Keeping Good Records – Hull on Estate and Succession Planning Podcast #114
Listen to Keeping Good Records
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about the importance of keeping good records in order to account for your conduct financially.
Keeping Good Records – Hull on Estate and Succession Planning Podcast #114
Posted on May 27, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #114 of our podcast on Tuesday, May 27th, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Ian Hull: Hi, Suzana.
Suzana Popovic-Montag: Hi there, Ian. How are you today?
Ian Hull: Fantastic.
Suzana Popovic-Montag: That’s good.
Ian Hull: So just to remind everyone to make sure that if you have any comments, to call in and, of course, the number is 206-457-1985.
Suzana Popovic-Montag: And that number, of course, is in our show notes along with our e-mail address which is email@example.com.
Ian Hull: Okay, Suzana, why don’t we come back to some of the discussion we were having in our last podcast because of the importance of the accounting. And we sort of left off in our last podcast talking about one of the big roles that we have, when once we become an executor. And probably, arguably, the most important role of that is, to keep good records and to account financially for your conduct. I thought what we might do today is talk a little bit about, maybe, I don’t know if we’ll call it a checklist, but just sort of things to watch for when we’re going through this process, because these items here that we want to talk about today are things that the Court will typically look to when, ultimately, if you do get audited by a judge, what the expectations are of you as a fiduciary and as an executor.
Suzana Popovic-Montag: And just a reminder, of course, that you don’t necessarily have to prepare Court format accounts. There are situations when an informal accounting of all of the ins and outs of the estate, so to speak, is prepared and that, similarly, will be reviewed by beneficiaries and you want to, as you say, sort of keep things in mind or what to look for in either of those two situations.
Ian Hull: That’s true and I think some of these comments, most of these comments anyway, reflect what you need to watch out for, whether you formally pass your accounts or whether you’re just keeping them informally.
Suzana Popovic-Montag: And the first thing that I normally do, Ian, when I’m looking at a set of accounts that have been prepared by an executor or when I’m telling people to prepare accounts, is to actually read the entire Will and any of the Codicils that are associated with it. So that you know as a starting point what the executor is supposed to do, who they’re supposed to pay out monies to and how they’re supposed to ultimately administer the estate.
Ian Hull: That is such a crucial first step and the comments about sort of what we need to look to when we’re going to be audited, either informally or formally by the Court, also reflect the expectations in large part for those who are appointed guardians or who are appointed attorneys under Powers of Attorney. So it’s crucial to look at the Power of Attorney document, for example. Or if we have been appointed under a Court Order as a guardian, look at, what we call in Ontario, the Management Plan or what was the scheme of expectation as to how money was going to be spent. If you skip over this stage, you can miss important factors. And one example would be, if you haven’t read the Will carefully, you may not realize that it’s a trust Will or it is a straight outright distribution Will. And that would dramatically affect how you’re supposed to keep your records, for example.
Suzana Popovic-Montag: And, of course, if you’re looking at actual responsibilities of an executor, normally you’ll look to the Will to find what those responsibilities are. For instance, investment powers, if there is in fact, this trust Will situation, you want to know what kind of investments the executor is authorized to invest in, or what kind of powers and duties they have in those responsibilities in those situations.
Ian Hull: So another preliminary step to consider in the course of preparing for this ultimate look-over-your-shoulder is to make sure you’ve looked at any other prior Orders of the Court or any judgments of the Court, if there’s been a prior passing of accounts by a Court. It’s crucial to look at that judgment because that gives you your starting balance for the next set of accounts, so to speak. But there may be other Court Orders that have said that, for example, there may have been an interpretation of the Will or the trust that’s involved, which tells the Court how, tells the parties as well, how to administer the estate.
I was involved in a case years ago where I had a client come in and say, “Geez, I need you to pass these accounts” and we had to go back about 40 years and approximately five years after the date of death of the deceased. So 35 years ago there was a Court Order that identified that the widow of the deceased got an Order for an extra payment under the Will. And that, of course, created a new trust in that example and it changed the whole accounting format. Now if we hadn’t drilled back and looked at that Court Order, we may have set up the accounts in the context of what we thought was the Will provisions. But there was a Court Order subsequent, under what we called the Dependant’s Relief Act in those days, and it changed the whole distribution of the assets of the estate. So we needed to make sure that we had all of the core documents in front of us before any mistakes may have been made in the context of preparing our accounts. And in that case, the accounts were just prepared informally, but we would have looked like we had real egg on our face if we hadn’t incorporated this dramatic change which was essentially creating a new trust. Notwithstanding the provisions of the Will, the Court said there is a new trust for the widow.
Suzana Popovic-Montag: That’s a great story, Ian, and it really does underscore the importance of cross-referencing all of the information in the situation to make sure that you’ve got the whole lay of the land, so to speak, when you’re doing these accounts.
Another thing to sort of cross-reference is this list of investments that estate trustees will have if there is, in fact, a trust in the Will. And you want to make sure that at the end of any earlier period, those balances are the same as the beginning balances for the next period, and that any unrealized assets that were on hand at the close of an earlier period are then the new beginning balances for the next period.
Ian Hull: And just, some of this stuff sounds a little bit daunting over the air, so to speak, because we don’t have visual representations to identify this. But we did do, Anne Werker of our office, did do with Jordan Atin, an excellent two-part series which we have on video format on our webpage, that shows you an example of audit accounts that are ready for Court passing. So you can see the unique format that’s involved. And it identifies things like the investment account, things like unrealized assets on hand and sometimes, a picture tells a thousand words. You can look at that and feel free to go to the webpage at hullandhull.com and look in the media links for that, so you can get some examples to see what we’re talking about with Court format accounts.
Okay, so one of the other sort of technical areas that we talk about in accounting for estates is the whole concept of receipts, both from a capital receipt standpoint and a revenue receipt standpoint. But why don’t we start with the original assets, cross-referencing it into the capital receipts because really, again, to simplify estate accounting, it is a bank book summary, a line by line date chronology summary of every financial transaction. So all that’s received comes in, all that’s dispersed comes out. It gets into another, more complicated layer of revenue receipts and revenue disbursements, which is essentially, a good illustration is just simply interest income on the capital of the estate that comes in and out. But let’s stay with the basic starting point, and that is, capital receipts at this point.
Suzana Popovic-Montag: And basically, what happens is that every asset of the estate is recorded as initially a capital receipt. And so it’s, as you say, this line by line bank book entry. Everything that comes into the estate is recorded at its value as of the date of death and then cross-referenced to this list of original assets, so that you can make sure that everything has been accounted for and has come into the estate.
Ian Hull: So, once we’ve created that, and what we do with estate accounting is actually we, line by line itemize it. But we also put a cross-reference number to it so that it’s easy to track them. So, for example, say there are ten assets of the estate, a couple of RRSP accounts, a couple of bank accounts, a cottage, that kind of thing, all of those line items, that’s one through ten, so we’ll itemize them as original receipts, capital receipts. But we’ll also put a number to them so that you can then track what happened to that receipt throughout the administration of the estate because you can always come back to what we call, in that case, Capital Receipt No. 3, for example. What happened with the RRSP account? Well, it’s not just line item 3 on page 16, it’s actually given itself a number. And again, if you look at our precedent on our webpage, you’ll see how important that can be because you end up putting in a lot of line entries because literally, every single transaction is set out in these format accounts.
Suzana Popovic-Montag: And by setting it up in this fashion then cross-referencing it to each of the transactions, it gives everyone an opportunity to see if the particular asset is suddenly being realized at a much higher or a lower value than its original date of death value. And that then leaves it open for an explanation as to why there is, in fact, this discrepancy.
Ian Hull: Alright. Before we wind up today’s podcast, we’ll just make a couple of comments about a unique capital receipt and that is, where you have real property. And with that, there are some preliminary steps you’ll want to take before you start putting the entry in, so to speak.
Suzana Popovic-Montag: And one of the first steps you’ll want to do is to actually obtain an appraisal of the value of that property as of the date of death, and then eventually, if there’s a delay in its sale, then possibly as at the time that you’re considering selling that asset as well.
Ian Hull: And finally, just make sure you’ve identified what encumbrances, if any, are on the real property. And that, too, needs to be identified in the accounts and how that encumbrance was dealt with.
So, although some of this stuff is a bit technical, we’re trying to simplify it as best we can. And we’re going to continue to work through this because this is, without a doubt, seen to be one of the more complex areas in estate administration. But, I can assure you, that in my experience and certainly Suzana’s, this is the one area that is a real hotbed of contentious problems. So the more we can learn about it now, the more we can avoid the problems later.
Suzana Popovic-Montag: Well, thanks very much, Ian. Just a quick reminder to our listeners, to please feel free to give us some feedback at 206-457-1985 or feel free to visit our blog at estatelaw.hullandhull.com.
Ian Hull: Thanks, Suzana.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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