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Monday, February 27, 2017

Failure to follow Prudent Investor Rule costs executor $350,000

I sincerely hope that each and every one of you who is acting as an executor has heard of the Prudent Investor Rule. This is the rule that applies in almost every part of Canada to set the standard for how executors and trustees are supposed to look after estate investments.

The rule, which is found in the Trustee Act of most provinces and territories, simply says that when an executor or trustee is investing the assets of the trust or estate, he or she must "exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments." This is usually interpreted to mean that the executor or trustee must make sensible decisions about investments such as investing at an acceptable risk level and diversifying the portfolio.

It's acceptable for an executor or trustee to hire a money manager or financial advisor. We are not all expected to be financial experts, after all. However, even when an executor hires professional help, he or she must give accurate information and make sensible decisions.

This rule is in place because, let's face it, sometimes executors and trustees get a bit reckless with the estate assets. The rule is supposed to provide a standard of behaviour that does not require anyone to be perfect but does expect everyone to at least be careful.

I came across a good article recently from Toronto lawyer Kimberley Whalen, in which she talks about the case of Mowry v Groome, a case decided in Ontario in 2016.Click here to go to Ms. Whalen's article. In this case, the executor was removed because he took several reckless steps with estate assets. For example, the executor hired a financial advisor but told the advisor that the risk tolerance for the estate was 90%, a hugely risky proposition for any portfolio but absolutely foolish for an estate. There were other mistakes, too. Hundreds of thousands of dollars were lost from an estate that was worth $436,000 at the date of death. He also took money out of the investments to cover a cheque to himself for $70,000 that he said the deceased had given him.

At the end of the day, the judge removed the executor and ordered him to repay $350,000 to the estate (including the $70,000 which the judge said was not a real gift). The judge's comments were interesting because the judge said he didn't find that the executor was dishonest, just that he had an inflated view of his own business sense and didn't seem aware of the risks.In other words, you can still be held liable for the losses even if the court doesn't think you did anything illegal.

To any executor who feels that he would not be able to repay such a large sum, this case should act as a cautionary tale. The estate money is not yours. You are a temporary caretaker of the assets on behalf of others, and if you mess that up because you're being careless, you could end up paying.

1 comment:

  1. Excellent. This should apply to beneficiaries as well ie. those who have POA, and who are not Executors and who take it upon themselves to play games with Estate Monies.


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