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.

"Whoops" doesn't cut it when estate value is not accurate

Today I'm sharing a cautionary tale from John Sewell, an art and antique appraiser, who recently posted an article on www.estatedebate.com. In the article, Mr. Sewell talks about a few cases in which household items that didn't seem like much turned out to be very valuable items. This really could happen to any one of us who acts as an executor. Click here to read the article.

The reason it's so important for executors to value estate items properly is that executors can be held personally liable for losses to an estate. This means that if you, as an executor, sell an item for peanuts and it then sells to someone else for thousands of dollars, you might have to come up with those thousands yourself to make it up to the estate. So please check out this article!

Can't sell the deceased's house because the other joint owner is also deceased - now what?

This reader wrote to me after what appears to be years of frustration with trying to deal with two entwined estates. At the root of the issue is the fact that a joint owner of a house did not take steps to update the title after the other joint owner died. Toss in a lost will and you have an interesting situation. Neither a lost will nor a failure to deal with a land title is at all uncommon, so I thought I'd share this reader's dilemma here.

Here is the question (or should I call it a cry of desperation?):

"I hope beyond hope you can help me. Grandfather died in 1988. Grandmother was co-owner of the house. Aunt was named executrix of Grandfather's will. Aunt lost the original will. We have copies. The will wasn't probated. Grandmother died in 2001. Her estate was probated and dealt with, except for house (paid off) which we cannot sell due to joint ownership. Not one lawyer will touch this. Not sure where to start. HELP!"

 

This isn't really that complicated. If no lawyer will touch it, it's because you're asking the wrong lawyers. Find someone who specializes in wills and estates by calling the Canadian Bar Association (not the Law Society) in your province. You can also google wills and estates lawyers, then read the profiles of lawyers in your area to determine whether they have the necessary experience.

 

In order to proceed with the sale of the house, first your grandfather's name must come off the title. To do that, your aunt needs to probate your grandfather's will so that his executor will have the legal ability to sign documents on his behalf. If the original has been lost, she needs to try to probate a copy of it. That isn't done often, but can be done in certain circumstances with the permission of the court.  It's more complicated than probating an original, but not impossible.

 

If your aunt is reluctant to act, you might remind her that she may be personally responsible (i.e. not covered by the estate but out of her own pocket) for any loss that occurs to the house, loss of rent since 2001, any capital gains tax that accrues while the house is waiting to be sold, and any court costs/lawyer's fees if you have to force her to take steps. Perhaps she would find that information to be motivational.

 

It wouldn't have been necessary for your grandfather's will to be probated if your grandmother had taken your grandfather's name off the title herself after he died. She, like any surviving joint tenant, could have simply gone to the land titles office with a death certificate and had the title changed over to her name alone. But since she didn't, and may have had no idea that she could even do that, now probate is needed so that someone has legal authority to deal with the title.

 

Once your aunt obtains probate, she will have the legal authority to take your grandfather's name off the title. After that, the executor of your grandmother's estate can arrange to sell the property. The proceeds will go into the grandmother's estate, not the grandfather's estate.

 

This situation isn't really all that unusual, in the sense that surviving joint tenants often don't realize that they have to do anything with the title to their home. They understand that when one joint tenant dies, the other automatically owns the house. The word "automatically" is misleading, as it implies that no action needs to be taken. More accurately, the surviving joint tenant has the right of ownership, but must make sure that the title record is brought up to date at the land titles office.

 

In your case, the loss of the original will does complicate things somewhat, but it's not impossible to deal with. The key for you is going to be finding someone with the required depth of knowledge in this area of law.

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.

Selling off assets in a garage sale risky for executors

I remember when, a couple of years ago, a story hit the news about how a woman holding a garage sale for an estate sold a painting for $2. She later found out that the painting might have been painted by Picasso and was possibly worth millions of dollars.

I suppose people would react to this story in different ways. Most were probably thinking about her bad luck in letting something so valuable slip away. Being an estate lawyer as I am, my thoughts were more about her duty to the estate and whether she might end up being personally liable for the loss to the estate. After all, if she had placed the correct value on the painting, the money would have gone to the beneficiaries of the estate.

This point was recently made in a blog post at www.estatedebate.com. Click here to read their comments and, if you like, read the original news story about the "possible Picasso" as well.

I don't want you to think that the moral of this story is that you should never hold a garage sale for an estate. Many, many executors successfully hold garage sales without any problems, and it's still a viable solution. The important thing to remember is that if you are an executor, you must be careful to place proper values on items. If the deceased collected paintings or sculpture, even on a small scale, get an appraiser to take a look before you decide to put items on that sale table. Same goes for almost any kind of collection, from baseball cards to antique furniture.

Failure to place proper values on items can lead to lawsuits against the executor by the people who would have inherited the money had the item been sold for its proper value.

Executor who helped himself to estate must pay punitive damages

One of the issues I hear about frequently from readers of this blog is out-of-control executors and trustees who don't seem to know or care about the rules they are supposed to follow. Sometimes the beneficiaries choose not to take action against these executors and other times they take the executors to court.

I've just read a case review that I'm going to share with you. It's a new case from Ontario where a man named his brother as executor of his estate, to look after the estate for the deceased's sons aged 12 and 16. The estate was not large, but the uncle squandered it and spent it. He didn't give the boys the personal belongings the father left behind. The boys ended up getting nothing of their father's. Instead of having their education paid for as their father intended, they had to take on debt to get through school. They sued their uncle.

This case is interesting because it goes beyond the usual remedies that are available against executors and trustees. Usually when an executor is behaving badly, he or she can be removed from the job, made to give up any executor fee, and made to pay legal costs. If things are really bad, the executor may end up paying for damages or losses out of his or her own pocket.

But in this case, the judge awarded punitive damages against the uncle. As the name implies, punitive damages are assessed against someone to punish them, much like a fine. They are relatively rare in estate litigation. In fact, the judge was so annoyed at the uncle's behaviour that he awarded double what the sons asked for (which was also more than double the full amount of the estate)! Click here to read the case of Walling v Walling.

I am so pleased with this case (and thanks to www.allaboutestates.ca for bringing it to my attention). I'm glad that the courts are taking a hard line with executors who cause not only financial problems for the very people they are supposed to protect, but heartache and frustration as well.

Executors and trustees, listen up. Do the job you were named to do, or you too could end up on the hook for thousands of dollars.

Executor liability insurance aims to cover increasingly risky role

Those of you who read this blog regularly are already aware that being an executor carries with it personal liability for mistakes and omissions on the part of the executor. Personal liablity goes beyond a slap on the wrist and maybe being kicked out of the executor role; it means you could end up paying out of your own pocket for mistakes you make during the administration of an estate.

This article from www.canadianunderwriter.ca talks about executor insurance. I know that most of you out there have had no exposure to executor insurance, as it's a fairly new product. Not to mention that your typical executor who works without a lawyer tends to do things as cheaply as possible, and would consider things like insurance to be "extras". But this article is interesting in terms of how executor insurance works and what it covers, so click here to check it out. You may still choose not to have this insurance, of course, but at least you'll know more about your personal liability.

Fair and honest is never enough

I'm  attaching a link to an article from www.allaboutestates.ca, one of my favourite blogs. It explains why an executor or attorney under a power of attorney must keep good records. If you're one of the many executors or attorneys who is somewhat careless in record-keeping, be sure to check out this article for a bit of incentive. Click here to read the article.

Know exactly what you're getting into before you agree to act as executor

How I enjoy finding easy-to-read articles that are filled with common sense that I can share with my readers! I'm attaching an article by Gail Vaz-Oxlade that appears in www.moneysense.ca. In the article, Ms. Vaz-Oxlade suggests that you give serious thought to whether or not you accept an executor appointment in someone's will. Click here to read the article.

I totally agree that it's something you need to think carefully about before going ahead. If you start work as an executor on an estate, you have the job for life unless the court releases you. If you make mistakes, you can be held personally liable.

To those of you who are in over your heads and simply can't seem to deal with the estate properly because of time constraints, battling beneficiaries or legal issues, get help. See a lawyer or trust company and ask them to give you some guidance or even take over parts of the work. Did you know that you can walk into almost any major bank and ask them to put you in touch with their in-house trust company?

Why do executors get sued?

I received a newsletter this morning from my friends over at ERAssure (Estate Risk Assurance). These are the people who offer executor's insurance, and they have first-hand knowledge of the trouble executors get into. The newsletter included a list entitled "Why do executors get sued?", and I was interested to see that the reasons very much correspond with my own experience of estate litigation.

When you read the list, which I've reproduced below, you will notice that the very first item on the list is lack of communication leading to frustrated beneficiaries. Executors take note! Every day I receive comments on this blog and emails telling me about how the executor simply won't answer questions or reveal anything. It seems to be a pretty common practice for executors. The executors who think this is ok should probably know that often they will end up in court for behaving that way.

Another point that I found interesting is that one of the problems is "perception" of favouritism or conflict of interest. To me this leads right back to communication. If there is a perception that an executor is behaving incorrectly or dishonestly, and the executor chooses not to address the concern, the perception will only be reinforced. However, if the executor addresses the perception by explaining why he is taking certain steps in a certain way, there is a pretty good chance that the issue can be resolved.

The lesson for executors here is that you can get into trouble not just for what you're doing (or not doing) but also for what the beneficiaries believe you are doing (or not doing).

I hope that by reading this list, executors will understand how important it is that they do the best job that they can, and that they remain transparent and accountable to beneficiaries.

Why do executors get sued?
- communication challenges - frustrated beneficiaries
- acrimony with beneficiaries and/or executors
- perceptions of favouritism or conflict of interest
- individuals that are treated differently in the will
- executors that had Power of Attorney for Care or Property for the deceased
- failing to properly value assets
- improper management of financial assets, like stock portfolios
- failing to protect the assets
- improper division of assets between beneficiaries
- failing to recognize debts due from or to the estate
- family law issues
- charities that may challenge the executor
- do-it-yourself real estate transactions

If you want to know more about executor's insurance, visit www.ERAssure.com. There is a lot of good information for executors on their site.

Get along with your co-executor or it will cost you

Attention co-executors who are squabbling and fighting with each other. You know who you are.  You are probably siblings. Somebody made the ill-fated decision to ask you two to get along in the best interests of their estate, and it has fallen apart. One of you makes decisions about the estate without the other. One takes the other to court repeatedly on the slightest excuse, asking the court to remove the other, with accusations of lies and duplicity. One executor is bullying the other.

Well, you'd better figure out how to act like adults and get along.

In a new case from Alberta, the court slapped the bullying co-executor with big court costs. The court made it clear that co-executors have an obligation to try to resolve their differences amicably without resorting to the courts if at all possible. The estate suffers when co-executors behave badly and make the estate administration all about their personal issues. The court's message is to get along, or it will cost you. To read more about this case in a story from lawyer Chris Staples, click here.

Why does a beneficiary not receive money until ALL have signed Releases?

When an executor is ready to distribute an estate, she will send out an accounting to the beneficiaries that tells them what has happened with the estate so far, and let them know exactly what each of them will receive. If the beneficiaries agree with the accounting, they will sign their Releases. Once all of the Releases have been signed, the cheques are sent out.

One part of this process causes problems for both executors and beneficiaries. That's the part about waiting for ALL Releases to be signed before anyone gets their inheritance. This reader wrote to me to ask why she has to wait for other beneficiaries to sign their Releases. I thought the question and the answer would be useful to many of you, so here it is:

"The executor we are dealing with says that we have to wait for the 3rd person ( The estate was divided between 3 people) to sign off before she can give us our part of the money. The tax clearance certificate has been dealt with. But for some reason the executor keeps saying that we need to wait for that 3rd person to sign off on the papers. And the problem with this is that the 3rd person is apparently in Europe and they cannot get ahold of her which is completely delaying the process of me receiving the money. I was wondering if she was allowed to do this ? I dont understand why I need to wait for another person to sign off on their money for me to get mine."

In this case, the executor is following the right procedure.

All beneficiaries must agree to a certain distribution before the distribution can be made. The beneficiaries aren't just signing off on their own money; they are approving of all that the executor has done so far, and agreeing to the payout the executor is proposing for everyone.

Let's look at it this way. Say the estate was $30,000. The executor  divides the estate three ways so that each beneficiary is going to get $10,000. Two of the beneficiaries agree, so she sends them $10,000 each. There is $10,000 left.

The third person, however, doesn't agree. The third person challenges the executor's accounting and refuses to sign the Release, so the executor has no choice but to apply to the court to pass her accounts. The court and legal fees add up to $5,000. The executor now has to divide an estate of $25,000 rather than $30,000 among the three people. That means each would get $8,300. She has overpaid the first two beneficiaries and now only has $5,000 to pay the third one. The balance of $3,300 would have to come out of the executor's personal pocket.

Until the third beneficiary signs the Release, the executor doesn't know whether there is going to be a costly dispute, so she is right to wait to send out the money. It's too bad that the person is unreachable at present, but every estate has at least one wrinkle to deal with.

The Clearance Certificate that you mentioned is issued by Canada Revenue Agency to certify that the estate does not owe any more tax. It should be reassuring to the beneficiaries that this has issued, as it will give them information that they need when considering signing the Release.

It sounds to me as if this executor is taking her time and completing one step at a time. It sounds as if the right steps are being followed. This can be frustrating for a beneficiary as sometimes it seems as if you are waiting an awfully long time, but that can easily happen when you don't see what's going on behind the scenes. I don't see anything wrong in the executor's actions based on what you've told me.

Proceed with caution: Executors do some heavy lifting

Several months ago I spoke with Elyse Umlauf, a reporter, but it wasn't until today that I came across the article she wrote based on our interview.

The article talks about 8 things you should consider when choosing an executor. Then, just to round out the topic, it talks about 5 things you should consider before saying yes when someone asks you to be their executor. It has tons of good information so if you want to check it out, click here to be taken to the Canadian Newsletter for www.seniorsrealestate.com.

Five Mistakes That Estate Executors Make

I'm in the Globe and Mail again today. This article talks about five common mistakes that executors make, with comments from me and two other estate specialists. It's a really good article, so click here to check it out.

The Executor's Year

I've posted on this blog before about the executor's year, but I know it's something that readers need to know more about. It's a rule of thumb that says an executor should have substantially wrapped up an estate within a year unless there are extenuating circumstances that prevent that.

I recently found the following case summary at www.disinherited.com that talks about the court's application of the executor's year rule, and makes it clear that an executor can be called upon to explain himself or herself if the estate is taking too long. The executor in such a case can be removed as executor for improper delays, and held personally liable for any losses to the estate that result from improper delays. Click here to read the case summary.

I particularly liked the author's summary, as follows: "most of the complaints relating to the executors year is often related to an executor that either cannot or will not deal with the estate for various reasons, usually emotional, or they are simply power tripping over the other beneficiaries and literally keeping them in the dark."

The phrase "power tripping" is absolutely perfect to describe how many executors behave. However, if the power trip lasts longer than a year for no good reason, it may well be cut short by the courts.

Do the beneficiaries have to repay funds if the executor doesn't keep enough to pay tax?

What happens when an executor distributes an estate to the beneficiary and then - oops! - discovers that the tax owing is more than expected and there isn't enough left in the estate? This happens more often than you might think, even though most executors are aware that taxes must be paid first.

An executor in this position is up the proverbial creek unless the beneficiaries are willing to co-operate and give some of the money back. In most cases, however, either the beneficiaries have either already spent/used the money or they simply don't want to give it back. This is especially true when the beneficiaries know that the executor has used estate funds to pay for professional advice from lawyers and accountants and still hasn't got it right.

Legally the responsibility for these taxes lands squarely on the executor. He must pay the taxes and other expenses before he pays the beneficiaries. If he makes a mistake or miscalculation, he is legally responsible for the payment of the outstanding taxes.

In practice, almost all estates are paid out in part before the executor gets a Tax Clearance Certificate from Canada Revenue Agency. When that payout (known as an interim distribution)is made, the executor must calculate how much tax is going to be payable and hold back enough to pay it. I always advise executors to get an accountant to help them make the calculation to make sure they are holding back enough. I also advise adding a little bit more to the holdback as a cushion. If there is a bit too much held back and the taxes are paid leaving a bit in the estate, that bit can then be distributed according to the will.

Recently I had a note from a reader asking whether the beneficiaries were required to repay money when the executor miscalculates taxes, and whether the beneficiaries could be harassed for the money. This two-part question requires a two-part answer. No, the beneficiaries are not required to repay the money given to them by the executor. But can they be harassed? Well, unfortunately that could happen, since most people are quite willing to harass others without any particular legal reason.

Civil contempt and the wayward trustee

Here is yet another story about an executor who chose not to follow the rules, including court orders directing him to pass his accounts. Yes, he ended up in jail for refusing to pass his accounts, but this article by Jason de Vries of http://www.allaboutestates.ca/ describes what the beneficiaries had to go through to achieve that. It sure takes persistence to bring some of these wayward executors to heel.

Even death can't erase debts

I missed this article when it came out in the Financial Post soon after Christmas but fortunately someone brought it to my attention. It contains some really useful advice for executors on how to handle the debts of the estate so that the executor doesn't end up paying them personally. Click here to read the article.

Court dings executor for costs for not remaining neutral

In BC, Sheryl Laing brought an action in court to vary a will, and was successful (Laing vs. Jarvis Estate, 2011 BCSC 1411). The executor of the estate, Kevin Jarvis, fought the court action. He wasn't a beneficiary of the estate.

When a beneficiary goes to court to ask for a ruling such as this, or on interpretation of the language of a will, the executor is not supposed to take sides. The executor's job is to present the facts and stay neutral. The executor should not favour one beneficiary over another or put his own interpretation on the meaning of the will.

In this case, Mr Jarvis clearly did not stay neutral. As mentioned, he opposed Ms Laing's court application. Once the matter was settled, Ms Laing asked that instead of taking the costs of the court action out of the estate, the costs should be paid by Mr Jarvis personally.

Another general rule of estates is that an executor is indemnified for fees and costs by the estate, so the court had to take that into consideration. However, Mr Jarvis hadn't followed the rule of neutrality that an executor is expected to follow. The court agreed with Ms Laing that Mr Jarvis had to pay the costs out of his own pocket. The costs were $9,611.04.

I like this ruling. I hear story after story about executors who do whatever they want with the estates they were chosen to look after and don't bother to follow the rules. I'm glad to see the courts sending this warning to executors everywhere.

To read the case, click here.

Don't be victimized by estate abuse

This article from http://www.canadiancapital.ca/ talks about the estate of Paul Penna, in which millions of dollars went missing in the hands of a group of executors. Click here to read the article. While I agree with the article's conclusion that the choice of executor is crucial, I don't agree with all of the opinions and recommedations given by the people quoted in the article. In any event, it's an excellent article and contains plenty of food for thought.