Retirement Shocker

This article talks about beneficiary designations, something we've talked about a number of times on this blog. It's definitely worth repeating though because it continues to trip up so many people. Estate planning is not just about getting a Will made. It's about setting up a comprehensive plan that includes all of your assets and liabilities, and all of the people that are important to you. Click here to read the article. It's American and therefore refers to US 401Ks, but the very same principle applies to Canadian RRSPs and RRIFs.

Can an executor distribute estate assets before getting the tax clearance certificate?

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As I mentioned in a recent post about tax clearance certificates (click here to read it), an executor usually waits for Canada Revenue Agency to send him or her a Tax Clearance Certificate before giving the beneficiaries their shares of the estate. This procedure arises from the fact that an executor is required by law to pay all debts and taxes before giving money to beneficiaries, and the Clearance Certificate is proof that there are no more taxes owing by the estate.

However, there is a process for an executor to give the beneficiaries most of their inheritance before getting the Clearance Certificate, a process known as an interim distribution.

Before an executor takes this step, consider the fact that if he or she pays the beneficiaries before paying Canada Revenue Agency, that executor will have to come up with the tax money, even if it is out of his or her own money. Once you've given the money out to the beneficiaries, it's pretty hard to get some of it back again to pay taxes.

To boil down a detailed process into a simple description, the idea of an interim distribution is to hold back enough money in the estate to pay future taxes, future expenses and any legal or accounting fees, and to distribute the rest to the beneficiaries. The executor will produce a legal accounting of the estate that details all of his or her financial transactions on behalf of the estate. It will also include a Statement of Proposed Distribution that shows how much of the estate the executor proposes to give out to the beneficiaries now, and how much is being held back for taxes and other expenses. The financial documents are given to the beneficiaries along with a Release document. If all beneficiaries agree and sign their Releases, then the executor can go ahead with the interim distribution.

How do you know how much to hold back for taxes? Obviously you must get this number correct. I have never proceeded with an interim distribution without working with a tax accountant who can estimate better than I can what taxes might be owing by the estate.

Most of the time, beneficiaries will pressure executors to make an interim distribution because it takes months to get a Tax Clearance Certificate. However, beneficiaries should understand that they cannot force an executor to make an interim distribution because it means the executor is assuming risk for the payment of estate taxes.

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Are co-executors liable for each others' actions?

Many people like to appoint co-executors of their estates. There are a number of reasons for having more than one executor, ranging from wanting to share the workload to wanting the executors to keep an eye on each other. When co-executors are appointed, they are told that they must work together and that decisions about the estate must be made jointly. But what if they aren't made jointly? What happens when one executor takes matters into his or her own hands and ends up causing a loss to the estate? Are they both responsible for the loss?

The answer to this depends on the specific facts of the case, but generally speaking if one executor acts alone without the knowledge or consent of the other executor, and makes a mess of it, the executor who caused the problem is the only one responsible.

If they are both at fault, then usually both will be equally responsible for the loss. However, one fact that can make a big difference is the identity of the co-executor. For example, if one of the co-executors is a lawyer, he or she might end up being held the only one responsible, even though both co-executors participated in the actions. This is because the lawyer has specialized knowledge and training that should have an impact on how that lawyer behaves as an executor.

Trust companies are, just like lawyers, held to a higher standard than individual executors because of the experience and training of the trust company's staff. This can mean that if a trust company is a co-executor with an individual and both executors participate in a transaction that causes a loss to the estate, the trust company might be held solely responsible.

Executors and co-executors can be held liable for the actions of others if they hire people to help them with an estate. Frequently executors will hire lawyers, accountants, realtors, appraisers, investment advisors and others to carry out specific jobs within the estate administration. Sometimes the person hired may make a mistake that leads to a preventable loss on the estate. Is the executor responsible for that?

As long as the person hired does ONLY the work that is within his or her specialty, any loss due to an error is not the executor's responsibility; it's the hired person's responsibility. But if that executor asks the hired person to do anything that is not their specialty (for example, a lawyer completing a tax return or a realtor giving investment advice) and there's a mistake, that is considered the fault of the executor.

The rules are somewhat complicated when it comes to figuring out who is to blame for something. This is why executors and co-executors are told the rules of how they are expected to act when they take on the job.

Collaborative law - the alternative to duking it out

If you've ever been unfortunate enough to be involved in a personal legal dispute, you've probably wished there was a better way. Litigation is expensive, time-consuming and, let's face it, pretty unpleasant at times. Fortunately, divorce, custody battles and estate battles don't always have to be done the hard way.

Collaborative law is an alternative way of settling legal matters. It has been extremely successful across Canada and the USA and its popularity continues to grow.

The basic idea behind collaborative law is that the people on both sides of the dispute, along with their lawyers and any other advisors (e.g. accountant) form a team that is determined to find a solution to the issue together. Both sides agree in writing that they will not resort to the courts. If for some reason the matter simply can't be resolved and someone wants to take it to court, both sides have to get new lawyers and start from scratch.

One of the things that makes this system workable is that lawyers who call themselves "collaborative lawyers" must take specialized training in negotiation and mediation and must become members of their collaborative law association. In Alberta, to learn more about the association or to find a collaborative lawyer in your area, click here.

It's a pretty radical departure from what the legal system has traditionally done for individuals. Our system is set up to be adversarial, and, in my opinion, presupposes that people have tried all available methods of dispute resolution before resorting to the courts. However, we all know that there are plenty of lawsuits out there where nobody actually tried any dispute resolution before going to the courts, so collaborative law is a welcome addition.

Collaborative law is mainly used for family law issues such as divorce, custody and child maintenance. But it does also have relevance to wills and estates disputes. One of the things I found so disheartening about estate litigation (which I practiced for many years in my pre-bank days) was that families never really recovered from the effects of suing each other. The fallout tended to be permanent. If more families could agree to reach a collaborative settlement, this would be a great benefit to them.

I know that some lawyers are finding ways to apply collaborative law to estate issues, and I hope to see more of that in the future.

How do I get a Tax Clearance Certificate

A tax clearance certificate is a notice you receive from Canada Revenue Agency that states that all taxes owing on an estate have been paid. Although it is not the law that every executor must get one, the majority of executors will do so. This is because if the executor goes ahead and distributes the estate to the beneficiaries and then later finds out that there is tax owing, the executor himself might have to pay the taxes out of his own money.

I'm often asked how a person goes about getting a tax clearance certificate. The certificate does not come out automatically; it has to be requested in the right way at the right time. The vast majority of executors that I've worked with have asked the accountant who does the tax returns for the estate to request the clearance certificate. This is because accoutants who are familiar with taxation know how and when to get it.

However, if you want to request one yourself, here are the basic steps:

1. file all of the necessary tax returns for the deceased and the estate;


2. receive the Notice of Assessment for the returns you've filed;


3. fill in a form called TX19, that you can find online here;


4. send the form to your local tax office, along with a copy of the Will, a copy of all probate documents and a statement of proposed distribution.


5. wait.

It takes a long time to get the tax clearance certificate. You should expect to wait several months in most cases. Because of the long wait and the unwillingness of beneficiaries to wait longer than necessary for their inheritance, there is a process in place for making an interim distribution of the bulk of the estate while keeping back enough money to pay the taxes and future expenses. I'll post about that interim process in a separate post.

To go to the Canada Revenue Agency page on clearance certificates, click here.

What are the executor's duties?

When I talk about executor's duties in this blog, I usually focus on one duty or one detail at a time. However, I think many executors out there would appreciate having an overview of their duties, either as a first-time checklist, or as a refresher of what they learned when they first began working on the estate. So here is a list of what an executor in Canada is supposed to do (note that an administrator appointed by the court has to do these things as well, though he or she cannot do them until they are appointed):

• make arrangements for the disposition of the deceased's remains, as well as any arrangements for funeral, memorial service, etc.


• find out the names and addresses of the beneficiaries and notify them of their interests in the estate.


• list the contents of any safety deposit box owned by the deceased


• make an inventory of all of the assets and debts of the deceased. Give all assets and liabilities a value as of the date of death.


• check that property is insured. Advise the insurance company of the death. Place additional insurance if necessary.


• secure any valuable estate property. Once smaller valuable items have been inventoried, put them somewhere safe where they can't be stolen or damaged.


• arrange for protection and supervision of vacant land and buildings.


• make arrangements for the proper management of estate assets. If there is a business or farm, make sure there is someone running it properly. Sell assets if appropriate.


• apply for a Grant of Probate or Grant of Administration.


• hire a lawyer to advise you on any complicated or unclear issues.


• apply for all pensions, death benefits, life insurance or any other benefits that are payable to the deceased's estate.


• if there is any jointly owned property, advise the other joint tenant of the deceased's death (notice that this list does not include you taking care of the transfer of title. The surviving joint tenant can do that).


• if there are any life insurance policies, RRSPs or any other assets that name a beneficiary other than the estate, notify that beneficiary of the deceased's death.


• pay all of the debts and expenses owed by the deceased and by the estate.


• decide whether or not to advertise for creditors and claimants. If you choose to advertise, do so in accordance with the law. If there are claims, check them out for legitimacy. Pay legitimate claims from the estate.


• determine how much tax the deceased owes. Have tax returns prepared and filed on time. Pay the taxes before paying beneficiaries. Get a Canada Revenue Agency tax clearance certificate.


• if there is a lawsuit against the estate, hire a lawyer and run the lawsuit on behalf of the estate.


• set up any trusts directed by the Will. Administer the trusts for the length of time and on the conditions set out in the Will.


• answer enquiries from residuary beneficiaries, creditors and other stakeholders.


• prepare executor's financial statements including a proposed compensation schedule and a proposed final distribution schedule.


• distribute the deceased's property in accordance with the Will or with intestacy law.

As you can see, many items on this list are going to break down into smaller lists with several items of their own, but this should give you a general idea of what you'll be expected to do as an executor.

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PLEASE NOTE: The maximum number of comments this system will allow is 200, and this post now has more than 200 comments. IF YOU POST ON THIS THREAD, I WILL NOT BE ABLE TO SEE OR RESPOND TO YOUR COMMENT. Please feel free to ask your question on any thread with less than 200 posts.

How does an executor assign values to estate assets?

A task for executors and administrators everywhere is preparing an inventory of assets and debts of the deceased person. This leads to questions about how the executor knows what values to give to items. Some executors make their lives more complicated by simply guessing values, or by giving artificially low values to try to keep fees lower.

When giving value to items and preparing the inventory, keep two things in mind. One is that it's part of a document that you will swear under oath to be true. So if it is found not to be true, you might be getting yourself into trouble. Second is the fact that an inventory of an estate is potentially seen and used not just by the executor but also by the judge, the lawyer, the accountant, the clerks at the Land Titles Office, the beneficiaries (and possibly their lawyers) and the creditors.

So, having been given the above warnings, how do you give value to assets? Some ideas for different types of assets are given here. You'll notice that having written back-up that proves you didn't just pull a number out of a hat is a good idea.

House, cottage - the best source of value is a property appraiser. If that is just not in the budget, also acceptable are estimates by realtors (get a few) and the appraised value given on the annual tax assessment notice.

Farmland - I recommend that you hire a property appraiser for valuation of farmland. Farm equipment should be valued by a farm equipment dealer.

Investments and accounts - for any accounts, investment portfolios, DRIPs, mutual funds, RRSPs, RRIFs, etc. you should rely on the statements provided by the financial institution. Remember that you always have to assign the value as of the date of death, so if possible get a statement dated that day. If not, get one as close to the date of death as possible and choose the balance that applied before the date of death.

Pension - for private pensions, contact the pension administrator (who should be identifiable by looking at stubs or letterhead in the deceased's records, or by calling the employer) and ask. In come circumstances, you may be given a "lump sum" value that would apply if an amount that would otherwise be paid monthly were to be taken all at once.

Life insurance - request a letter from the insurance company by quoting the policy number. Some policies pay only the face value, while others may have a calculation of face value + savings - loans.

Shares of publicly traded companies - you don't have to look up shares that are held in a portfolio as the financial institution or advisor will value the whole portfolio. But if there are shares held outside of a portfolio, you need to put date of death values on them. You can find these values online on sites for transfer agents or financial newspapers (e.g. Wall Street Journal, Globe & Mail). Make sure you get a historical balance that applied on the date of death.

Shares of private companies - depending on the size and complexity of the company, you may wish to bring in a professional business valuator to determine the value. Another good approach is to have the company's accountant value the shares based on the assets and liabilities of the company. If the business is going to be sold, you could contact a business broker.

Vehicles - your provincial motor association will let you know the book value of pretty much any vehicle. If this isn't available, ask for quotes from dealers and look in publications such as the Auto Trader to see what prices are being realized on similar vehicles.

Household goods - this can be the trickiest of all. If there is a collection of artwork, stamps, coins, hockey memorabilia, rare books, etc, have that appraised by someone in that field. If there is jewelry, have it appraised by a jeweler. If there are antiques, have them appraised by an antiques dealer or estate auctioneer. In most homes, however, the majority of household and personal goods are not commercially valuable. For those items, you can assign a more or less arbitrary number such as $1,000, as you are unlikely to obtain more than that for them if they were sold at an estate or garage sale.

Can a lawyer act for an executor and for the beneficiaries?

When there is a lawyer acting on an estate, he or she has usually been hired by the executor to handle the probate of the Will and sometimes the administration of the estate as well. In a case like this, the lawyer is acting for the executor. The lawyer's loyalty is to the executor, who in turn represents the estate.

A lawyer can act for the executor and the beneficiaries at the same time, but has to be careful about conflicts of interest. For example, a very common situation is one in which a man dies, leaving his wife as the executor of his estate, but he doesn't leave her the entire estate. The wife hires a lawyer to probate the Will. The lawyer knows that the wife can apply to the court to get more of the estate. The lawyer could not act for the wife with respect to the application for more of the estate, but he or she could act for the wife on the probate. Any executor who is making a personal claim against an estate like this is wearing two hats - one executor hat and one personal (beneficiary) hat - and will likely have two lawyers.

The estate lawyer cannot represent anyone whose interest is, or could be, adverse to the well-being of the estate (for those of you who are into research, this is set out in the Alberta Lawyer's Code of Professional Conduct, Chapter 6, Rule 2, Commentary 2.4).

Most of the time, the beneficiaries don't want or need their own lawyers because things go along smoothly. They would probably hire a lawyer if they wanted to dispute what they were getting under the Will, if they needed an answer to a legal question (such as, was the joint property really joint property), or if they need to do something about an executor who is fraudulent, negligent or otherwise acting suspiciously. Other than that, beneficiaries usually have no need for their own legal representation.

But beneficiaries need to realize that the estate lawyer will do, on the instruction of the executor, what he or she thinks is best for the estate, even if that is not necessarily what any individual beneficiary wants. An individual beneficiary cannot instruct the estate lawyer to do what that one beneficiary wants. That would be chaos.

In most estates, there is a lawyer who represents the estate and is frequently the only lawyer involved in it. When beneficiaries receive the final accounting at the end of the estate and are being asked to sign off on it, they sometimes consult an estate lawyer for a couple of hours just to review/interpret the accounting and to ensure that all is in order.

Does an incarcerated person forfeit his or her inheritance?

Executors of estates can easily get bogged down whenever there is a beneficiary named in the Will who is in an unusual or unexpected situation. One of the situations in which it isn't always obvious how an executor should proceed is that of one of the beneficiaries of the estate being in jail. For the sake of this post, let's assume that the beneficiary in question is going to be in prison for many years to come.

If the person is incarcerated, is he going to forfeit his inheritance?

No, he or she is not going to lose the inheritance just because of the fact that he or she is prison. If the Will says that no beneficiary who is incarcerated shall inherit, then the answer is different.

In some provinces, there is a requirement that an executor who is applying for probate of a Will must give notice in writing to each beneficiary of the estate. If a person is incarcerated, he or she still has to be sent a notice in the same way that any other beneficiary would be notified.

Things for an executor to consider when selling a house from an estate

One of the largest tasks that an executor often has to take care of in an estate is selling the deceased's house. There are a lot of issues to consider before taking this step. Here are some of the things you should keep in mind:

1. Has the Grant of Probate been issued? If not, you will not be able to transfer the title to anyone. This doesn't mean you can't list the house before getting probate, but the deal has to be made subject to the Grant issuing within a reasonable time.

2. Does the Will direct you to grant an option to purchase to anyone? Are there any other instructions in the Will about disposing of the house?

3. Keep the house insured right up until the title transfers. The house is legally under your care while you're the executor so if it burns down before it's sold, you're on the hook. Let the insurer know that the house is vacant.

4. Get an appraisal - or two - before listing the property. This will head off any objections from beneficiaries that either you sold it too cheaply or it's taking too long to sell because you priced it too high.

5. Do a title search to check that the ownership of the house was owned by the deceased alone. Check the title for liens and mortgages that you might have to deal with.

6. Check the Will to see what it says about dealing with personal items in the house and in any outbuildings such as garages, shops and sheds. Give away items according to the Will. You will have to decide what to do about the rest of the furnishings and household items, whether that ends up being an estate auction, a garage sale or a donation of items to charity. Any money earned from selling items should be pooled with the estate.

7. You might have to spend some money on repairs, cleaning or renovations before the house can be sold. If there is estate money available, this is a legitimate estate expense as long as you keep it reasonable and you keep detailed records with receipts. If you end up spending your own money on this because there is no estate money available, you are entitled to be repaid before the beneficiaries split the sale proceeds.

8. If the house you're selling was the deceased's principal residence, there will be no capital gains tax arising from the sale. However, if the house is a cottage or other secondary home, there will be tax implications. Remember that taxes have to be paid before beneficiaries can receive their shares.

9. Deposit the proceeds from the sale of the house into your executor's bank account. Never put estate money in an account with your own personal funds.

Does an executor have to pay the deceased's unpaid debts out of his own money?

This isn't going to be a quick yes or no answer because, as with everything in law, much depends on the circumstances of each case. Here are some general rules you can work with.

The debts of an estate (including income tax) must be paid before any beneficiaries receive their money. If an executor ignores the debts and pays the beneficiaries, the executor may be held personally liable for those debts.

If paying the debts first means that the beneficiaries get little or nothing out of the estate, this is not the executor's fault.

Often an executor asks about debts because there are more debts than there are assets in an estate. An executor should a) honestly try to figure out what legally enforceable debts exist, b) be very careful to put appropriate values on estate assets, and c) use the estate assets to pay the debts. Where there is a lot of debt, this usually means selling assets to realize a cash value that can be divided among creditors. If there is not enough money to pay everyone 100% of what is owed to them, the executor may have to try to negotiate a settlement whereby each creditor gets a certain amount on the dollar.

If the estate is fully used up to pay the legally enforceable debts and expenses, and there are still debts of the deceased unpaid, the executor does not have to use his own money to pay them. That's assuming, of course, that the executor has not done anything fraudulent or negligent with the estate's money.

When listing the debts of an estate, the executor should remember to include debts that are not payable immediately but that will become payable in the future, such as income tax at the end of the year.

To protect himself or herself against personal liability, an executor should advertise in the newspaper for creditors and claimants against the estate. Doing so won't overcome any negligence on behalf of the executor, but assuming there is no negligence, advertising for creditors certainly helps.

Why can't I see the Will?

Over the years, I've been asked by dozens of family members and other interested parties how they can see someone's Will. In each case, it wasn't a general interest question, but a request that I help them obtain a copy of a certain individual's document. Usually, but not always, it was the Will of someone who had passed away. I find it interesting that a lot of people believe they have a right to see a Will just because they want to see it, which of course is not the case.

A Will is a private document. Lawyers advise their clients to keep their original Wills in the safe deposit box at the bank, in a locked safe at home, or in the lawyer's vault. Part of the reason is that they don't want to lose the original Will, but just as importantly, they don't want it to be read by anyone. An individual can choose to show someone his or her Will if they want to, but nobody, including the executor named in the Will, has an enforceable right to see it if the owner doesn't want to show it.

After the owner of the Will (the testator) has passed away, things change, but the Will is still private. If the Will is held at a bank, lawyer's office or trust company, it won't be released to anyone except the executor named in the Will itself. Nor will it be shown to anyone else. There could be an exception where the testator left written instructions to give it to someone else, but that is extremely rare.

The most common reason given for wanting to see someone's Will is that the individual asking the question believes that he or she is a beneficiary of the Will. They want to confirm this, and to find out what they will inherit.

In Alberta, when a Will is probated, the executor is required to provide every beneficiary with a notice by registered mail of what they are going to inherit. If they are inheriting a portion of the residue of the estate, they will receive a copy of the whole Will along with copies of all documents (including inventory of assets and debts) filed with the court. If they are receiving a specific gift, such as a piece of jewelry or a stated amount of cash, they will not be given a copy of the Will, nor are they entitle to receive one. The notices are usually sent out by the lawyer's office.

Not all estates go through probate, so this process does not cover everyone. However, the same rules apply. If you are a residuary beneficiary of an estate, you are entitled to see the entire Will. Otherwise, you're not.

A problem sometimes arises when an executor is overly secretive about the estate. This could signify a problem, but not always. A family member who is positive that he or she was named as a beneficiary in the deceased's Will may be suspicious or upset if the executor refuses to say whether the person is or is not still in the Will. In a case like this, if you want to see the Will, you should consult an estate litigation lawyer to represent you in a formal request for the information you want. Sometimes a court order is required.

There are other reasons for wanting to see what's in a Will. For example, if you are acting for an incapacitated adult under an Enduring Power of Attorney or Personal Directive, you will likely be allowed to see the incapacitated adult's Will while he or she is alive. This is because you will have to make decisions for the incapacitated adult that might be affected by what is in the Will.

Network with other Wills and Estates professionals

For anyone working in Wills, Estates, Trusts and Elder Law who would like to meet, network with and exchange information and ideas with others in the industry, please feel free to join us at www.LinkedIn.com. Once you're on the site and have set up a profile (it's free!) look for the group called "Canadian Will and Estate Professionals" and click on "request to join". I'm the moderator of the group and will get to your request very quickly! Lawyers, accountants, trust officers, insurance representatives, business planners, financial advisors and medical professionals who deal with mental capacity issues are all urged to join us. Some of the topics posted for discussion so far include TFSAs, a horrendous but important elder abuse case and the importance of being a member of STEP. The group is growing quickly, so please check us out.