At Gale Law, we understand the complexities of trust disputes. Whether you need to challenge a trust due to concerns about its validity or management, or you’re a trustee seeking to defend against a challenge, our experienced estate litigation team is here to help.
What is a Trust?
A trust is an obligation binding a trustee to deal with someone else’s property for the benefit of the beneficiaries (or “cestuis que trust”). A trust isn’t a legal entity (thing) – it’s a relationship between the trustee(s) and the beneficiaries. The person who creates the trust is called the settlor. Trusts are advantageous in tax reduction strategies.
Within a trust, there are essentially three parties:
⦁ The Settlor (the person who created the trust)
⦁ The Trustee (the person who will manage/control the property on the behalf of the beneficiary)
⦁ The Beneficiary (the person entitled to be given assets from the trust).
Types of Trusts: Testamentary and Inter Vivos
Testamentary Trust
A testamentary trust is a trust that is established in accordance with the instructions contained in a person’s last will and testament. Testamentary trusts are used to manage and distribute the deceased’s assets to beneficiaries over time, often for purposes like supporting minors, individuals with disabilities, or providing structured inheritance.
Inter Vivos or “Living” Trusts
Inter vivos trusts are those which…..These types of trusts are used mainly for tax planning and passing on wealth. Some examples of popular inter vivos trusts are:
- Alter Ego Trust: the settlor is minimum 65 years old and is the only person entitled to receive all income that comes during their lifetime and only person to use income of the trust. This is a popular choice for tax reduction.
- Joint Partner Trust: Similar to an “alter ego trust” however instead of just the settlor being able to use all income from the trust, their spouse or common-law partner has the right to do this.
- Qualified Disability Trust: This allows a beneficiary living with a disability to receive a yearly allowance and reduce the affect it holds on their taxes
In addition to setting aside testamentary or inter vivos trusts, another estate planning method is to name a beneficiary in life insurance, TFSA, RRSP/RRIF and pensions.
How Can I Challenge a Trust?
Two examples of how an/or why a trust challenge may arise is when a trustee has absolute discretion and when beneficiaries invoke the rule in Saunders v. Vautier. These principles outline key situations in which a trust can be scrutinized or even terminated.
Absolute Discretion
Some trusts are discretionary, meaning that the trustee holds the power to make decisions such as when, how much, and if beneficiaries receive property for the trust. In these types of trusts, the trustees have absolute discretion in that they hold governing power in making those decisions, with only very rare exceptions.
Specifically, an exception would be if a Court were to find the trustee was acting in “bad faith”, meaning that the trustee is not acting along with the purpose for which the trust was initially created.
Examples of when a beneficiary might attempt to challenge a trust are:
⦁ The trustee is ignoring requests by a beneficiary for a payment without giving an explanation;
⦁ The trustee is refusing to give a beneficiary a payment from the trust due a personal prejudice against the beneficiary
⦁ The trustee is using funds from the trust for their own personal use
⦁ Trustee is acting not in line with the purpose of the trust or the settlor’s wishes
Bust the Trust (the Rule in Saunders v. Vautier)
Called “the rule in Saunders v. Vautier” the law allows that if all of beneficiaries of a trust are capable and of adult age, then the beneficiaries may call upon the trustee to terminate the trust and distribute the trust property as they direct.
Frequently Asked Questions
A trust is a legal relationship where one person (the trustee) manages property or assets on behalf of another (the beneficiary). The trust is created by the settlor, who transfers property into it. Unlike a corporation, a trust is not a legal entity—it is a binding obligation. Trusts are commonly used for estate planning, tax efficiency, and ensuring assets are protected and distributed according to the settlor's wishes.
There are three key parties in every trust:
• Settlor – the person who creates the trust and transfers assets into it.
• Trustee – the individual or institution responsible for managing the trust property.
• Beneficiary – the person (or group) who benefits from the trust, either by receiving income, assets, or other benefits.
A testamentary trust is created through a person's will and only takes effect after their death. It is often used to provide long-term financial support for minors, family members with disabilities, or to structure inheritances.
An inter vivos trust, also known as a living trust, is created during a person's lifetime. It can be used for tax planning, wealth transfer, and maintaining control over how assets are used. Examples include Alter Ego Trusts, Joint Partner Trusts, and Qualified Disability Trusts.
These trusts are popular with older adults (65+) who want to simplify estate planning and reduce taxes. An alter ego trust allows the settlor to be the sole income beneficiary during their lifetime. A joint partner trust extends this benefit to both spouses or common-law partners. These trusts can help avoid probate and provide smoother asset transfer to heirs.
A qualified disability trust is designed to provide financial support for a beneficiary with a disability while reducing tax burdens. It allows income to be taxed at graduated rates rather than higher marginal rates, helping preserve more funds for the beneficiary's care and long-term needs.
A trust may be challenged if there are concerns about its validity or how it is managed. Common grounds include:
• The trustee is not fulfilling their duties or acting in bad faith.
• Funds are being misused for personal benefit.
• A trustee refuses to provide distributions without proper reason.
• Beneficiaries believe the trustee is acting against the settlor's intentions.
In some trusts, the trustee has full authority to decide whether beneficiaries receive payments, how much they receive, and when. While trustees generally have wide latitude, courts can intervene if they act in bad faith—for example, ignoring the trust's purpose, showing bias, or misusing funds.
This legal rule allows all beneficiaries of a trust, if they are adults and legally capable, to agree together to terminate the trust. They can then demand that the trustee transfer the trust property directly to them, even if the trust terms state otherwise.
A trustee has a fiduciary duty to act honestly, responsibly, and always in the best interests of the beneficiaries. This includes managing trust property carefully, avoiding conflicts of interest, following the settlor's instructions, and keeping accurate records. Failure to meet these duties can result in legal action.
Yes. Trust disputes can be highly complex, involving detailed rules of equity and estate law. A lawyer experienced in estate litigation can help evaluate the strength of your case, protect your rights, and represent you in court or negotiations. Whether you are a beneficiary concerned about trustee conduct, or a trustee defending your actions, legal advice is strongly recommended.
Let’s Talk Law
We simplify legal talk so you don’t have to Google it. Tips, trends, and thought pieces straight from our attorneys to help you stay ahead.
