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Monday, February 22, 2016

Was it ok for the estate lawyer to write a cheque to the executor for her executor fee without approval of beneficiaries?

The relationship between beneficiaries, executor, and estate lawyer is a confusing one for many people. A reader wrote to me recently to ask about an executor who instructed the estate lawyer to write a cheque for the executor's fee. Read on to see her note and my comments:

"I am a beneficiary of an estate along with my two siblings, one of whom is the executor. Can she pay herself an executor's fee without having a release signed by all the beneficiaries agreeing to the amount? Should the estate lawyer have issued a cheque to her without a signed release? When we questioned him about it, he advised us that she told him that her fee was presented, discussed and approved by the beneficiaries, which it was not, so he took her word on the matter and issued the cheque."

There are two issues here. One is the question of the executor paying herself the fee, and the other is the issue of the lawyer issuing the cheque based on the executor's assurances. Let's take one at a time.

An executor is not entitled to pay herself a fee until either the beneficiaries agree to the fee, or a judge orders that the fee may be paid. The usual procedure for beneficiaries agreeing to a fee is for the executor to include the request for compensation in her accounting to the beneficiaries at the end of the estate. The executor provides a package of documents that shows all of the work she did on the estate, accounts for all of the transactions in and out of the estate, describes how the remaining funds are to be divided up, and requests payment for her work.

All of that material usually accompanies a Release document. If the beneficiaries are satisfied with the accounting, they will sign the Release. Because the request for compensation is part of the package, the beneficiaries' consent applies to it as well.

As we all know, not all executor's accounts meet with the approval of the beneficiaries. When that happens, either the executor or the beneficiaries may apply to the court to have the accounts passed. This basically means that if the court thinks the accounting is okay, the court's approval does away with the need for the beneficiaries to agree. As part of that application, the judge will decide whether the executor's request for compensation is reasonable or not.

An exception to this general rule about not taking compensation until approval has been received is that a will may include a statement that the executor may "pre-take" compensation. I rarely see this clause except in wills that name trust companies as executor. They like to have the clause included in case the estate ends up taking a couple of years, so they won't have to wait until the end to be paid.

Unless the will you're working with has a pre-taking clause, your sister is required to go through the usual steps of either getting beneficiary consent or a court order.

Now, onto the question about the lawyer's actions. One of the things that people in general misunderstand about estates and estate lawyers is that the executor is the person in charge. The lawyer works for the executor and not for the beneficiaries.Therefore, the executor is the one calling the shots. It's not up to the lawyer to decide whether the executor gets paid or not. If the executor tells the lawyer that the beneficiaries have agreed to the fee and directs the lawyer to write the cheque, then the lawyer is going to write the cheque. Since the legal liability for taking money without permission is all on the executor, you wouldn't think an executor would deliberately take actions that are against their own interests.

In your case, however, the executor did instruct the lawyer to do something that is against her interests. The executor may think that it was great to get the fee this sneaky way, but it may well come back to bite her. The lawyer doesn't have much recourse. The lawyer must hand over trust money when the client asks for it, as the lawyer has no claim to it. All the lawyer can really do is fire the client, since the client isn't following legal advice anyway.

While it's possible that any executor can make a procedural mistake, and plenty do despite their best intentions, I don't think it was an honest error in this case. She lied to the lawyer about getting approval.

The beneficiaries, on the other hand, have control over the executor's fee. The executor may not ask for a Release and may not present a proper accounting, believing that this will excuse her from having to get the approval of the beneficiaries. However, as I mentioned above, the beneficiaries can force the executor to pass her accounts in court. If she has taken too much in executor's fees, the court can order her to repay it.

An executor is usually indemnified by an estate for legal fees on a passing of accounts. However, if the passing of accounts is brought by the beneficiaries in order to deal with discrepancies by the executor and the executor loses the application, the court may decide that the executor must pay the costs herself.

4 comments:

  1. Another excellent post and response.

    So much of what I read here is so often about 'common sense'. If only it were more common.

    ReplyDelete
  2. I Googled 'breach of fiduciary duty by a beneficiary' who was also a POA and all I got was this. Am I the only Trustee to have have run into such a situation with a benificiary?
    http://tinyurl.com/jyhgfxh

    ReplyDelete
    Replies
    1. That may be because the fiduciary duty is owed by the trustee, not the beneficiary. In the search you mentioned, the trustee (under the POA) also happens to be a beneficiary but those two roles do have to be separated.

      Lynne

      Delete
  3. Lynne
    Confusion on my part. I did not Google POA in that search. I am the trustee and I have done my fiduciary duty. Both Informal and Formal Pass Accounts reconcile. I have a 'sibling beneficiary' problem. A very expensive mess. TBC.

    ReplyDelete

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