Cross-Border Real Estate: Snowbirds Face Storm of the Century


The lure of buying real estate in the United States as a result of the available bargain basement property values and warm weather has resulted in Canadians becoming one the largest foreign investors of property in the United States. Many Canadians who have purchased or plan to purchase real estate in the U.S. are unfamiliar with the potential tax and estate planning consequences they could be facing.

There are potential tax liabilities and cross-border bureaucratic differences between our two countries that should be considered before buying U.S. real estate property.

Even if Canadians are not considered residents of the U.S. for tax purposes, if they own U.S. real estate, they are subject to U.S. estate tax. Consideration of Canadians for U.S. tax purposes depends on how many days you are in the country. You would need to perform a substantial presence test calculation to determine if you would be subject to U.S. tax filing and requirements.

As a result, tax and estate planning should be considered an important course of action when purchasing real estate in the United States. The economic shock that could arise from unexpected taxes could dash any good intentions. Countless Canadians have been stunned to learn that the estate of a Canadian resident may have to pay United States estate taxes because they, like many Canadians, owned property in the U.S.

United States estate tax applies to estates with worldwide assets over a certain limit.  You will need to report any capital gains in both Canada and the United States if your U.S. property is not designated as your principal residence.

Before purchasing real estate in the United States, it would be prudent to seek competent real estate, tax and estate planning advice on how to best take ownership (title) of the property, and to review potential tax liabilities based on your tax rates and worldwide assets.  You may also want to review various estate planning strategies that are being used by savvy homeowners to reduce potential US estate taxes, penalties and interest.

After the United States housing crash, many Canadians purchased real estate (houses/condos) in Florida. If these properties were rented out while in Canada or purchased for the purpose of receiving rental income, then you are obligated to report the income to both the Canada Revenue Agency and the Internal Revenue Service.  Canadians who fail to do so will find themselves facing unwanted fines and interest penalties in addition to any taxes due.

For the do it yourself renovator, there is no problem if your property is for personal use. However, if your property generates rental income, U.S. regulations do not allow you to operate a rental or a business. In order to legally have your rent collected and your property maintained with any required renovations, you would need to hire a property management company. To perform these operations yourself would require you obtaining the appropriate work visa.

If you own, or are considering buying U.S. real estate, make sure you keep the Canada Revenue Agency and the Internal Revenue Service as Allies. 

There is No Substitute for Qualified and Specific Professional Advice!

Tax and estate planning proficiency to make sure title is taken in the most favorable structure to minimize legal issues upon sale or death.

Can Estate Planning Save You Potential Problems and Expenses?

estate planning lawyer

Wills, estates, trusts and power of attorney are all common tools used in estate planning.

Estate planning involves legally structuring your assets (e.g. property, stocks, business interests, money) so as to minimize potential taxes and fees, thereby, maximizing the after-tax value of your Estate on behalf of your beneficiaries in the event of your untimely death.

Recent surveys have concluded that many Canadians are unaware of their options or of the potential consequences for failing to plan.

One out of five Canadians have not prepared a Will

They mistakenly assume their estate will pass to their spouse/ beneficiaries. Dyeing without a Will in Canada means you are considered to have died “intestate.” Intestacy rules are governed by each province and could result in additional legal costs and time delays for your beneficiaries. In addition, your beneficiaries will not be able to decide how your estate will be divided – that decision will now be in the hands of the provincial government.

Less than half of all Canadians have Wills that are actually current

Canadians should review and revise their Wills annually; first and foremost if there is a major life or financial change; or secondly if there are changes to federal or provincial laws which may potentially save them thousands of dollars by taking advantage of new regulations.

You should periodically review and update your plan in case of:

Birth or adoption of children
Blended family relationship
Living common-law
Same-sex partner
Changes in Business interests
Illness or incapacitation
Changes in your intentions
Changes in tax or non-tax laws
Receive an Inheritance/windfall
Change in assets
Change in residence
Purchase Foreign Real Estate
Death of family member

One out of three Canadians believe a Will is sufficient

There’s more than One Pillar to a properly executed Estate Plan

A properly executed estate plan based on precise jurisdictional guidelines is designed to:

  • Help you accumulate wealth, preserve it and then pass it on to your beneficiaries
  • Help you plan for your retirement and or business succession
  • Help you minimize taxes
  •       During your lifetime
  •       Upon your death
  •       On any income that might be earned after your death
  • Provide for your family in the event of an untimely death or disability

Over one third of Canadians fail to consider potential problems which would require a Power of Attorney or Power of Attorney for Personal Care 

When Canadians are no longer able to make decisions about their personal care or medical treatments, a written document “Power of Attorney for Personal Care” explains how they would like to be medically treated to ensure their wishes.

A Power of Attorney would designate either a trusted individual or a trust company to manage their financial affairs should they be unable to do so. Without a Power of Attorney, an application would have to be made to the court requesting permission to manage their affairs.

The Tax Man Cometh

Presently Canada has no true Estate Tax. However, ones estate could be subject to three potential taxes or pseudo-taxes:

Income Tax Due to Deemed Disposition

A final tax return needs to be filed by the estate’s executor and must include all income earned, and any net capital gain recognized under the deemed disposition rules up to the date of death.

Provincial Probate Taxes

Upon death, the estate’s executor is generally required to file for probate with the provincial court and submit an account of the deceased’s assets as well as the original Will.

The estate’s executor is required to pay any probate tax owing and is based on the total value of all assets that pass through the Will.

Probate taxes may be reduced by the naming of beneficiaries, utilizing Joint Tenancy with the Right of Survivorship agreements and the use of living trusts.

Canada Trusts, if planned and executed correctly, offer:

Asset Protection (structuring to better protect your assets from future creditors)
Tax planning

U.S. Estate Tax (on your U.S. assets)

Canadians are required to pay U.S. Estate Tax based on the market value of their U.S. assets (real estate, publicly-traded stocks and bonds and other types of government (debt) at death.

Over 70 percent of family-owned businesses do not survive the transition to the second generation

Numerous family business shareholders have not completed an estate or succession plan for their business and mistakenly feel that writing a Will is all that is needed to safeguard their family business succession.

Succession planning should be considered synonymous with tax planning and estate planning for the reason that all three relate to planning for your future, your business future and your family’s future.

A family business succession plan provides instructions for your partners, heirs and successors to follow in the event of your death, disability or retirement and may include:

Buy-sell agreements between business partners and heirs
Distribution of business stock and other business assets
Life insurance policies
Debt elimination schedules
Division of successor responsibilities
Business valuation
Other factors that may affect the business

There is No Substitute for Qualified and Specific Professional Advice

Skilled tax, estate and succession planning are exceptionally complicated. Horror stories of do-it-yourself forms obtained from the Internet can be found everywhere. Obtaining the advice of a competent and skilled professional cannot be overstated. This means an attorney who specializes in tax, Wills and estate planning.

An experienced estate planning attorney will help you properly structure your estate and succession plan to help minimize taxes and disputes, thereby providing for your family in the event of an untimely death or disability.

Balancing Pros and Cons of Henson Trusts

Wills, Estates, Charities & Trusts

With greater power comes greater risk. That’s the balancing act lawyers and their clients must weigh when considering a Henson trust. Two factors distinguish Henson trusts from others. One is ownership. “In a normal trust, the money belongs to the beneficiary. That is not the case in a Henson trust. It’s just not the person’s asset. It rests in some residual beneficiary,” said Ken Pope, an Ottawa-based lawyer whose practice centres on real estate planning for people with special needs. That residual beneficiary, for example, could be a person or organization, such as a charity, named to receive the remainder of an estate when the beneficiary dies.

As the population continues to age and improved medical treatments extend the life expectancy of disabled individuals, I would expect to see Henson trusts see increased use
in estate planning.

Gregory Prekupec, Makooli Prekupec LLP

“As such,” said Gregory Prekupec, a founding partner with Makooli Prekupec LLP in Toronto, “if the beneficiary is on an asset-tested assistance program, such as the Ontario Disability Support Program, the trust assets are not treated as his or her assets [for tax purposes]. The beneficiary can continue to draw government benefits, and funds can be paid slowly from the trust to supplement that individual’s available funds.”

That ability to draw certain types of government benefits is the chief advantage of a Henson trust, he added.

The other distinguishing feature of this type of financial tool, named after a landmark Ontario case in 1989, is the power it gives to trustees.

“The terms of a Henson trust provide the trustee with absolute and sole discretion regarding payments from the trust to the beneficiary. The trustee is not obliged, and cannot be compelled, to pay out any of the funds in the trust to the beneficiary for his or her support,” said Joanna Ringrose, a certified specialist in estates and trusts law in Oakville, Ont.

“Therefore,” she added, “capital of the trust is not considered an asset of the beneficiary, and the interest, if reinvested in the trust, it is not considered income.”

While that combination of factors makes a Henson trust useful to protect provincial benefits and provincial supplementary income from the clawback hands of the government, there are risks, Pope said. “You have to be prudent because the trustee has absolute discretion.”

The unconditional nature of the trust is its fundamental drawback, said Ian Speers, an associate with Makooli Prekupec LLP. “The beneficiary has no right to demand funds from the trustee. As such, if the trustee elects not to advance funds to the beneficiary, there is little recourse, and the intent of the trust is defeated. With Henson trusts, one places significant faith in the trustee.”

Ringrose cautions: 

“If the intended beneficiary is mentally capable and if the funds available are substantial, a Henson trust could deprive the beneficiary of the use of the funds, particularly if the trustee is not acting in the best interests of the disabled beneficiary.”

One of the most common scenarios of a Henson trusts is to name as trustees the siblings of a disabled person; they will receive the residual money in the trust when the disabled sister or brother dies, Pope said. The potential conflict of interest is often all too real. The siblings acting as trustees, for example, might want to try and save as much money as they can and deny funds to the disabled sibling.

Counterbalancing the risks are numerous advantages, Ringrose said. These include providing a safety net should provincial benefits end in the future and protecting the beneficiary from creditors. As well, she said, “the trust funds could be fully paid out by the trustee to the beneficiary if he or she recovers from the disability.”

At its heart, a Henson trust is still a trust, however. “It’s also used in many of the ways a traditional trust would be used; for example, to enhance tax benefits,” Pope said.

The popularity of the tool appears to be growing. In addition to being well-known within the legal profession, Henson trusts are helpful in situations that lawyers may see more of in the future.

“As the population continues to age and improved medical treatments extend the life expectancy of disabled individuals, I would expect to see Henson trusts see increased use in estate planning, alongside other tools such as [registered disability savings plans],” Prekupec said.

For many lawyers, such as Ken Pope, Henson trusts are preferred. “I use Henson trusts by default because they are stronger,” he said. “There is no case law on this, but I believe [the trust] would even withstand bankruptcy. It’s extremely powerful.”

Reprinted with permission of LexisNexis Canada Inc.  All Rights Reserved.


Gregory Prekupec B.A., J.D. (Hons)
PARTNER Makooli Prekupec, LLP

Gregory Prekupec is a licensed Ontario lawyer and a member of the Law Society of Upper Canada. As a Canadian lawyer, Mr. Prekupec represents and advised clients on all types of commercial, corporate structuring and tax planning matters.

Ian Speers B.A., LL.B.
ASSOCIATE Makooli Prekupec, LLP

Ian Speers is an associate of Makooli Prekupec LLP, with a practice concentrating on real estate, wills, estate planning, and estate administration.

Real Estate, Estate Planning, Estate Administration Lawyer

Ian Speers, Real Estate, Wills, Estate Planning, & Estate Administration Lawyer

Real Estate, Wills, Estate Planning, & Estate Administration 
Through an integrated team approach and personalized quality service, Ian Speers, real estate lawyer at Makooli Prekupec LLP is able to creatively achieve results in various real estate matters.
Residential Real Estate
Commercial Real Estate
Real Estate Dispute/Litigation
Ian Speers at Makooli Prekupec LLP will meet with you and inform you of all your rights and obligations pursuant to the Agreement of Purchase and Sale. In addition, services for residential real estate transactions also include:
• Negotiating and drafting Agreements of Purchase and Sale;
• Purchase and sale of new homes, re-sale homes and condominiums;
• Discharge and Registration of Mortgages;
• Acting for borrowers and lenders in mortgage transactions; and
• Title insurance.

Corporate, Estate, Tax Planning Lawyer Toronto

Gregory Prekupec, Corporate, Estate, Tax Planning Lawyer Toronto


 Corporate, Estate, Tax Planning 
Gregory Prekupec, corporate, estate and tax planning Lawyer at Makooli Prekupec LLP understands the importance of asset protection, from both an individual and business standpoint. It is vitally important to be proactive and minimize the risk of claims against your assets by insulating both your personal and business assets from creditors and judgments.
Tax Planning And Asset Protection
Taxation Of Trusts
Taxation Upon DeathTrusts are a valuable planning tool that can be a very important part of wealth management planning for families. A well structured trust can be very effective, allowing for a number of advanced tax and estate planning strategies. The key to successfully using trusts is to understand how they work, when they work and how they can fit into your long term planning.

Incorporation and basic tax planning
Distributions to owners-managers
Income splitting through incorporated businesses
Retirement compensation arrangements
Income tax consideration in the purchase and sale of a business
Transferring assets
Life insurance

Life insurance
Post mortem issues
Trustees powers and duties
Creditor proofing
Tax treatment of life insurance
Wills and will substitutes



Importance of a Will


Wills form an important part of any estate plan, even of the most basic form.

At the simplest level, without a valid will, you have no control over how your possessions will be distributed on your death.  Someone who dies without a will is said to die “intestate”, and in Ontario there are rather inflexible rules as to how, when, and to whom an intestate person’s property is disposed.  This may mean that people you would rather ‘cut out’ end up inheriting some or all of your estate.  Conversely, a close friend or relation may inherit nothing simply because they do not fall into the correct category of legal beneficiary.

With a Will, you, rather than the government, have control over how your property is distributed after your death.


Generally, everyone would be advised to have a will to allow for certainty upon one’s death.  There are, however, certain family dynamics that make wills particularly important. The following are examples of such circumstances:

Marriage: Unless a will contains a provision that it was made in express contemplation of marriage to a named individual, marriage revokes all previous wills.  As such, it is important that those planning to get married, or those newly married, should consult with a lawyer about the status of their wills.

Parents: For those with younger children, a will can be used to nominate a guardian for their children, thereby providing some comfort that their wishes are clear.  In Ontario, such an appointment is not binding and must be affirmed by a court, but it is often given a high level of deference.  For those with older children, the will can be used to restrict access to their inheritance until the children reach a certain age.  Without such provisions, such assets normally pass to the children once they reach 18 years of age, an age at which not all people have the maturity to handle a sudden influx of funds.

Divorce: While marriage revokes a will, divorce does not.  As such, upon a marital separation, legal advice should be sought as to the state of one’s will.

Second marriages: Those on second marriages, either through divorce or death of a spouse, may wish to make sure that children of previous marriages or previous spouses are not overlooked in one’s estate distribution.


In addition to such basic benefit of controlling one’s property after death, the exercise of preparing a will should be combined with other estate planning tools, encompassing a more comprehensive plan than simply ‘who gets what.’

Estate planning may begin by structuring key assets so that they pass to another individual automatically upon one’s death, without reference to the will.  Joint ownership of assets may simplify the transfer of assets upon one’s death, and this process may also reduce probate taxes, or in certain situations the need for probate itself.  Similarly, beneficiary designations on insurance policies and RSP plans can not only exempt these assets from probate fees, but also protect them from being used to satisfy any debts that one’s estate may have.

One may also wish to reduce or defer the tax burden at the time of their death.  Bequests of property made to a spouse will normally benefit from a deferral of capital gains taxes, meaning the tax is not payable until the death of the surviving spouse.

Trusts may be used to give greater control over assets after death, or to protect beneficiaries.  A spousal trust may give your surviving spouse the benefit of your assets during his or her lifetime, but can at the same time give one control over where the remaining assets go after their surviving spouse dies.  This structure can be particularly useful in safeguarding assets for children from multiple marriages.  Likewise, a form of a trust known as a “Henson trust” may be used to protect a disabled beneficiary from losing asset-dependent government benefits.

Furthermore, if your estate is ‘cash-poor,’ having few liquid assets, one’s family may find that certain property needs to be sold off to satisfy liabilities of your estate.  To help prevent this, the use of insurance products, f (for example life insurance,) can help reduce the risk of needing to sell assets in such circumstances.


There are many ‘kit wills’ on the market for modest prices.  Many question the need to go to a lawyer to have a Will prepared, at greater expense, when these do-it-yourself alternatives are available.  While some such kits are good, if used properly, the reality is that these are not tailored to an individual’s needs, and generally offer minimal, if any, estate planning guidance.

A lawyer’s role in crafting a will is much more than simply ‘taking instructions,’ writing them down, and having you ‘sign on the dotted line.’  In a will interview, a lawyer will attempt to find out as much as possible about an individual’s assets and their family structure.  This is not the lawyer being nosy, but rather part of the lawyer’s professional duty to discover what an individual owns and offer possible suggestions of how to deal with the property through either provision in the will or other forms of estate planning.  One may already have a general estate plan in mind, and in such cases your lawyer can act as a ‘sounding board’ to such ideas, outlining possible alternative structures to consider.

A lawyer also acts as an impartial, professional witness to one’s state of mind at the time of making a will.  Through an interview process, a lawyer seeks to ensure that an individual has the capacity to make a will.  A lawyer also takes steps to verify the individual’s identity.  Such steps may help safeguard a will from unfounded attack—a luxury not available to those using ‘kit wills.’

It is not expensive to have a lawyer prepare a basic will, with our firm charging a reasonable fee for meeting with individuals to discuss their wishes, preparing the will, and then meeting with them again to arrange its execution.  The cost of litigation from a poorly prepared kit will can reach the tens of thousands of dollars in legal fees—hardly a savings!


While a will controls one’s property after death, a power of attorney for property is equally important to ensure a smooth administration of one’s assets while still alive.

Without a power of attorney, in the event of one’s incapacity, decision making on their behalf may default to the Public Trustee, an office of the provincial government.  Arranging for a power of attorney puts individuals in control, allowing them to decide who will handle their property, on their terms.  One can create multiple powers of attorney to deal with specific assets, and also guide the manner and circumstances in which an attorney may act.

A power of attorney must be given with some caution.  While the law requires that an individual’s attorney act in that individual’s best interests, the reality is that attorneys can (and, sadly, occasionally do) abuse their position of trust.  Individuals need to trust the person named as an attorney, and may wish to place restrictions on how and when the attorney may act.  These considerations are an important part of having a lawyer craft a power of attorney document to help safeguard their interests.


Many of the same arguments for naming an attorney for property apply to medical substitute decision makers.   Individuals, rather than the government, have a better knowledge of the temperaments and coolness under pressure of relatives and close friends.  The degree to which one trusts a person’s judgment may have no relation to their rank within the default order of decision makers under provincial legislation.  By naming an attorney for personal care, an individual has control over who gives instructions to medical staff when he or she is incapacitated.

The medical substitute decision maker is bound to follow an individual’s ‘prior capable wish’ is consenting to medical treatment.  If this desire is not known, the decision maker is bound to act in the individual’s best interests.  These two courses are not always the same.  As such, it is therefore important that one discuss one’s preferences with the substitute decision maker.  Certain instructions one may wish to leave in writing, or in the power of attorney for personal care document.


Estate administration is an important aspect of administering the provisions of a will after death.  The estate is administered by an Estate Trustee, more commonly known by the term ‘Executor,’ who is appointed in a will.  The Executor may apply to court to have his or her authority formally recognized, in a process often referred to as ‘probate.’

When a will exists, the will itself creates the appointment of the Estate Trustee, and in certain circumstances of simple estates no probate application may be necessary.  For example, in the case of a small estate with no real estate holdings and the surviving spouse being the sole beneficiary and executor, probate will often be unnecessary.  Legal advice should always be sought before proceeding in this manner, as the reaffirmation of the appointment through a court can help shield the Estate Trustee from legal liabilities, particularly if there are contentious matters anticipated in an estate.

Probate may, however, be unavoidable if the estate includes assets such as real estate holdings or publicly traded stocks.  Banks may also require probate if there are significant deposits and multiple beneficiaries named in the will.

In the event that no will is available, the appointment of the Estate Trustee must be confirmed by a court.

A lawyer can help an Estate Trustee through the cumbersome Estate Court paperwork, and can also advise Estate Trustees as to their duties and responsibilities throughout this process.

Furthermore, Estate Trustees who retain a lawyer may avail themselves of an insurance product against their errors and omissions.  There are now insurance products available to Estate Trustees, provided that they are administering the estate in conjunction with legal advice.  In an increasingly litigious age, this product can help shield an Estate Trustee from certain claims of improper or imperfect estate administration.  Such a tool is a useful adjunct to the administrative and advisory role that a lawyer takes in assisting Estate Trustees.


While a will is an important part of certainty in distributing an estate, the transition is sadly not always smooth.  Disputes over a will can break out in many circumstances.  Some common ones follow:

Lack of testamentary capacity: Family members, or others, may assert that an individual had insufficient capacity at the time he or she wrote a will, and may seek to have the will set aside.

Ambiguous will provisions: At times, the provisions of a will may be ambiguous and inconsistent, leading to uncertainty as to how assets are to be divided.  Such situations can often be resolved by agreement of the beneficiaries, but will often need to be referred to a court for guidance.

Failure to provide for spouses or dependents: Ontario law establishes a formula, based on matrimonial property values, of the minimum portion of an estate to which a surviving spouse is entitled, regardless of the provisions of the will.  If the will does not make such provision, the spouse may apply to vary the terms of the will.  Similarly, if a third party was financially dependent upon the deceased, that individual may have a claim on the estate under a dependent’s relief claim, also regardless of the provisions of the will.

In all such cases, resolution may require recourse to the courts, if the beneficiaries and affected parties are unable to reach an agreement otherwise.

DISCLAIMER: The foregoing commentary is provided on an as-is basis, being non-exhaustive and generic in nature.  It cannot be construed as personalized legal advice, and it is not offered as such.  The foregoing article applies to the laws of Ontario only: laws of other jurisdictions may be quite different, and the reader should consult with a lawyer within your jurisdiction before proceeding with any estate planning or estate administration matters.

Protectors: Panacea or Problematic

By: Gregory M. Prekupec

Makooli Prekupec LLP 

When establishing a trust for whatever purpose, the settler is often hesitant to relinquish all means of control of the property to be transferred into the trust, and ultimately the hands of the trustee.  It is for this reason that the position of the “Protector” in relation to trusts was created. The protector is more often than not a close family friend or professional advisor of the settlor, who is appointed as a third party to oversee the trustees’ trusteeship and to ensure that the terms of the trust are followed. The protector can be said to have a better knowledge of the personal circumstances surrounding the settlor due to the nature of their relationship. The following is especially true where the trustees are remote from the beneficiaries and settlor, and often located in a foreign jurisdiction.

But are Protectors the answer to a settlor’s fears? According to Jeffery Evans Stake, “If settlors are never told about the need for protectors, i.e., if no one raises the issue of trustee misbehaviours that are beyond the courts to rectify, many courts will go to their graves perfectly content with their settlements.”[1] He continues, “For them, protectors only serve to quell fears they would have never had if protectors and the need for them was not mentioned”.[2]

Many professionals question if trusts are currently over-protected. Alexander A. Bove suggests that “a protector may not be necessary or the only means of overcoming problems for the beneficiary”.[3] Conversely, the use of a protector is not the only way that a settlor can maintain some form of say as to how assets placed in a trust may be dealt with.

This paper will first lay out how the protector came into being and the current day role, as well as to suggest alternatives to the use of a protector.


Age of the Protector

                The “protector” may be new, but there is nothing new in the concept of a non-trustee having powers in relation to trust property.[4] The courts in England and in other major trust jurisdictions have been dealing with this phenomenon for centuries. There are plenty of reported cases dealing with dispositive powers held by non-trustees.[5]

According to Bove, the origins of the trust protector came from two major fronts. First, wealthy European families, rather than leaving assets to the next generation outright, felt it necessary to have to funds administered through a trust or foundation. While trustees and directors managed the funds placed into the trusts, the settler of such funds wished for an advisor of sorts to oversee the trustees and directors, to ensure that the assets were being allocated as desired. Second, Bove states, protectors arose due to the new found creativity of drafters, inserting into trust documents, new provisions which to that point were unheard of and untested in the legal world. Included were clauses such as the “anti-duress clause”, and the infamous “jurisdiction hoping clauses”.

Relatively new however, is the term “protector”, and provisions relating to a “protector” within legislation. As the use of the protector become more prevalent, several offshore jurisdictions enacted legislation to authorize their use. The Cook Islands took the first step to recognize the protector with the

International Trust Amendment Act of 1989,[6] after which several offshore as well as onshore jurisdictions followed suit.


Role of the Protector

The role of protector was outlined by the High Court of Justice of the Isle of Man in a case known as Steele v Paz Ltd.[7] Here it was said that,

“Such person would not be a trustee and would not have any trust property vested in him and need not be a resident of the Isle of Man. On the other hand, he would be independent of the settlor who could not, therefore, be said to have retained and control over the trust funds. A “protector” would be a typical example of a person in that position. He would be in a position to reflect the wishes of the settlor whilst being independent of him and would be entitled to prevent any exercise by the trustee of their powers insofar as they went beyond the “spirit” of the settlement.”[8]

A protector’s powers over a trust could be negative, such as a veto power over some proposed trustee act, or positive, such as the power to remove and replace trustees or add beneficiaries, or amend the trust, or even the power to terminate the trust.[9] Typical powers granted to the protector by the settlor include the power to:

  • Remove trustees;
  • Appoint new trustees;
  • Change the venue of the trust;
  • Change the country whose laws will govern the trust;
  • Approve the appointment by the trustee of an investment advisor
  • Veto or direct trust distributions
  • Add or delete beneficiaries
  • Veto or direct investment decisions
  • Terminate a trust


While it is possible for the settlor to grant to the protector nearly every power, doing so may have negative repercussions. The granting of too much power to the protector, rather than to the trustee may result in the trustee being deemed an agent of the protector, for all real powers will lie in the protector’s hands rather than that of an independent third party.


Protector’s Powers – Fiduciary or Personal

The relationship between a Trustee and the Protector, is predicated by whether or not the Protector is deemed to be exercising a fiduciary power, or merely a personal power granted to it by way of contract. An individual holding a personal power cannot be forced to exercise it and in fact need not even consider whether to exercise it.[10] In Rawson Trust v Perlman [1990], resulting from the fact that a protector’s powers were deemed personal and not fiduciary, it was determined that a court could not impeach the protector as a result of any capricious or other reasons for exercising such a power.[11] Therefore, a trustee who must in some way consider or react to a personal power is under no duty to look behind the exercise, or review the motives for or reasonableness of its exercise, so long as the terms governing the exercise have been satisfied.[12] Therefore, motive is not considered.

Conversely, if the protector’s powers are fiduciary, then the trustee is in a much more sensitive position. Any exercise of power that benefits the protector, directly or indirectly, would subject the protector to liability for breach of a fiduciary duty, and possibly cause the acts to be held invalid as a fraud on the power.

According to Peter Hodson, “The core obligation of a protector is to enforce the terms of the trust and thus use the powers given under the trust instrument for a proper purpose ie. one which is in the best interest of the beneficiaries, not the protector or others.”[13] Accordingly then, the protector is usually found to be a fiduciary. The view now appears to be that a professionally paid protector is subject to the full fiduciary responsibility as applied to trustees.[14]

The Star Trust case confirmed the role of a protector as a fiduciary.[15] Here, the initial trustees and the First defendants, Bermuda Trust Company had refused to follow the protector’s attempts to persuade them to vote against moves to remove the settlor from the board of directors of the Group. It was decided that the protector’s powers were fiduciary in nature, although the deed did not expressly state them to be so.

Similarly, Von Knierem is authority for the proposition that Protector’s power to appoint and remove trustees is a fiduciary power because it could not exercise the power for its own benefit, but only for the benefit of others.[16]

Current case law has come to the same conclusion; that the duty of a protector has evolved from being a mere personal power, to being widely recognized as fiduciary in nature.


Relationship with the Trustee

The protector is often said to have two types of power: “proactive” and “reactive”. Colin Maltby states “a reactive power would be, for example, the power to veto proposed distributions of the trust fund, while a proactive power could range from the removal and appointment of trustees to the supervision on behalf of the trustees of their majority shareholding in a private company.”[17] Given the nature of the role, there is no doubt that the Protector will in some way have an influence over the role of the Trustee. To what extent is determined by the settlor.

As Gregory Alexander so duly points out, “The more power you give to a trust protector over the trustee, the more risk you are making the trustee look like a mere agent, a development that the settlor probably neither contemplated nor would have wanted.”[18] A trustee should not necessarily acquiesce in a protector’s overriding decision where he disagrees with that decision. This exact notion has been the subject of many court decisions. In Re Rogers, the Court directed the trustees to carry on in disregard of a “delinquent” protector, who was in a conflict of interest and could not properly discharge his fiduciary obligation.[19] In comparison, the Court in Johnson Matthey Bankers Ltd v Shamji and Others said that if a trustee was not in agreement with the protector, then the Trustee could apply to the Court for direction, but that the Trustee must note this may be again the wishes of the settlor.[20]

Stewart Sterk , in his article “Trust Protectors, Agency Cost, and Fiduciary Duty”, provides an excellent overview of what effect the Protector has on the Trustee’s performance. He begins by stating that the danger in appointing a Protector in the first place is that is that it reduces the incentive for the Trustee to exercise prudence in managing the trust assets.[21] He further concludes that the danger of appointing a Protector is threefold:

First, once a protector is appointed, the trustee becomes, to a varying degree, accountable to the protector. That accountability may lead the trustee to be responsive to the protector’s wishes even when the trustee believes that the protector’s preferences diverge from the interests of the

beneficiaries. Making the trustee accountable to the protector threatens to reduce the quality of the trustee’s decisions.[22]

The second and third notions proposed by Sterk outline that the appointment of a Protector will diffuse the trustee’s attention and energy away from making ever important investment and distribution decisions. The trustee will be required to spend extra time and energy persuading the protector that the trustee’s decision is appropriate, given that the protector may have veto power in regards to that decision.

Though a trustee may be initially hired for the skills that they possess in respect of certain assets, the appointment of a protector will take away from the effectiveness of that trustee. By constantly seeking approval from a proactive protector, the role of the trustee is therefore altered from being responsible for the trust assets to being responsible to the protector, eliminating the reason why the trustee was appointed in the first place.


Protecting our way to trouble – the Sham Trust

The more control a settlor has, the less asset protection he or she has. This is the basic principle in determining whether or not a sham trust is in existence. Lord Diplock in Snook v London, states that, “[The sham doctrine] means acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”.[23] Diplock further explained that in order to meet the criteria of a sham, “all parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”[24]

Where a protector is appointed who has a long standing close relationship with the settlor, it is easy to see why the trust may be held to be a sham.  Peter Willoughby explains that “Where a protector has been appointed with wide powers and the protector is a close friend, relative, or long standing legal advisor of the settlor, the trust may be attacked as a sham and the trustee sued for breach of trust”.[25]

One such theory relied on by the American courts to deem a trust a sham is the “alter ego” doctrine. Here it is held that the assets located within the trust never really left the control of the settlor, or that the settlor treats the assets of the trust as if they are his own, rather than the assets of a separate entity. Two such famous American cases are Deryll Wayne Pack v United States and United States v Reinhard P Mueller.

An infamous, widely publicized sham trust case is Rahman v Chase Bank Trust Company Ltd and Others (1991) JLR 103. Here it was decided that Mr. Rahman never intended to lose control of the trust assets and had continued to take all decisions relating to the management of the assets as if he were the absolute owner of them.

Grupo Torras SA and Another v Sheik Fahad and Others (1995) 1 Lloyd’s Rep, 374 and (1996) 1 Llyods Rep, 7, C.A. is another example of how a trust may be deemed to be a sham. There it was held that where the evidence indicates that the primary beneficiary of a trust treats the trust as his alter ego, the court will lift the veil so as to determine to what extent trust funds, allegedly misappropriated, are to be considered as the beneficiary’s and therefore subject to a worldwide Mareva injunction and discovery order.[26] While the trustee in this case was empowered to act independently regarding investment of trust assets, a clause in the trust deed stated “…but subject to the written consent of the Primary Beneficiary [Sheik Fahad] or such person or persons as the Primary Beneficiary may from time to time designate…’”.[27]

In (In) re Abacus the court set a threshold for determining the amount of trustee involvement to avoid a sham. Here the court in rejecting a sham claim outlined that, “[The trustee] considered each request in good faith as an independent trustee, applied its mind to the issue at hand, decided whether to go along with the request and reached its own conclusions having regard to its fiduciary duties. “[28]

One can then see how the settlor, acting through the guise of a protector, may be deemed to still be in control of the trust assets. In cases as such the verdict will be held similar to that of Rahman and Grupo Toros, with the trust being set aside as a sham. Ramifications of a sham are as follows:

The Trustee will never have been more than a nominee or resulting trustee for the settlor who remains the sole beneficial owner. Any action of the trustee that has been inconsistent with the continued beneficial ownership of the settlor will have been unlawful. Fees will have to be repaid with interest and the trustee will have to make good losses caused by distributions to beneficiaries other than the settlor or, if he has died, his estate.[29]

The role of the Protector is merely a way for the settlor to try and accomplish two things; sheltering of assets while maintaining control. Thus, the settlor should be seen as the true beneficial owner, with the others being viewed as mere puppets being strung along by the settlor.


To Protect or not to Protect – Alternatives

Letter of Wishes

Letter of wishes related to the distribution rights within a trust. They have also been used as a means of giving the settlor a form of control with regards to investment decisions made using the trust assets. According to Duckworth, “…the letter of wishes invites the trustee to consult with the settlor before making important decisions.”[30]

Settlor’s Reserved Powers

Settlers have increasingly chosen to reserve to themselves certain powers within the trust. The settlor may choose to reserve powers with regard to the administrative functions of the trust, such as the power to veto before the trustees exercise their investment power, or powers over the distributive function of the trust, such that the settlor has a say in the appointment of new beneficiaries, as well as the removal of beneficiaries. In essence, the settlor is reserving for himself, powers which would otherwise be granted to the Protector.

Private Trust Companies

Here, the settlor creates a company to act as trustee on behalf of his trust. Great care must be taken to ensure that the effectiveness of asset protection is not damaged when using this structure. PTC’s allow families’ control over the trust via the appointment of the settlor and/or family members to the board of directors.[31] A main benefit in the family maintaining control over the family business, is the requisite amount of expertise needed to run such an organization. By placing members of the company on the board, it ensures that each matter is tended to with the appropriate amount of care.

A Shared Company

The property is held and administered by a company in which the trust holds shares which carry a substantial financial interest but little or no voting rights; the settlor holds the other shares which carry full voting rights.[32] Hence, the settlor has control, and he has it outside the trust structure. As the controlling shareholder, he has no fiduciary obligation to the beneficiaries, though the directors have their usual fiduciary obligation to the company.[33] In many cases this is the best solution for the settlor who really does want hands-on control of operations.[34]

Springing Protector

A trust with a springing protector is one where there is no protector unless and until that position is created pursuant to the terms of the trust, so that until such terms are implemented or triggered, no protector is appointed. Once, however, a triggering event occurs, then the office of the protector emerges. A benefit of this type of protector is that it can be created by more than just the settlor. Terms of the trust may allow for the protector to be appointed by the beneficiaries, as well as an outside third party. Another key feature is that the protector may be appointed for a specific amount of time, rather than for the duration of the trust. When the event that triggers the protectors is no longer, it may be possible for the trust to again carry on without an active protector.



While the paper does not try to suggest that any of the alternatives are without their own weaknesses, it goes to show that for some form of power to remain with the settlor, it is not always necessary to appoint a protector. One must consider the needs of the trust, as well as predict which problems may arise in the future. If appointing a protector as a means to regain control over the trust assets, the settlor then opens the trust to the possibility of a sham, upon which the trust is no longer credit proof, or sheltered by any means of asset protection.  Many suggest a protector out of fear of not having one, not necessarily because their trust arrangement calls for one.

[1] Jeffery Evans Stake “A Brief Comment on Trust Protectors”. Cardozo Law Review, April 2006, pg 2817.

[2] Ibid

[3] Alexander a Bove Jr. “The growing use of trust protectors: are we over-protected”. Trust and Trustees September 2005 Volume 11 Issue 9 Page 17



[6] Stewart E. Sterk, “Trust Protector, Agency Costs, and Fiduciary Duty”, Cardozo Law Review, Volume 27 Number 6, April 2006 page 2764

[7] Steele v Paz Ltd and Others (1993-95) MLR 102

[8] Ibid

[9] Alexander Bove Jr and Melissa Langa, “Peter Protector in Trust Neverland – The Real Story of the Trust Protector”, Massachusetts Lawyer Weekly, March 10, 2003, Page 2.

[10] Alexander A. Bove Jr. “The Trust Protector: Trust(y) Watchdog or Expensive Pet? Estate Planning Volume 30

No. 8Warren, Gorham & Lamont, August 2003.

[11] Supreme court of theBahamas

[12] Alexander A. Bove Jr. “The Trust Protector: Trust(y) Watchdog or Expensive Pet? Estate Planning Volume 30

No. 8Warren, Gorham & Lamont, August 2003.

[13] Peter Hodson, “The trust protector: friend or foe?” Trustee and Trustees, May 2006, page 8.

[14] Re Z Trust [1997] CILR 248

[15] Jurgen von Knieriem v Bermuda Trust Company Ltd and Grosvenor Trust Company Ltd and Bermuda Trust

Company Ltd v Jurgen von Knieriem & Others, Supreme Court of Bermuda July 13, 1994.

[16] Terence Tan Zhong Wei, “The irreducible core content of modern trust law”, Trust and Trustees June 2009, p8.

[17] Colin N Maltby, “The developing role and liabilities of protectors”, Trust and Trustees, Volume 9 Issue 4, March

2003, page 8.

[18] Gregory Alexander, “Trust Protectors: Who Will Watch The Watchmen?”, Cardozo Law Review, Volume 27, No.6,

April 2006, p.2810

[19] Colin Maltby, “The developing role and liabilities of protectors”. Trust and Trustees Volume 9 Issue 6, 2003, p.8

[20] Ibid

[21] Stewart Sterk, “Trust Protectors, Agency Costs, and Fiduciary Duty”, Cardozo Law Review, Volume 27 No.6, 2006,


[22] ibid

[23] Snook vLondon [1967] 2 Q.B. 786 at 802

[24] Paul Matthews, “How Many Shams make Three?” Trust and Trustees June 1998, pg 11.

[25]Willoughby, “Misplaced Trust”. Gostick Hall Publications, 1999.

[26]Willoughby page 40

[27] Ibid

[28] In re Abacus C.I. Ltd (2003) ITELR 368

[29] Ibid 16

[30]Antony Duckworth, “The Role of Offshore Jurisdictions in the Development of the International Trust”. Vanderbilt Journal of Transnational Law, October 1999, pg 23

[31] Bonnie Steiner, “Private Trust Companies: a Double Edged Sword? The Pros and Cons. Trust and Trustees, June 2009, pg 2.

[32]Antony Duckworth, “The Role of Offshore Jurisdictions in the Development of the International Trust”. Vanderbilt Journal of Transnational Law, October 1999, pg 26

[33]Antony Duckworth, “The Role of Offshore Jurisdictions in the Development of the International Trust”. Vanderbilt Journal of Transnational Law, October 1999, pg 26

[34] Ibid


Trusts & Estates Lawyers Toronto


Express Trusts – are expressly, voluntarily and intentionally created by the Settlor. These can be created in three ways:

  1. inter vivos voluntarily executing a Deed of Settlement, transferring the assets to the Trustees.
  2. Inter vivos transferring the assets to the trustees and the trustees executing a Declaration of Trust whereby they acknowledge that they hold the assets subject to the terms of the trusts set out in the trust instrument.
  3. On death the testator executes a will which takes effect on the testators death whereby the testator’s executors are directed to transfer all or part of the Testator’s estate to Trustees to hold subject to the terms that are set out in the will.

Implied Trusts

Implied by law from circumstances rather than the expressed wishes of the Settlor. Include resulting trusts and constructive trusts.

Resulting Trusts

These happen when property goes back to the Settlor when the purpose of the transaction fails.

Constructive Trust

Imposed by a court of equity in circumstances where it would be unfair for the person holding the property to keep it for himself because he has been “unjustly enriched”. Constructive trusts are used by the Courts as a remedy.

Private Trusts

Benefit a private individual.

Public Trusts

Made to benefit the public at large or a section of the public e.g. charitable trusts.

Bare Trusts

Occurs when trustees hold property for a beneficiary who is absolutely entitled to the trust property. Not really a Trust because the Beneficiary can ask for the transfer of property at any time. E.g. a Shareholder Nominee Agreement where the shareholder appoints a third party to hold the shares in the company (to keep the identity of the shareholder confidential).



Creation of a Trust

  1. Deed of Settlement
  2. Declaration of Trust
  3. Settlors Will



Valid Trust

  1. Creation of the obligation
  2. Constitution of a trust which involves Settlor transferring the property to the trustees.

For the trust to be valid it is necessary to ensure that:

  1. The Settlor has capacity to create and constitute the trust
  2. The Trust cannot extend beyond the maximum duration allowed.

The Three Certainties

These are necessary for the trust to be valid:

  1. Certainty of intention
  2. Certainty of object
  3. Certainty of subject

Certainty of Words of Intention

Words must be clear, unambiguous and show intention of the Settlor that a binding fiduciary obligation is to be imposed on the Trustee(s)

Certainty of Subject Matter

Property of the Trust must also be clear and unambiguous. Property must be:

  1. described with sufficient precision
  2. defined so the assets can be ascertained with certainty

If subject matter is not certain the whole trust fails e.g. the “bulk” of my residuary estate – “bulk” is not certain.

Certainty of Objects

Beneficiaries must be:

  1. Named/identified of
  2. Defined so that they can be ascertained with certainty. Otherwise the Trust fails for lack of certainty.
  3. It must also be “workable” (McPhail v. Doulton)



Discretionary Trust

Trustees are given the discretion to decide which Beneficiaries are to receive any benefit.

Failure of discretionary Trust:

Brown v Gould “my old friends”

Re Baden’s Deed Trusts No 2 “former employees of XYZ Co Ltd, their relatives and dependants”

If the beneficiaries are conceptually certain then the gift will not fail even if its composition is evidentially uncertain. A trust can though, be void for being “unworkable”.

Effect in Law of an Absence of any of the Three Certainties

Absence of certainty of subject matter – trust fails – property will then form part of the person’s residual estate.

Absence of certainty of objects will create a resulting trust in favour of the Settlor or Settlor’s estate (if dead).

Absence of certainty of words of intention creates an absolute gift to the transferee.

Requirements That the Trust be Properly Constituted

  1. The three certainties
  2. That the assets have been properly transferred to the trustees

Trust assets must be properly transferred in order to constitute a valid trust

Offshore method of transfer it is usual for the Settlor to transfer the assets to an underlying company:

  1. S transfers assets into the name of an asset holding Company (AHC)
  2. Shares of the AHC are issued to the Trustees (in bearer form)
  3. Trustees execute deed of Settlement of Deed of Trust agreeing to hold the shares in trust according to the terms of the trust instrument.



Formalities required for an effective transfer of assets:

  1. Ownership

Settlor must be capable of transferring the assets and must have the legal title vested in him.

  1. Capacity

Settlor must have the capacity to hold and transfer legal title – a personal capacity in that he is over 18 and a proprietary capacity.

Trust Must be Properly Constituted

Settlor must properly and completely transfer legal title of trust assets to the trustees. If transfer not complete then the trust will fail:

Milroy V Lord- “Equity will not perfect an imperfect gift.”

Settlor must do all that is necessary to make the transfer of the following:

  1. Personality (Chattels)

There must be a physical delivery of the assets accompanied by an intention to transfer said assets. A deed of gift or bill of sale is best evidence of delivery and intention to transfer.

  1. Cash

On an account must be transferred by cheque or other negotiable instrument.


Must be according to the Company’s Memorandum and Articles – usually means filling out a Stock Transfer Form – the form must be delivered to the Trustee or company with the share certificate. The trust is effectively constituted as soon as the company Secretary amends the share register (Re Rose).

  1. Realty

Must check the procedures of the jurisdiction for the correct transfer of land.

  1. Intangible property

e.g. S’s ownership of copyright, trademark, patent, life insurance etc must be transferred according to the appropriate statutory or other formality appropriate.


Settlor MUST constitute the trust by completing the transfer of the legal interest in the trust assets to the trustees.

No intention when:

  1. trust lacks essential certainty
  2. not completely constituted

The trust property will be deemed to remain vested in the Settlor.

Rahman v Chase Bank Trust Co.

The certainty of intention was absent and its constitution was a sham because Rahman had too much control over the assets of the trust even though the trust was otherwise properly constituted.

2 Types of Sham


(Rahman) when the Settlor has too much control over the trust assets and the trustees act as mere nominees rather than as independent trustees.

  1. SUBSTANTIVE (Also known as Administrative)

The reality of the arrangement is that the Settlor and trustees have entered into separate agreement between themselves which allows the Settlor an almost unfettered control over the trust assets.

Consequences of a Sham Trust

  1. Can be attacked by creditors or third party claimants
  2. If set aside the assets are deemed to belong to the Settlor and all transactions undertaken by the trustees deemed unlawful
  3. Professional fees charged by the trustees must be repaid
  4. Distributions to beneficiaries (other than the Settlor) have to be clawed back or the amount will have to be made good by the trustees
  5. Trustees can be liable to compensate the Settlor
  6. Trustees, if so liable, can probably claim a contribution from their lawyer



Some form of indirect control can be retained by the Settlor e.g.

  1. certain power over the assets
  2. Appointment of a protector to oversee the trustees actions with the power to intervene in, influence or veto the trustees decisions
  3. Provisions of letter of wishes expressing the wish that the trustees exercise their powers of management, investment or distribution in a certain way.


The greater the control that can be exercised by the Settlor the greater the risk that the trust can be set aside as a formal sham.

Cayman Islands passed the Trusts (Amendment) (Immediate effect and reserved powers) Law 1998 to clarify which powers may be reserved by the Settlor without the court holding that the trust is a sham:

Settlor may retain the following powers:

  1. Revoke, vary or amend the trust instrument
  2. Appointment of income or capital
  3. Act as director of a company whose shares are owned by the trust
  4. Give the trustees binding directions for the investment of trust property
  5. Appoint or remove trustees or protectors
  6. Change the proper law of the trust or
  7. Require the trustees to obtain consent of the Settlor before exercising any power.

Similar legislation has also been introduced in the Bahamas and Cook Islands. In jurisdictions that have not enacted this type of law, it is possible that the trust could be considered a sham – this means assets could be held on a resulting trust for the Settlor


Trust is created properly but administered improperly so that the trust is a sham and seen merely as the settlors own investment vehicle. The trust appears fine except in reality the Settlor has retained de facto control of the assets, makes investment decisions, to whom distributions should be made etc.

To avoid this, the trustee must:

  1. Comply with the trust instrument or the settlors letter of wishes
  2. Genuinely obtain and retain control of the trust assets
  3. Exercise discretion independently rather than just carry out the orders of the Settlor.



Proprietary Capacity: Settlor must be over 18 and must have the capacity to create a trust governed by a law that is not the settlor’s domicile.

  1. movables (money, shares etc) the validity of the trust will be determined by the proper law of the trust
  2. Land – the validity of the trust will be determined by the law of the country where the land is situated

If a country prohibits the Settlor from creating a trust then any trust of land in that country will be invalid.

Generally in offshore jurisdictions the law cannot validate:

  1. a trust where the Settlor never owned the property under the law of his domicile
  2. Update a transaction of a company contrary to the law of the place of the company’s incorporation
  3. Effect recognition of foreign laws which prescribe the formalities to be followed for the proper transfer of property lawfully
  4. Cannot validate a testamentary trust created by will when the will was invalid according to the law of the testator’s domicile.



Rule against perpetuities is the maximum limit to the duration of a trust (except charitable trusts). Purpose of the law is to ensure that interests in the property are not tied up in a trust too long into the future.

Common Law Rule

A future interest in property must vest no later than 21 years after the death of the last surviving life in being. If it does vest after the period has expired, the interest is void.

Perpetuity period = life plus 21 years.

Perpetuity Rule in Offshore Jurisdictions

Perpetuity rule is only relevant to trusts of real estate “land rich but cash poor situations with the land being wrapped upon trust.

Statutory requirements in offshore jurisdictions:

Cayman Islands – 150 years

Bermuda – 100 years

Bahamas – retained life plus 21 years

Hong Kong follows English law.




Trusts & Estate Planning

Trusts & Estates Lawyers Toronto

Of concern to every individual should be planning for the future. It is important to ensure the security of your wealth and that of your family. Making money is not easy, so every effort should be taken to safe guard it from attacks by any third party claims. At Makooli Prekupec LLP we work with some of Canada’s most experienced asset protection professionals, who are able to provide tailored planning for each client.

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