Ontario court: trustees can't just act in any manner they want

The Ontario Supreme Court of Justice recently handed down an interesting judgment that affects all trustees (which includes executors). It was a case involving a contested passing of accounts on a family trust. The case is Steven Thompson Family Trust v. Thompson.

The trustees wanted to pass their accounts. The beneficiaries objected to several expenditures, including fees paid to the trustees and fees paid to lawyers and accountants. To defend themselves, the trustees relied on two clauses that are very commonly found in wills and trust documents.

The first clause in question was one that allowed the trustees to hire lawyers, accountants and others to help them with the trust administration, and to pay them from the trust. The second clause, known as an exculpatory clause, was one that indemnified the trustees from any liability arising from errors that were made even though the trustees acted in good faith. As I said, these clauses are often included in trust documents to show that the settlor of the trust (or the testator of a will) intend for the trustees not to face legal trouble or financial loss due to errors.

The court looked at these clauses in the context of the facts of the case. The judge said that "an exculpatory clause cannot be a license to a trustee to act in any manner he wants." The judge refused to accept that an exculpatory clause means that no matter what a trustee does, the court can't blame them. As the judge said, for the beneficiaries of a trust, there is usually no way to fix trustees' mistakes without going to court, so it would be very unfair to cut off access to the courts.

Of the 23 disbursements to which the beneficiaries objected, 20 were disallowed by the court. Legal and accounting fees paid out that were considered to be no real benefit to the trust were disallowed, meaning that the trustees could not be reimbursed for them from the trust. This included $14,000 to a lawyer, $31,000 to accountants and an overpayment of $22,000 in trustee fees.

Those are pretty hefty bills to be paid out personally by trustees, but as the judge said, if the actions being taken are not really to the benefit of the trust, they shouldn't be paid out of the trust, even if the trust contains a clause saying that trustees are not to be blamed for mistakes.

Can an executor get away with ignoring the instructions in the will?

Here is another letter from a reader who, as you readers tend to do, hit the nail right on the head with a question that will interest many of you.

"What can be some ramifications of an executor who disregards instructions that have been written in the will? I assume they cannot just get away with doing whatever they want can they?"

Executors get away with a heck of a lot, partly because they don't really know what they're doing and partly because the beneficiaries don't know either. This only gets worse when the executor either deoesn't hire an experienced estate lawyer, or hires one and ignores his advice. A large number of executors are under the impression that the estate they are looking after has been given to them to do with as they see fit, including re-writing the parts of the will they don't especially like, and of course this leads to trouble.

I'm glad to see you asking questions about this because beneficiaries and families in general need to know more about the estate process. There is no government agency that oversees what executors are doing. It's up to the beneficiaries of an estate to keep the executor on the straight and narrow, but that's not easy to do when you don't really know what the rules are.

Yes, there can be ramifications for an executor who disregards the specifics of the will. The severity of the consequences will depend on the facts of the breach. For example, an executor might ignore the will's instructions to sell everything, and give the beneficiary an item without selling it first. That would be considered less serious than an executor who decides to keep all of the money in the estate for himself without giving anything to the beneficiaries.

If an executor has simply made a mistake and realizes it, the objective should be to fix it to the extent possible without any need to punish anyone. However, court involvement is usually required to bring about any consequences for an executor because few will admit they've done something wrong, and even fewer will volunteer to correct their mistakes. The severity of the penalty is decided by a judge. Some of the things that judges will do fairly often are:
- remove the executor from the job of being executor
- reduce the executor's fee or withhold it altogether
- force the executor to produce a decent accounting
- set deadlines for the executor to meet
- force an executor to pay back money out of his own pocket

If the executor refuses to do as the judge says, the judge might ramp up the consequences. This could mean holding the executor in contempt of court, which could mean a fine or jail time.

If an executor has stolen from an estate, he can be arrested just like anyone else. Depending on the facts, this could lead to fines or jail time or other punishments decided by the courts.

Lately I've posted a few times about new cases involving executors who have been held accountable for not following a will. The courts seem to be cracking down on them, and for the sake of the families and beneficiaries who are at the mercy of the executors, I'm happy to see it.

Fee for acting under a Living Will? And can I ignore funeral instructions?

The role of the executor is challenging, there is no question about that. I know that many of you reading this blog are executors looking for practical information about how to deal with the estate you're working on. The following question (which is really two questions) came in from a reader in exactly that situation, so I'm sharing it with you in case you're in a similar spot.

Here's the question:

"Can an executor charge fees before the person passes away if that person is in charge of the living will. Also does the executor have to follow the will to the tee for the funeral arrangements?"

 

First of all, a person whose authority comes from a will can't do anything with that will, including taking a fee, while the testator (the person whose will it is) is alive.

 

When you talk about the Living Will, I am going to assume that you're actually talking about a type of health care directive or advance directive. These directives usually include the kind of end-of-life instructions you see in a Living Will, but they also do much more. They usually appoint someone to make decisions, and as you say you are "in charge of" the document, this sounds more like what you are dealing with.

 

The law in Canada generally does not allow a person acting under a health care directive to charge a fee. You can, however, usually recover reasonable expenses. Please understand that this has absolutely nothing to do with the will. You have to follow the law as it applies to the health care directive, which varies from province to province.

 

As for your second question, the executor doesn't have to follow the will to a tee regarding the funeral. In fact, legally the executor can totally ignore what the will says about the funeral, because the funeral wishes in a will are a wish only. They are not legally binding. The law says that if the executor has the legal responsibility to dispose of the body, then he or she must have the legal right to decide the best way to do that.

 

Please keep in mind the emotional fall-out that can happen if you decide not to follow the will. It may upset people, to put it mildly. Consider what damage will be done to family harmony, and think about how you will deal with this. I'm not saying that you can't do the funeral the way you think best; I'm saying you may have to gently explain to family members why you made a different decision.

 

I'm glad you decided to ask for input before taking these steps. Sometimes just asking helps avoid real problems.

If I leave money to my executor, is it taxable?

If you leave money to your executor in your will, does your executor have to pay tax on it? Well, that depends on what your will says about it.

Let's say you want to leave your executor, Jack, a gift of $100,000. You can leave a gift of money to anyone you want to in your will, whether or not he is the executor. You would simply say "I leave $100,000 to Jack". If it's a gift, the recipient of the money doesn't have to pay income tax on it. Inheritances are not taxed in the hands of beneficiaries in Canada. That seems pretty straightforward, doesn't it? But unfortunately, some people accidentally make it more complicated.

The problem is that money earned by an executor for doing the executor's work is considered by Canada Revenue Agency to be earned income. Jack did work for the estate and was paid. Therefore, it's subject to income tax. When the will says to give Jack $100,000 for acting as the executor, Jack must add the amount of the fee he receives to his income for the year.

Again, this rule is pretty clear. Based on this rule, the solution arrived at by those people who hope to avoid the need for the executor to pay tax is to call the money going to the executor a gift, even though it's really only being given to them because they are executors. They believe that throwing the word "gift" in there will keep the executor's fee away from the tax man. I've seen many wills over the years, drawn by lawyers and non-lawyers alike, that say to give $100,000 to Jack as a gift to thank him for all his hard work on the estate.

As it happens, leaving this money to Jack to thank him for his work on the estate indicates that Jack is receiving the money for acting as executor. The fact that he worked for the money will override the word "gift". Jack would be obligated to pay tax on the $100,000 even though the will says to give it to him as a gift.

You may decide to leave your executor a gift without mentioning the work on the estate to avoid Jack having to pay tax on the money. That may or may not work out for your estate, though it is the best thing for Jack. The downside for not mentioning an executor's fee is that Jack would be entitled to claim an executor fee in addition to the "gift" because it will look as if you simply neglected to talk about Jack's fee. As I said, good for Jack, not so great for the estate.

As a general rule, if you're congratulating yourself on finding an easy way to get around a tax or estate-planning rule, you're probably just walking right into a problem you don't see coming. Just ask yourself why, if it's that easy, everyone isn't doing it. Professional advice is worth the money.

Can the executor hire cleaners?

It can be hard to find answers to "how to" questions about estates. That's something I hear from readers every day. So when someone writes to me with a question like the one below that I know many of you have to deal with, I like to post my answer here so that all of you can read it.

Here's the question:

"I am the executor for a friend that recently passed away [in another city]. I can do all the executor duties such that are administrative from home, but find it difficult to do the actual sorting of the house (clothes, furniture, stuff) because of the distance involved. Can I hire someone to do this manual work? Does the cost of this service come from the executor fee or is it considered an out of pocket expense?"

Yes, an executor can hire people or companies to help with many of his or her tasks, as long as the executor is not delegating his or her discretion. This executor is allowed to hire someone to take away items from the house and to clean the house and yard.

I would advise an executor to go through the house before hiring any sorters or cleaners, to check for small valuables (cash, jewelry, key to safe deposit box), important mementos (photo albums, framed certificates) and paperwork (I.D. cards, marriage certificate, birth certificate, credit cards, insurance policies, vehicle pink slip, bank statements, title deeds, etc). The executor must understand what's in the house. If the will leaves a specific item to a specific person, find that item and remove it to a secure place.

The executor should protect the estate against identity theft by removing or shredding the deceased's private information.

When hiring cleaners, make sure you give clear instructions about what is to be done with items taken from the home. Are they to be thrown away? Boxed and put into the garage?

The cost of hiring cleaners and sorters does not have to come out of the executor's fee. It is a legitimate cost of administering the estate. However, the executor should be absolutely clear on what is going to be paid and should keep the cost reasonable. Often a family member takes it upon himself or herself to do the cleaning and sorting because they don't want a stranger to do that. This is fine, as long as the individual doesn't then try to charge an exhorbitant amount for the work.

In many wills, there is a specified power or authority for the executor to hire "agents", which can include lawyers, accountants, appraisers, realtors and anyone else needed to carry out a smooth estate administration. This clause is included for the information of the executor and the beneficiaries so that everyone understands that the executor can't necessarily do all jobs himself or herself. Even without this clause, an executor can hire the help needed.

Are all legal fees for an executor paid out of the estate?

I've received the following question about lawyer's fees on an estate, which I think will be useful to many readers.

"My mother is an executor of a will and the lawyer who has assisted her with the proper legal forms etc, has sent her a lengthy letter and bill stating that his fees are to be paid out of her own pocket or rather out of her executor’s fee. It has been my understanding that all professional fees regarding the estate are paid out of the estate. Am I wrong in this?"

A blanket statement that included "all professional fees regarding the estate" would in fact be wrong. Let's take a look at the general rule, and then talk about what might change the general rule.

The general rule is that the legal fees for getting probate and looking after an estate are to be paid from the estate and would not not affect any executor's pay. This would include legal advice, obtaining probate or administraiton, sending out notices, preparing Releases, etc. However, the lawyer is often asked to take on tasks over and above legal work. For example, many executors ask the lawyer to hold estate funds in the lawyer's trust account, or to hold meetings with the beneficiaries, or to prepare an accounting.

When the lawyer does tasks that are really the executor's job, such as those last three examples I gave, this is not supposed to come out of the estate, but out of the executor's fee. If the lawyer does the executor's work, why should the estate pay both the lawyer and the executor? That means the estate is paying twice for the work to be done once.

People mistakenly think that the lawyer's job is to "do the whole estate". However, that is the job of the executor, not the lawyer. The lawyer's job is to take care of the parts of an estate that pass through the legal system, such as getting probate from the courts, or dealing with any litigation. If an executor is hiring a lawyer to do other, non-lawyer things - such as selling a house or cleaning out personal possessions from the home - the executor is simply choosing to hire an agent to do the executor's own work.

In this reader's case, I think the letter and bill were probably "lengthy" because the lawyer was giving a breakdown of exactly which tasks he or she did on behalf of the estate, in an effort to explain why funds were to come out of the executor's fee.

Based on my own experience of over 25 years of dealing with wills and probate, I believe that part of the problem is a mis-communication between lawyer and client. While the lawyer may think she is being perfectly clear when she advises the executor that the estate will only cover legal fees "to do the probate", this isn't a lot of help when the executor doesn't actually know what is and isn't included in a probate.

A bigger part of the problem, of course, is that most people are only executors once in their lifetimes or twice if they are very unlucky, and they don't really know what to do or where to start.

Here are some tips for dealing with legal fees on an estate:

1.  If you hire a lawyer, discuss legal fees up front before the lawyer does any work. Ask for details about what is covered. Ask a question such as "is there anything you're going to do on this estate that will come out of my executor's fee?"

2.  Get the details of the planned legal fees in writing. In some jurisdictions in Canada, lawyers are required by the Law Society to give this to clients in writing, so it might happen automatically, but always ask for this. Then when you get the letter you can read it over to make sure you understand the arrangements.

3. A key phrase to listen for when discussing the estate with the lawyer is something like "would you like me to take care of that, or would you like to handle it yourself?" If you can do it yourself but choose to get the lawyer to do it, chances are you're paying extra.

4. If you don't have the time or the ability to do all of the required estate tasks yourself, or the beneficiaries are questioning everything you do, you may well be tempted to hire the lawyer to do the whole estate. It's a lot cheaper, and in many cases much more efficient, to hire a trust company to do that. If you bank with one of Canada's major banks, you can simply ask the manager or the banking officers to put you in touch with the bank's trust company arm. (Or call me, I'll fix you up!)

How to leave a substantial estate in safe hands

Who have you appointed as your executor in your will? Did you consider appointing someone other than your spouse or children? There is a new article in the Globe and Mail that talks about alternate choices, including a trust company.

Having worked for a trust company for the last four years, I've answered many, many questions about how a trust company works. The first thing people ask me is how much it costs to have a trust company as an executor. Almost everyone is surprised to learn that a trust company charges the same fee that any executor - such as your kids or friends - can charge. The difference is, we have expertise!

If you've ever wondered whether a trust company is a good choice for you (or perhaps your parents), click here to read the Globe and Mail article for some good information and ideas.

When can the executor be reimbursed for expenses?

When an executor is compensated for his or her work on an estate, the amount he or she receives is separate from the reimbursement of expenses. Unless a will specifically says otherwise, the fee is over and above being paid back for expenses. In this post I'd like to look at the expenses rather than the fee.

It's always a good idea for an executor to try to limit his or her personal involvement with estate expenses by submitting bills directly to the bank where the deceased had an account. Many know that they can submit the funeral bill to the bank so that the bank pays that bill directly without the funds passing through the executor's hands. However, this arrangement also works for other bills that are clearly the deceased's bills, such as property tax for the deceased's home, or the final heat and electricity bills. It's worth a chat with a banking officer to see what can be done.

Of course, this idea only works when there is cash available in the deceased's account. Realistically there might not be enough funds. There are plenty of estates which consist of a house and a RRIF and not much more. In those cases, submitting bills isn't going to be helpful and the executor just might end up paying for things (funeral, lawyer, accountant, bills, tax) out of his or her own money.

When hiring a lawyer to obtain a Grant of Probate, you will likely find that lawyers who do a lot of estate work won't even bill you until they get the Probate. This is because they know their bill should be paid by the estate and that you likely won't be able to liquidate estate assets unless you have the probate.

I always advise executors not to take their fee until the estate is finished and the fee has been approved either by the residuary beneficiaries or the court (except for very unusual circumstances). However, that's not the case with expenses which the executor pays directly out of pocket. When the executor is out of pocket, of course he or she needs to be reimbursed as quickly as possible. The executor doesn't have to wait for any specific time or event.

Being reimbursed from the estate means that money has become available, either because an asset has been sold or an investment has been collected in by the executor. These funds would have been deposited into the estate bank account set up by the executor around the time he or she applied for probate. This is where any reimbursement should be taken from. Keep the arrangements simple and transparent. Don't take money directly out of accounts or investments owned by the deceased.

I would suggest that the executor reimburse himself or herself once a month out of the estate account. This way ALL money taken by the executor can easily be accounted for in one statement, and the executor never amasses unmanageable debts on behalf of the estate.

The executor should keep a receipt for every expense and know which cheque out of the estate account paid for which expenses. Don't keep track in your head; keep track on paper or computer. If he or she is claiming for mileage, it should be calculated on paper, which would then be used like a receipt (in my Alberta Probate book I provided a form for this that you can either print or download, as well as forms for all of the executor's record-keeping and accounting).

Now let me add the inevitable caveat. Be careful about what kind of thing you're claiming as an expense and don't make the mistake of thinking that everything even remotely connected to the estate is a legitimate expense. For example, flying your family members to the funeral is an individual's expense, not an estate expense. Getting that massage or that expensive champagne to manage your stress is your own expense. Remember that the residuary beneficiaries are going to examine your accounting at the end of the estate and if you have reimbursed yourself for inappropriate items, you will probably have to repay them to the estate.

Here's the second caveat. Don't be a spendthrift with estate money. The courts won't like it at all should you end up there, and that won't go well for you. Also, there might not even be enough estate funds to pay you back if the estate is small and there are debts and taxes to be paid.

Can the lawyer who writes the will be an executor? How much can he charge?

The relationship between lawyers and executors is in theory pretty simple. The executor represents the estate and hires the lawyer to give legal advice and to prepare probate documents. However, in practice there is often confusion among clients, executors and beneficiaries as to the role the lawyer is supposed to play. The following question, which is really a group of separate but related questions, was sent to me some time ago by a reader. Because this reader's questions are those I hear so often in my work, I thought everyone would be interested in the answer.

The question:

Can a lawyer who writes up a will also be an executor of that will? Also, can he claim fees as both a lawyer and as the executor? And who decides how much the executor receives? If there are two executors, do they both get the same amount? Are there any limits to executor fees?

Certainly a lawyer who writes a will can be an executor of the will. There is no conflict there. However, if the lawyer who writes the will is also a beneficiary, that's a problem. Over the years I've met a handful of elderly people who are so grateful for help and attention that they have wanted to leave me something in their wills that I prepared for them. I've never accepted this, and I never will. Even if I knew for sure I hadn't influenced them in any way, the optics of the situation would be terrible.

At the time the lawyer drew up the will, he or she would have billed the client legal fees for that service. If the client later passes away and the lawyer is the executor, the lawyer can only charge executor's fees and not legal fees for the executor work.

Having said that, you must realize that an executor normally hires a lawyer to prepare probate documents, and pays the lawyer legal fees for that. If the executor is a lawyer, it is acceptable if he or she hires himself or herself (or their office, partners etc) to do that. The lawyer can charge legal fees for the probate work. This is not charging legal fees for the whole estate; I am referring to the steps involved in preparing the probate documents, filing them, going to court if necessary and obtaining the Grant of Probate.

The billing and recording of the lawyer's time on the estate might be complicated, as the lawyer is filling two roles. The executor's rate of pay and the lawyer's rate of pay are likely quite different, and will be billed and paid at different times.

As for who decides how much the executor receives, I wish more people addressed this in their wills. If there is an amount or a percentage stated in the will, that is how much the executor will get. The will rules. The majority of wills, though, don't say anything about executor's fees. When nothing is said in the will, the executor calculates how much he or she thinks is appropriate, based on time spent, complications (missing beneficiaries, overseas beneficiaries, missing assets, etc), size of the estate (bigger estate = more responsibility), number of beneficiaries, any losses the executor may have caused to the estate, and similar factors.

The executor asks for this amount by including it in his or her final accounting that is presented to the residuary beneficiaries at the end of the estate. If the beneficiaries agree, they sign off and the executor [ays himself or herself out of the estate.

If the beneficiaries don't agree, and believe me they frequently don't, they can attempt to negotiate the fee with the executor. If that is unsuccessful, the amount of executor fees must be set by a judge. Keep in mind that no beneficiaries can be paid their shares until this question is resolved, because nobody will know what the judge is going to decide.

There are limits on how much an executor can charge (where there is no guidance in the will). Each province and territory has a Trustee Act that says something about fees, but in many areas it only refers to a "fair and reasonable fee", which is certainly open to interpretation. The courts have dealt with this frequently and clearly, and the range of "fair and reasonable" is interpreted as between 1% and 5% of an estate.

The final question is whether two executors split a fee equally. Yes, they split the fee, but the split should only be equal if the amount of work done by them was approximately equal.

Executor's fee slashed by court for mis-management of estate

Thanks to the folks at http://www.disinherited.com/ for the following summary of a recent BC case in which the court wouldn't allow an executor to have the fee she claimed. I like to post this type of article because they are real-life examples of what's going on out there and many of you will be able to relate the cases to your own situations. The case is called Re Stolarchuk Estate 2011 BCSC 1681.

Executors have a lot of power over an estate. That's necessary and logical. However, when executors mix up their own agenda with that of the estate, the beneficiaries at least have the power to object to the fee that is claimed, as you will see in this article. Click here to read it. If you would like to read the entire case, click here.

Does the court decide the executor's fee?

I get many, many questions on my blog about executors and what the heck they are supposed to be doing. It's not surprising really, since most executors have never done the job before and are learning as they go. One topic that I hear a lot about is the executor's pay - how much it should be, who decides, where the money comes from, etc.

Most recently I was asked whether the court decides the executor's fee. This question can be answered on two levels. One is the general question of whether the courts in any given province set guidelines for all estates. The other is whether a judge sets the fee for a particular executor in a given case. Let's look at both.

If you are an executor working on an estate, to determine your fee you will look first to the will. If the will says how much you are to get, then that is how much you get. Courts rarely interfere with that under normal circumstances, as the amount in the will is the amount the deceased wanted to pay. An example of situations that might be outside of "normal circumstances" is that in which a beneficiary is challenging the executor's actions on the basis that they caused a loss to the estate. In that situation, the court might decide that the executor has to repay the estate by foregoing the executor's fee.

An executor's fee might also be set by the court in an individual case if there has been an estate lawsuit or other complication that the executor had to deal with - something over and above what most executors have to do.

If the will doesn't say what an executor is to be paid, then the amount is negotiable between the executor and the residuary beneficiaries. If they all come to an agreement on the fees, as is the usual case, there is no reason for a judge to be involved. If an agreement simply can't  be reached, then a judge will set the fee.

This is where the discussion leads into the more general realm of courts setting fees for all estates. In some provinces there is a fairly specific formula for calculating the fee. In others, there is only the guideline that the fee be "fair and reasonable". Over time, the decisions of our courts, when looked at together as a group, clarify the formulas and guidelines to give judges, lawyers and executors more certainty as to what fee is appropriate.

This body of law - that being the laws themselves and the cases decided on them - give the framework for the negotiations between the executor and the beneficiaries. This body of law tells us that an executor should receive between 1% and 5% of an estate, barring unusual circumstances as I mentioned above. So we know, for example, that if an executor who has looked after a relatively simple estate decides that he wants 30% of the estate for a fee, he is asking too much.

Is the executor supposed to use his fee to pay estate expenses?

On an estate I was involved in a few years ago, a dispute blew up between the beneficiaries and the executor over who was to pay for the five-star lunch that was provided to funeral attendees. The executor paid for it from estate funds. The beneficiaries objected, stating that since the executor was being paid an executor's fee, that fee was supposed to be used to buy the lunch.

A similar question arose on a different estate more recently. The executor sold the deceased's home and paid the realtor with estate funds. Again a dispute arose. The beneficiaries believed that the executor's fee was supposed to cover the realtor's commission.

Are these examples of things that an executor should pay for with his or her executor's fee?

No. Both of these executors did exactly what they were supposed to do. The executor's fee is a wage for the work, time, responsibility and effort of the executor. It is not meant to be a fund for paying estate expenses. It's money that the executor is intended to use as he pleases for his personal use.

There are always expenses on an estate. Some of the largest ones are the funeral, realtor's commission, the deceased's mortgage, probate fees, lawyer's fees and taxes. Then of course there are dozens of smaller ones (household bills, deceased's credit cards, cost of getting the house cleaned, obituary etc). All of these expenses are meant to be paid out of the estate.

What if the executor and beneficiaries can't agree on an executor's fee?

In some places in Canada, the amount of fees that an executor can expect to receive from an estate is decided by a formula based on the value of assets. In other parts of the country, there is no formula in place, simply a direction that the pay be "fair and reasonable". Both of these approaches are valid, but both sometimes result in a dispute over the amount to be paid.

The "fair and reasonable" scenario seems to be based on the type of estate where everyone is getting along, the executor has done a fair, efficient, honest job, and the beneficiaries appreciate the amount of work the executor has put in. In other words, an estate unlike the ones most of us run into.

When an executor is paid, the funds come out of the residue of the estate. Residuary beneficiaries of the estate realize it's coming out of their pockets. They become quite possessive of the money, even though up until now it belonged to someone else. They forget that a year's worth of work adds up, usually to thousands of dollars. The number seems large and they feel they are personally losing that amount of money. So they don't find the number proposed by the executor to be "fair and reasonable".

Not that executors are blameless in all of this. Most executors have never done the job before and end up learning as they go. Even the honest ones make the occasional mistake or cause the occasional delay. And the dishonest ones, well that's another story.

Even the formulaic approach to deciding on compensation has its drawbacks. As soon as something as material as a fee is to be based on the value of an asset, that value becomes debateable. The one receiving the fee always thinks it's higher than the one paying the fee.

So, we've established that agreeing on a fee is tough. Now what is to be done about it? It's up to the executor to have the fee set, so if the beneficiaries don't agree, the executor must ask a judge of the superior court of the province to set the fee. The executor will take all of his or her records and paperwork along to describe his work and efforts to the judge, who will decide on a fair fee.

The part that the beneficiaries sometimes forget about is that the cost of the executor's lawyer to do this application is paid by the estate. So not only are the beneficiaries not going to get the amount paid in executor's fees, their shares are further reduced by the amount of the legal fees.

If you're thinking that there simply must be a better way, you're right. The best way to head off all of these arguments is to state in your will what you want your executor to be paid. You can state a dollar amount, but most people choose to use a percentage. If the beneficiaries or the executor wanted to dispute the amount, they would have a tough time of it in court, as judges will try to uphold the directions given in the will.

Including an executor's compensation clause in your will can save thousands of dollars and months of time by short-circuiting disputes.

Some Taxing Issues Surrounding Executor's Compensation

Are executor's fees received when an executor works on an estate taxable? Generally, yes, but that's not the whole story. To find out more about this, click the link below, which goes to Megan Connelly's blog, the Toronto Estates and Trusts Monitor.

Some Taxing Issues Surrounding Executor's Compensation

I echo Ms. Connelly's advice to check with an accountant before deciding to accept executor's pay.

Executor's fees, lawyer's fees or both?

Today I'd like to answer another excellent question from a reader that I think will be of interest to many of you. The question is:

"Can a lawyer who writes up a will also be an executor of that will? Also, can he claim fees as both a lawyer and as the executor? And who decides how much the executor receives? If there are two executors, do they both get the same amount? Are there any limits to executor fees? Thanks."

Yes, a lawyer who writes up a will can be the executor, though he should not witness the will if he is named as executor.

At the time the will is drawn, the lawyer will claim his usual fee for writing the will. Later, when the testator passes away and the lawyer acts as executor, he will claim an executor's fee, which would be the same as a non-lawyer would claim. The lawyer would only be able to claim a lawyer's fee on top of that if he did legal work for the estate that would have needed a lawyer in any event. For example, if a lawyer would have been hired to file for probate anyway, then the lawyer/executor (or his firm) can do that work and charge the usual lawyer's rate for that work.

When a lawyer or accountant is named as an executor, it's a good idea to include a clause in the will that specifically addresses the fact that they can be paid professional rates for professional work and not for their entire executorship. The lawyer and the accountant should already know what they can charge, but the other people involved in the will might not know.

If the will states how much an executor is to be paid, then that is how much the executor will receive. Occasionally the amount is set out in dollars, but usually it's expressed as a percentage of the estate. Unfortunately, plenty of wills don't address executor's fees.

If the will doesn't address executor's fees, the executor must fall back on the statute law and case law for guidance. Executor fees vary from province to province, though there are usually only general guidelines to follow. Estates vary widely, depending on the kind of assets, the value of assets, the number and location of beneficiaries, whether there are claims or difficulties, the expertise of the executor and a hundred other things. As a general rule, an executor is able to claim between 1% and 5% of an estate, with only the more complicated estates reaching the top of that range.

The amount the executor receives - within the range mentioned - is normally determined by the residuary beneficiaries of the estate. During the final accounting for the estate, when the executor is ready to cut the cheques to the beneficiaries, the executor should put forth in writing a proposal of the fees he or she wants to claim. The beneficiaries are asked to approve the estate accounting including the proposed executor's fee.

If the residuary beneficiaries think the fee is too high (and quite often that's the case) then the executor and the beneficiaries may be able to negotiate a sum that's satisfactory to everyone.

If they can't agree, the executor's fee must be set by the court. This involves a hearing in courtroom. The estate can't be distributed to the beneficiaries until that has happened because the fee may be set higher or lower than the executor had requested.

If there is more than one executor named, the fee is expected to be split among them. It's not always an equal split. Sometimes one executor has taken on more of the work because of geography, time or skill. The executors should work out between themselves how they are going to split the fee, and if they simply can't agree, it has to be decided by a judge.

Arriving at a co-executor's fee

You and the co-executor are just about ready to finish winding up the estate, and it's time to think about taking your fee. It sounds simple, but as with most things to do with estates, the rules are unfamiliar. Here are some ideas for getting it right, compensating both executors fairly and keeping the beneficiaries happy.

The will may contain instructions about the amount to be paid in executor's fees. It could say that the executor gets a stated dollar amount as a fee, or that the executor gets a percentage of the estate.  Both are acceptable approaches. If the will includes a clause like this but contains no other instructions, this means that the fee stated has to be divided between the executors. It does not mean that each executor gets the amount stated; they must share it.

This leads to an assumption among most people that the executor's fee must be divided equally. But if you've worked on an estate, you know that the work is rarely evenly divided between the two. Sometimes one lives further away than  the other, or one has more expertise than the other, or simply has more spare time to devote to the estate. Any or all of these factors should be taken into consideration. If one executor has done more than the other, the fee should reflect the division of labour.

However, don't forget that the fee is also intended to compensate for the risk of the personal liability of the executor, so even if you feel that you've done all the work, that doesn't remove the other co-executor from his or her liability and you'll still have to share.

Many wills don't say anything about the fee that is payable to executors. In that case, the co-executors would fall back on the amounts normally awarded in their province or territory, and would share that amount.

In addition to carrying out executor's duties, an executor might provide professional services to an estate. For example, an executor might be a realtor who sells the deceased's home, or might be an accountant who prepares tax returns for the estate. These services are over and above executor's fees. These are things that the executors would have to pay for anyway, and should pay the executor his or her normal rate for those services. The payment comes out of the estate, but not out of the executor's fees. Therefore an executor or co-executor should be paid for their professional services and receive an executor's fee.

What if a beneficiary won't sign the Release?

An executor emailed me recently, asking what to do if a beneficiary won't sign the Release. I don't know the facts of the case, but this appears to refer to the Release document that is given to the beneficiary for signing at the end of an estate, accompanied by financial documents that explain what the executor has done with estate assets and liabilities and how he intends to distribute the estate. If the beneficiary signs the Release, it means that he or she approves of the financial accounting provided and will not be able to come back against the executor in the future about anything covered by the accounting.

When one beneficiary doesn't sign his or her Release, it means that  none of the beneficiaries can receive their inheritance.

If a beneficiary were to refuse to sign the Release, I would want to know why. Is there an objection to the contents of the financial documents? Is something missing? Does the beneficiary understand that he or she won't get any money until the accounting is approved (either by the beneficiaries or by the court)? Does the beneficiary object to the compensation the executor is requesting?

If you can find out where the objection lies, you can most likely address it. In many cases, a refusal like this is actually a request for more information. For example, say a beneficiary wants to know why the house sold for $450,000, but only $420,000 shows in the bank account. The executor could show the calculation that showed how much of the $450,000 was spent on realtor's commission, legal fees and payment of taxes. The executor could show the cancelled cheques for those expenditures. Perhaps the executor didn't do a very good job of setting out the numbers, or backing them up with receipts or statements.

Many executors who are acting without lawyers or accountants tend to give an "accounting" that is little more than the current bank balance, without explanation of what happened to investments, RRSPs, the deceased's car, etc. If that's what the executor is presenting, he or she shouldn't be surprised at the beneficiary not signing the Release. I wouldn't sign it either.

If the beneficiary is objecting to the amount of compensation that the executor is requesting, the executor might provide a breakdown of how he or she arrived at that number. The breakdown might include the number of hours the executor put in, the number of kilometres driven, or a list of all of the tasks that the executor had to take care of (this is one reason why executors are always advised to keep a diary or journal of all of their actions on behalf of an estate).

If the issue is compensation and a more detailed accounting isn't persuasive, the executor and the beneficiary may negotiate a different amount that satisfies both of them. If that doesn't work, the executor will have to ask the courts to set the compensation by court order. This takes longer and the beneficiaries get even less because the executor's lawyer is paid from the estate, but at least the issue can be resolved.

It's unusual for a beneficiary to simply dig in his or her heels and refuse to sign the Release without giving a reason or stating an objection, but it can happen. In the end, the executor will give up on asking for information that isn't forthcoming, and will ask a judge to approve the accounting.

What goes into an executor's accounting?

Many times in this blog I've mentioned that the executor accounts to the residuary beneficiaries of an estate. No doubt you have heard this mentioned elsewhere as well. If you're an executor, do you know how to prepare an accounting? If you're a beneficiary, do you know what to look for in the executor's accounts?

In this post, I'm going to talk about the basics of preparing an executor's accounting. You are most likely to see an accounting at the time that the executor is ready to distribute the estate to the beneficiaries. That means that the funeral, the bills and the taxes have all been paid, and the money left over is going to be split among the beneficiaries in accordance with the Will. The executor prepares his/her accounting, gives it to the beneficiaries, and the beneficiaries are asked to approve the accounts.

Getting the approval of the beneficiaries means that the executor is released from all personal liability for everything he/she has done. Obviously the beneficiaries are going to check everything over pretty carefully before agreeing. This post should be useful both to an executor trying to prepare accounts, and the beneficiary trying to decipher accounts.

The basic idea behind the executor's accounting is to describe what has happened with each of the assets in the estate and subtract all of the bills and liabilities that were paid out, to arrive at the present value of the estate. Here are the elements of the accounting:

1. The inventory of the estate that was included in the application for probate. This is the starting point, as the executor is not responsible for anything that happened while the deceased was alive.

2. A Statement of receipts and disbursements. This can be either a handwritten ledger or a computer-generated statement. It shows all money that came into the estate and everything that was paid out, listed item by item, by date. Many clients find it useful to think of this statement as similar to a bank statement for the executor's bank account. Every asset that was sold - house, car, antiques, cottage - shows as money coming in. Every account or investment that is cashed in also shows as money coming in. Every bill or expense that was paid out show as outgoing money.

3. Reconciliation. Start with the value of the estate as shown on the inventory, add all incoming money, and subtract all outgoing money (using the figures on the statement of receipts and disbursements). If everything has been properly included, the number you get should be the same as the current balance in the executor's account. This, the current balance of the account, is what is now available in the estate to be divided up.

4. Statement of how much the executor wants to be paid. The amount will depend on what was said about compensation in the Will, or if nothing was said, it will depend on the guidelines for your geographical area. The amount of work and responsibility handled by the executor are also factors. The executor should state the dollar amount and how that amount was arrived at (e.g. an hourly rate, a percentage, etc). The executor should also state how much he or she wants to be repaid for out-of-pocket expenses.

5. Statement of any money being held back for future expenses or taxes. Executors have the right to wait for a final Tax Clearance Certificate from Canada Revenue Agency before distributing money to the beneficiaries. However, sometimes the executor agrees to distribute before the tax certificate is received. If the executor does this, he or she should figure out what the taxes might be, and what will be spent on the accountant to do the return, and keep that amount of money in the executor's account.

6. Statement of proposed distribution. The executor should state the names of the beneficiaries, the portion of the estate each will receive, and the dollar amount.

7. Release. The beneficiaries are each asked to review the accounting, and if all looks fine, to sign a release that states they are satisfied with the accounting. A wise executor won't give any beneficiaries their shares until all beneficiaries have signed releases. When all the releases are received by the executor, he or she will give the beneficiaries their cheques.

There is of course a lot more detail I could include here. (I have a chapter about this in my upcoming Alberta Probate Kit, to be released in 2011). This post is intended to give you an idea of what is involved. Executors always have the option of hiring accountants or lawyers to help them with the accounting, which is a good idea if the estate is complicated.

Can I appoint my lawyer as my executor?

In Canada, you can appoint either an individual or a trust company as your executor. If the individual you choose is a lawyer, that's the same as appointing any other person. It means, however, that you can't appoint the law firm that the lawyer works for, just the lawyer himself or herself.

By the way, I should clear up one common misconception here. If your lawyer acts as your executor, your lawyer cannot charge your estate for executor work at the same rate he or she would charge for legal work. If your lawyer may charge $350 to work on your lawsuit or contract, but he or she cannot charge that for executor work. This is because you appointed an individual executor who just happens to be a lawyer. The lawyer will be limited to charging what any other executor could charge (in Alberta, that's 1% to 5% of the estate).

If your executor is a lawyer and he or she does legal work for the estate, such as applying for probate, then that work can be charged at full lawyer's rates, because your executor would have to pay a lawyer for that anyway.

In my years of private practice, before coming to my current job of in-house lawyer, I was asked many, many times to act as executor for clients. I almost always turned it down. In speaking with other lawyers about this, I understand that most lawyers will turn it down most of the time. Where your lawyer is a family member or close friend, that's different. However, I think that even if you do want to appoint your lawyer, you may not be able to get your lawyer to agree to it.

Most people will ask their lawyer to be their executor because they don't have anyone in the family or a close friend that they feel is appropriate. This often happens when people have immigrated from another country and don't have relatives in Canada. It also happens when people don't have children, or their children live far away, or perhaps don't get along. It can also happen when the clients want to set up lengthy or complicated trusts that they don't feel would be best managed by an inexperienced person.

Before you name your lawyer as your executor, think about this. If you name your lawyer as your executor, and your lawyer dies before your estate or your trusts are wound up, who is then in charge of your estate? The executor named in your lawyer's Will becomes your executor. Do you even know who that is? Your lawyer's husband/wife? One of the lawyer's children? Remember that you are appointing the individual person who happens to be a lawyer; you're not appointing the law firm.

The same idea applies when you appoint your accountant, your financial planner or your doctor, all of whom I hear proposed as possible executors from time to time.

If you don't have an appropriate family member, or you need specialized skills for your estate that you are not sure are available in your family, consider a trust company. Most people immediately think that using a trust company is terribly expensive, but in reality it's cheaper than you think. It's certainly worth a phone call to a trust company, or a conversation with your banker, to find out what it would cost you. And always remember to look at the value of what you're getting and not just the price of what you're getting.

What happens with a bankrupt estate?

First of all, it's important to realize that there is a difference between an insolvent estate and a bankrupt estate. An insolvent estate, which is much more likely, simply does not have enough assets to pay all of the debts. A bankrupt estate has actually declared bankruptcy.

When talking about either insolvent or bankrupt estates, I often hear people comment that nobody needs to do anything about it because obviously there are no assets. But that's not necessarily true. A deceased person could have a half-million dollar home and another half-million in investments, but if he or she has more than a million dollars in debts and liabilities, there isn't going to be enough money to pay all the creditors. So even though there are assets, the estate is still insolvent. And someone still has to sell that house and cash in those investments on behalf of the deceased person and pay out the proceeds.

That person is the executor named in the Will. If there is no Will, there should be an administrator appointed by the court in the usual way.

Usually in an insolvent estate, the executor will negotiate with the creditors to come to an agreement as to how much each will get. Often everyone agrees to a certain amount "on the dollar" so that they'll each recover at least part of the debt. It's to everyone's advantage not to turn it into a lawsuit, because fighting it out in court means the resources of the estate, which are already not enough, will end up being spent on legal fees and court fees.

If after an executor starts working on the insolvent estate, it is petitioned into bankruptcy by the creditors or the executor declares that the estate is bankrupt, the executor will have to step out of the picture. The control of the assets and debts will be handed over to the Trustee in Bankruptcy to deal with. The executor's claim for compensation can be added to the other claims against the estate.