CITATION: Klatt v Klatt., 2015 ONSC 216
COURT FILE NO.: CV-14-1153
DATE: April 2, 2015
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
DAVID KLATT
Joseph P. Hamon, for the Applicant
Applicant
- and -
VICTOR KLATT, IN HIS CAPACITY AS ESTATE TRUSTEE OF THE ESTATE OF CARL J.H. KLATT
M. Peter Sammon, for the Respondent
Respondent
HEARD: January 7, 2015
REASONS FOR DECISION
James J.
Introduction
[1] The applicant, David Klatt, applies for:
a) the termination of a testamentary trust created by the terms of his grandfather’s will;
b) a declaration that the respondent as estate trustee is in a position of conflict of interest and ought to be removed as estate trustee;
c) an order directing the passing of accounts including a proper accounting for timber cutting and selling;
d) a declaration that the applicant has the right to enter upon and use the estate property;
e) directions setting out the steps to be taken and a timetable for the litigation.
[2] The respondent has brought a motion within the application for:
a) a determination if the applicant has legal standing to seek the relief he has requested;
b) for an order restraining the applicant from entering upon or interfering in any way with the estate property; and,
c) such directions as may be necessary.
Facts
[3] The issues raised by the application and the motion arise from the last will and testament of Carl Klatt made on May 13, 1994.
[4] Carl Klatt had several children including Lorne (father of the applicant) and the respondent Victor Klatt, Lorne’s brother. Lorne died in April 2009 following a long illness including dementia which commenced approximately in January 2003. In his will, Carl Klatt transferred the farm property to Victor and Lorne as tenants in common in trust until the second of them dies “for the use of my surviving children for recreational purposes… such trust to terminate with the death of the second of the said Lorne and Victor” (sometimes hereinafter referred to as the “trust”).
[5] There are siblings of Victor and Lorne who remain alive but there is an absence of information about them, such as where they reside, their present state of health and whether they continue to use the property.
[6] After providing for certain expenditures, Carl Klatt designated the rest and residue of his estate to be a trust fund in the name of his executors to be used for the upkeep of the farm, buildings and payment of taxes.
[7] The testator died in April 1995. Victor and Lorne were appointed as estate trustees.
[8] Both Victor and Lorne signed the application for issuance of a certificate of appointment of estate trustees. In it they declared that the personal property of the estate had a total value of $41,348.21 and the real estate had a value of $175,000.
[9] When Lorne died, he left a will which was not probated. In that will he gave all his property to his wife Ines.
[10] Ines made a will at the same time as her husband Lorne. Ines died in 2009, several months after the death of her husband. Her will, also unprobated, included a gift to her son David (the applicant), “of the one-half interest in lot 23 and part lot 24, concession 8 in the Township of Raglan (the farm property) which half interest my husband inherited from his late father.”
Issues
[11] The issues raised by the parties are as follows:
a. Does the applicant have a “financial interest” within the meaning of rule 74.15 and legal standing so as to require the respondent, his uncle Victor Klatt, to account for his administration of the trust fund created in Carl Klatt’s will and to question the respondent’s management of the property?
b. Does the applicant have the right to enter upon and use the farm property?
c. Should the trust be terminated at this time?
[12] The position of the applicant is as follows:
a. The reference in Carl Klatt’s will to “his children” being able to use the farm property includes grandchildren (the applicant being one such grandchild);
b. Victor Klatt has made improper disbursements from the trust fund that was created by Carl Klatt to pay expenses related to the farm property;
c. Victor Klatt ought to be removed as estate trustee;
d. As trustee of the farm property trust, Victor Klatt has an obligation to account to the applicant and the applicant has sufficient financial interest to require an accounting;
e. The applicant is entitled to use and enjoy the farm property;
f. The trust ought to be terminated now and the property divided so that the applicant can gain control of half of the property inheritable through his father.
Analysis and Discussion
a) The Trust Fund
[13] The relevant portions of the will that deal with the trust fund are set out in paragraphs 3(d) and 4 as follows:
(d) All the rest and residue of my estate, including cash on hand and monies on deposit (after payment of the amounts referred to in clauses (a) and (b) of this paragraph 3 of this my Will) including any funds on deposit in any bank accounts to be set up as a trust fund in the name of my Executors with the income and any necessary principal of same used for the upkeep of the farm, buildings and the taxes.
- …..I ALSO AUTHORIZE VICTOR KLATT AND LORNE KLATT as Trustees of the farm property to cut timber on the said lands and to be paid their normal expenses for cutting and removing such timber with the net profit from such sales to be added to the trust fund. In the management of the said farm, I specify and direct that such trust shall continue so long as any one of LORNE KLATT and VICTOR KLATT, the Trustees, is alive and upon the death of the second of them to die, the trust shall cease and the balance, if any, in the trust fund shall be divided one-half equally among those of the children of LORNE KLATT, who are living at the date, and one-half equally divided among the children of VICTOR KLATT, who are living at that date…
[14] The applicant says he has sufficient “financial interest” to require Victor Klatt to account for what the applicant says are financial discrepancies and mismanagement respecting the use and operation of the trust fund.
[15] In addition, the applicant says that timber has been cut from the farm property but not been accounted for despite the provision in Carl Klatt’s will that the net income from timber was to be added to the trust fund.
[16] The respondent says that he should not be required to provide the accounting requested by the applicant because the amount involved is not substantial, the costs of retaining a qualified person to prepare an accounting would be excessive in relation to the amount of the trust fund and that in any event he doesn’t think the applicant will ever be satisfied with the information that may be provided through an accounting or passing of accounts.
[17] The respondent also contends that neither the siblings of Lorne and Victor, the beneficiaries for whom the farm property was placed in trust, nor the children of Lorne and Victor, except for the applicant, has complained about the handling of the trust fund.
[18] It appears that there has been partial financial disclosure to the applicant but it does not appear that he has been provided with a complete picture of monies in and out of the trust fund.
[19] I share the concern that the costs of preparing an accounting and addressing the applicant’s complaints may be disproportionately large in relation to the value of any discrepancies, bearing in mind that the applicant is only one of the contingent beneficiaries of the trust fund. I should add that the record before me does not disclose exactly how many contingent beneficiaries there currently are but I infer that the applicant is not the only person who is in line to get a share of the trust fund when it is distributed. There is a risk that the entitlements of other beneficiaries may be negatively affected if the fund is eroded by legal or accounting costs in circumstances where the allegations are ultimately unproven or any discrepancies turn out to be insignificant. This concern is heightened by the applicant’s unsubstantiated allegation that there was an additional $50,000 in or belonging to the trust fund that was used to purchase a GIC and that has never been accounted for. The respondent has produced documentation that goes considerable distance in neutralizing the applicant’s bald assertion that $50,000 is missing. Firstly, the application for a certificate of appointment clearly sets out that the personal property of the estate, including cash, was about $41,000 and this certificate was signed by both estate trustees. Secondly, the respondent’s position that there was never an additional $50,000 has been corroborated by the solicitor for the estate.
[20] The applicant also alleges, without corroboration, that timber having substantial value has been cut and sold. It doesn’t help that the respondent does not address this allegation in his responding material but I note that the respondent was not cross-examined on his affidavit for the purpose of obtaining evidence to support the applicant’s allegations. Although the applicant purports to identify who removed or bought the timber, there is no evidence from them to support the allegations and no explanation as to whether information was requested and refused. Also, if forced to pass the accounts, it is reasonable to assume that Victor Klatt will use this as an opportunity to request remuneration as a trustee which his counsel estimates may amount to $10,000.
[21] I think that properly characterizing the status of the applicant’s present interest in the trust fund is relevant to the issue of whether the respondent ought to be required to pass the accounts. It appears to me that the applicant does not have a presently-vested interest in the trust fund. I say this because only those children of Lorne and Victor who are living at the time of Victor Klatt’s death will be entitled to a share of the proceeds. While it is certain that at some point Victor Klatt will die and the trust fund will come to an end, it cannot be said with certainty that the applicant will receive a share. He must be alive at the time of Victor Klatt’s death to have an interest. When an interest is contingent (i.e., subject to the happening of an event which may never happen) it is one that may never come into being. (see MacKenzie, Feeney’s Canadian Law of Wills, 4th ed., LexisNexis Canada Inc., 2000, p. 17-1). Accordingly, I have determined that the interest of the applicant in the trust fund is a contingent interest only.
[22] My conclusion that the applicant has a contingent rather than vested interest in the trust fund is not intended to be determinative of the applicant’s request. There are many situations where a court has determined that potential beneficiaries have interests that warrant protection. It is, however, a relevant factor to be considered when assessing the position of the applicant in relation to the provisions of rule 74.15.
[23] In Smith v. Vance, [1997] O.J. No. 6534 (Div’l. Ct.) Sills, J. considered the meaning of the term “financial interest” in the context of a contested will and whether the proponents of an earlier will (the “claimants”) should have a chance to participate in a proceeding to determine the date of incapacity of the testator. In the particular circumstances there, the court concluded that the claimants had sufficient interest to justify their inclusion as a party to the proceeding. Smith v. Vance raises the issue of “financial interest” in a different context and on different facts. That case was focused on rule 75.03(1) and section 23 of the Estates Act.
[24] I have concluded that the applicant is not entitled to an order requiring that the accounts be passed at this time for the following reasons:
a) He has a contingent interest only in the trust fund;
b) There may be other contingent interest holders whose interests may be negatively affected if amounts are spent from the trust fund to address complaints that may ultimately have less value than the cost of addressing them. There is nothing in the court file to indicate that they were served with notice of this proceeding although their interest in the trust fund may be affected; and
c) The principle of proportionality requires a careful weighing of the prospective costs and benefits of the requested remedy and an assessment of where these costs and benefits fall. The evidence available to me indicates that after the initial permitted disbursements from the trust fund, it was reduced from $41,328.21to about $24,625.78 in May, 1996. The fund was further reduced to $16,937.29 as of April, 2014, a period of about 18 years. This may be contrasted with several reported decisions where the rights of prospective beneficiaries were considered in the context of large estates involving substantial sums of money. That is not the case here.
[25] At the same time, however, I note that there is no indication that the respondent has made the accounting records available for review by the applicant and there is no documentation in the record before me to support of the respondent’s statement in his affidavit that the balance remaining in April, 2014 was $16,937.29.
[26] I think it is reasonable to require the respondent to provide a copy of the accounting records for the trust fund to the applicant. The cost of copies can be charged against the fund. If the respondent wishes to have an opportunity to show cause why disclosure should not occur, the respondent may request (within 30 days) a hearing date from the trial coordinator, on notice to the applicant, returnable before me.
[27] If the respondent does not show cause why the records should not be produced and following the applicant’s review of the records, if the applicant is satisfied that just cause exists, he may commence an action for an accounting and any related relief.
(b) The Applicant’s Right to Use the Land
[28] Paragraph 3(c) of the will provides:
To transfer and convey to VICTOR KLATT and LORNE KLATT as Tenants in Common in trust until the second of them dies the remainder of my real property consisting of LOT 23 property consisting of Lot 23 (sic) and part of Lot 24, Concession 8, in the Township of Raglan, in the County of Renfrew, including the old house and outbuildings located thereon and the implements, equipment, machinery and tools located therein or thereon to be held and retained as detailed later in this Will, such trust to terminate with the death of the second of the said LORNE KLATT and VICTOR KLATT.
[29] Paragraph 4 provides in part as follows:
The said LORNE KLATT and VICTOR KLATT as Tenants in Common as Trustees of my farm property, as set out earlier in this Will, are to maintain the property for the use of my children who wish to use such for recreational purposes only, such users are expected to cooperate in the care and maintenance of the property. In addition, those who use the property are to pay any expenses which they incur while using the farm property and also pay a proportionate part of the taxes on the subject property… In the management of the said farm, I specify and direct that such trust shall continue so long as any one of LORNE KLATT and VICTOR KLATT, the Trustees, is alive and upon the death of the second of them to die, the trust shall cease… The ownership of the farm property pursuant to the tenancy in common shall belong one-half to those to whom the said LORNE KLATT shall have left his one-half interest by Will or intestacy and the other one-half to those to whom the said VICTOR KLATT shall have left his one-half interest by Will or on intestacy.
[30] The applicant claims his interest in the property through the wills of his parents. Even before they died, the applicant says he used the property for many years without any issues or problems but since he started asking questions about the trust fund, the respondent has taken a different position regarding his entitlement to use the property.
[31] I am prepared to assume solely for the purposes of this motion, on the threshold question of whether or not the applicant has inherited his father’s interest in the land, that he is entitled to advance this claim without the wills of his parents being probated. This is an important concession because not only are the wills not probated, the will of Lorne Klatt that was included in the Application Record, through which the applicant claims his entitlement, is unsigned.
[32] Unlike the applicant’s contingent interest in the trust fund, his one-half interest in the farm property is a vested, not contingent, interest. Certain implications arise from this state of affairs. Firstly, because his interest is vested, there are no conditions which must be satisfied that could prevent the applicant from making a bequest of his interest in his will at this time. The applicant’s interest is presently inheritable, just as his parents’ interests were vested and their interests became inheritable by the applicant, even though the trust created by Carl Klatt’s will still exists. It is the absence of any conditions that makes the difference between contingent and vested interests.
[33] Secondly, his presently-vested interest in the land does not bring with it an accompanying right to immediate possession or enjoyment of that land. This means that the applicant does not have the right to possess or go on the land pursuant to the inheritance from his father until the trust is brought to an end when Victor dies. At present his right to go on the land is as an invitee only. This is a common situation. For example, it arises where a life interest is given to one person with a gift over to another person after the death of the life tenant. The right to possession remains with the holder of the life estate until he or she dies, and all the while the next person in line has a presently-vested, future interest in the land. The applicant’s position is similar. He is vested in interest but not vested in possession.
[34] The applicant also contends that the will ought to be construed so as to permit Carl Klatt’s grandchildren to use the property for recreational purposes. He says that the reference to Mr. Klatt’s “children” is ambiguous; the grandchildren should be included as beneficiaries of the trust.
[35] On this point, I do not agree. The will is not ambiguous. Mr. Klatt’s intentions are clear. Mr. Klatt could easily have included a reference to his grandchildren if he wished to do so but he did not. Also, there is nothing that may be drawn from the context of the will that suggests the interpretation suggested by the applicant ought to be preferred.
[36] The decision in Re S. (N.) (Trustees of) (2007), 2007 NSSC 288, 36 E.T.R. (3d) 43 (NSSC) does not assist the applicant. It deals with a completely different situation. There the question of whether “children” included grandchildren was considered in the context of a class gift and whether a lapsed gift to a member of the class should pass to the deceased beneficiary’s children or benefit the remaining members of the class who were still alive. Smith, A.C.J. concluded that the will ought to be interpreted so as to exclude grandchildren from receiving the lapsed gift of their parent.
(c) The Request to Terminate the Trust
[37] The applicant says that because Victor Klatt is in an inherent conflict of interest between his children and the children of Lorne Klatt, and because he is in breach of his duties as trust, the trust ought to be terminated.
[38] I have several concerns with this position. Trustees are often in a potential conflict of interest but the possibility of conflicts of interest does not automatically disqualify a trustee from acting. How have Victor’s children been improperly preferred? What are the details of any actual conflict of interest and how has the applicant suffered as a result? Also, the applicant’s position does not take account of the rights of the beneficiaries of the trust, Carl Klatt’s children, the aunts and uncles of the applicant. In addition to Victor, at least two other siblings remain alive. Why should they be deprived of the use of the property for recreational purposes in favour of the applicant’s desire to terminate the trust and taken possession of his undivided one-half interest? On the evidence here, no good reason has been shown to interfere with the present beneficial interests of the beneficiaries of the trust. Also, the record before me doesn’t disclose if they have been given notice of the applicant’s request. Their positions are unknown.
[39] A purposeful consideration of the Variation of Trusts Act leads me to conclude that the repugnant conditions or unfair circumstances that the Act is intended to address are not present here.
[40] The applicant has not demonstrated that the termination of the trust will benefit all beneficiaries.
(d) The Request to Remove the Respondent as Estate Trustee
[41] The request that the respondent be removed as estate trustee is based on conflict of interest allegations and in particular that “since the death of Lorne Klatt, the respondent has a conflict of interest which has diminished the intentions and continued necessity for the trust by an equally benefiting (sic) his children at the expense of the share intended to the children of Lorne Klatt.” (Notice of Application, para 2(m)).
[42] The jurisdiction to remove a trustee is found in section 37 of the Trustee Act. Misconduct, bad faith, improperly receiving personal benefits, an unwillingness to carry out the terms of the trust or acting to the detriment of beneficiaries are all factors that may form the basis for an order removing a trustee. Generally, though, courts are reluctant to interfere with a testator’s choice of estate trustee and will only act where there is a clear necessity to do so. The evidence here falls short of meeting the required standard, in part because the evidence respecting how the respondent’s children have benefitted at the expense of the applicant is not clear.
Disposition
[43] My disposition of the application and the motion is as follows:
a. The request for an order that the respondent be removed as estate trustee is dismissed;
b. The request for an order directing the respondent to pass the accounts at this time is dismissed;
c. The respondent shall provide a complete set of the accounting records, such as they currently exist, to the applicant within 45 days. The cost of preparing copies may be charged against the trust fund.
d. The request for a declaration that the applicant has the right to attend and enter upon the estate property is dismissed;
e. The request to terminate the trust is dismissed.
f. The respondent’s request for an injunction/ restraining order is dismissed without prejudice to a further motion if new circumstances warrant. The legal positions of the applicant and the respondent have been clarified by this decision. Fresh evidence of difficulties between the parties would be required in order to consider granting such an order.
g. On the issue of costs, if the parties cannot agree, the respondent shall have 10 days to deliver an outline and bill of costs and the applicant shall have 10 days to respond. I would also ask that both counsel address the possibility of allowing recovery of an amount, for example the sum of $3,500 plus HST, from the trust fund and thereafter each party would bear his own costs.
Mr. Justice Martin James
DATE RELEASED: April 2, 2015
CITATION: Klatt v Klatt., 2015 ONSC 216
COURT FILE NO.: CV-14-1153
DATE: April 2, 2015
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
DAVID KLATT
Applicant
--and—
VICTOR KLATT, IN HIS CAPACITY AS ESTATE TRUSTEE OF THE ESTATE OF CARL J.H. KLATT
Respondent
REASONS FOR JUDGMENT
Mr. Justice Martin James
DATE RELEASED: April 2, 2015