation law firm whose practice is focused on estate and commercial litigation.

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