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Monday, February 10, 2014

Beneficiaries paid before taxes were paid? Oops...

Here is one of those cases in which a reader asks me for information and I provide the answer that he absolutely does not want to hear. In this case, the executor  hired a trust company as agent, and the trust company overpaid the beneficiaries before paying taxes. Now the executor is wondering whether the beneficiaries have to return the funds. I doubt he will like my answer, but here it is.

"I was named executor in my dad's will (he died in 2011) & I asked a major Canadian bank (not BNS) to take over this duty which was done through the proper channels. An interim distribution was made in Nov. 2011. Now the 3 beneficiaries are being told by the bank to repay $5,000 to the estate to pay CRA penalties for my parents failing to file back tax returns. Are we obligated to return this money to the estate? They have had the file since 2011 and made a distribution before being sure that CRA was not owed money. Are the beneficiaries responsible for their oversight?"

No, the beneficiaries are not responsible for their oversight; you are.

I've made this statement based on the assumption that when you hired the bank, you did not renounce as executor, but simply hired them as your agent. I assume this partly because this is how it is usually done, and because you didn't say otherwise.

The fact that there has been an error like this puts you in a bad position. I do not believe that the beneficiaries are obligated to return the funds, but you might hope that they do. It is the executor who is responsible for unpaid taxes when the estate is prematurely paid out, and you are the executor.

You have the final say in all decisions and as far as CRA and the law are concerned, you are the one who is ultimately responsible for the erroneous payout of the funds to the beneficiaries. You are responsible for all actions taken by anyone acting as your agent.

Having said that, I understand that when a bank/trust company or lawyer is helping with an estate, the executor leans heavily on their advice. They are professional executors and should be well versed in the tax rules. So, in reality, I think if the beneficiaries do not return the funds (and why would they?) you should try to get the bank to cover the shortfall.

It was their mistake, from what you've said. You haven't mentioned whether or not they hired an accountant to provide an estimate of taxes owing, so I will assume they did not. They might decide to cover the shortfall simply from a customer satisfaction perspective, if the mistake was indeed their fault.

This is a shame, really, because it seems to me that the bank/trust company was probably trying to do the beneficiaries a favour by paying out as much as possible and to hold back the minimum. This isn't the first estate that has been caught out this way, and it won't be the last.

But understand that this tax debt is ultimately yours as the executor of the estate. The bank is entitled to rely on the letter of the law that says that you personally are responsible for ensuring that taxes are paid or funds withheld.

2 comments:

  1. Hi Lynne,
    I have a question which I'm hoping you might do a post on - what happens to an estate when there is a marital separation and then the death of one spouse before assets are divided? The spouse who moved out of the family home is the one who passed away first, without a will. Subsequently, the second spouse also passed away, also without leaving a will. There are no children, so both sides of the family are squabbling over who get what!

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  2. Hi Lynne: I'm not sure if I'm repeating myself, because I can't find the post I sent. My deepest apologies if it's redundant for you or a waste of your time.
    I want to know why I have to sign a Release and Indemnity agreement for an interim distribution? What if I later on find discrepancies, have I already given up my right to contest things? I don't want to do that? I don't trust the Executors because I believe they helped themselves to my father's money when they had his POA the last two years. It's a long story, I have 100 pages of accounting to get through and the lawyer sent it last night at 5 PM and expects the relase from me with indemnity clauses everywhere, today. I say NO way, you can't hold me hostage like that. She said everyone else has signed except me, I say that's too bad, it will ahve to wait until I have tim to go over everything. Can I tell them I'd sign without indemnifing them? Can I release the funds to all 5 beneficiaries without indemnifying the Executors? Not sure why it's such a big rush, I know they hid money and stole money when they had POA, now they are railroading this through. Something is amiss here. they say the form is a Standard BC form of release and they can't change it. I say that's not true, we don't even need a lawyer to do any of this, and it's advisable to have a release but I don't see any Law that says I have to sign a release and indemnity document. Is there a law that says I absolutely MUST sign this? they are pushing me very hard.

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