The Capital Account – Hull on Estate and Succession Planning #117
Listen to The Capital Account
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about taking capital out of an account and what to consider along the way.
The Capital Account – Hull on Estate and Succession Planning Podcast #117
Posted on June 17, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #117 of our podcast on Tuesday, June 17th, 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: Well, I’m a lot better than you. This is the joys of podcasting, and one day we may go to video podcasting but we aren’t there, we are in audio. And so, those who are listening don’t get the pleasure of seeing a big cast on your right arm, as Suzana tried to leap from giant buildings and be Superwoman, and broke her arm. So if I get out of line, you’ll hear a chunk against my head, and we’ll have some interesting podcast. So, good to be back and always good to see you. Hope you had a busy but fruitful week last week.
Suzana Popovic-Montag: A little bit slower than I’d like, but certainly trying to limp along. Thanks, Ian, for that. I did just want to start by mentioning we did get a little bit of feedback on our last podcast and I just wanted to clarify that when we were talking about capital disbursements, we were talking about the kinds of entries that are typically in those listings. And I did mention that we would be looking for whether or not there are any entries for the purchase of investments. And someone correctly pointed out that they ought not to be listed in there and that’s absolutely right. What I had meant to say and didn’t get across quite properly, was the fact that those are things that we look for when we’re trying to identify possible problems with the accounts. And even though they may show up in a listing on capital disbursements, they have to be backed out later on any accounts as well. So thank you for having mentioned that and for that clarification.
Ian Hull: That’s a great point and you know, the thing about accounts in this world, this strange world of estate accounting, is that to simplify down to basic terms, there are really categories that these accounts are in. And one of the separated categories as you say, is the investment account. So it is much easier to follow it through. And we’ve talked about the two aspects of any financial accounting and that is, one is, you’ll have capital, you’ll have the core asset and then you have essentially income that gets generated, or revenue as we call it in the estate world more often than not. And we spoke about last week the capital disbursements as you say, and why don’t we spend a few more minutes going through some of this concept of taking capital out. Taking a core asset, for example, a GIC, on death goes into the accounts at $112,000 because that’s what the deceased had on the date of death, and that comes into the estate in the form of capital. And let’s continue to work through how that $112,000 comes out, and how it is shown in the estate accounting world.
Suzana Popovic-Montag: And then what’ll happen is, once that money is taken out, whether in that denomination or in another, the executor will, depending on the terms of the Will and how liquid the estate needs to be relative to the timing, will decide whether or not to invest that account or that amount into some other form of investments.
Ian Hull: Right, because in some cases, say there’s $112,000 and say there’s a $12,000 gift to a favourite charity of the deceased, and you want to pay that quickly for example, you would take that and you could pay some of that GIC out, put it all into the estate account and then pay some of it out quickly to the charity to satisfy that particular gift. But leave the rest in for the other, depending on the terms of the Will. So, when we go through these accounts with our fine-tooth comb, and we’re looking for problems that may exist or not exist, is that one of the things we also look for are the professionals. And how are the professional’s fees being dealt with in the accounts themselves.
Suzana Popovic-Montag: And as part of that, we’re looking for, for instance, for the legal accounts or the accountant’s bills and that, and how they’re reflected as capital disbursements presumably at first instance. And then the question is, are those proper expenses of the estate, are they properly reflected and particularly in a situation where the executor is also the lawyer for the estate, the question as to whether or not there’s a possible sort of double-dipping in terms of compensation at the end of the day.
Ian Hull: And one of the things that I often will say to my clients is “just ask for copies of the professional’s accounts”. So there’s a bill in there and the capital disbursements that’s been paid to XYZ Corporation, an accounting firm, then to get a handle on what work they did or didn’t do, you know, say you don’t want to pay the $5,200 or the $2,300 or the whatever amount it is, look behind it because sometimes that will tell you whether or not (a) it’s appropriate and (b) whether or not the administration of the whole estate may come into question. Because if it was a simple step such as filing a T3 return, and you’re being charged $10,000 for it, you may want to ask some other questions and start to wonder whether or not the professional work is being done at a reasonable fee basis.
Suzana Popovic-Montag: And the other thing that normally people will look for is that the work that’s being done by a lawyer who is an executor of the estate, that there is legal work and that that’s distinguished from executor’s work. Because the understanding, of course, according to the case law, is that you shouldn’t be compensated for accounting work or for other executor’s work at your legal rates. And so when it comes to determining the proper amount of compensation at the end of the day, looking at the detailed docket entries, looking at the detailed accounts, allows people to make that determination in terms of the appropriate breakdown between executor’s compensation and legal fees.
Ian Hull: And just following through on that legal fees, the delineation is sometimes hard. It’s a bit blurred. I usually use the example of an executor, as a lawyer or as an accountant, for example, and they charge their hourly rate to go down to the bank and set up the estate bank account. That is improper. The Courts will typically say that setting up a bank account, for example, is a job of an executor and you should be paid out of your compensation as opposed to at the hourly rate. Now having said that, we have to remember that under the Trustee Act and there’s a clear provision that says that you can contract out of the general rules. You could actually put in your Will that you want your executor to charge at the hourly rate. There’s a specific provision in the Trustee Act, s. 61(5) that says that if you want, you can change those terms, so to speak.
Suzana Popovic-Montag: Another illustration of a situation where you’d look in more detail is when you’ve got legal accounts for the sale of real property. And you’ll want to review, in those circumstances, the statement of adjustments and the solicitor’s trust account, just to make sure that there is again, no duplication of charges.
Ian Hull: So, Suzana, one of the things that I sometimes get bogged down on are entries regarding payments of loans and promissory notes. In particular, where they are made to persons who are not at arm’s length to the deceased. When I say not at arm’s length, I mean to payments and loans that have been created before death with say, a brother of the deceased or with a spouse, or a common-law spouse, that may raise your eyebrows. What’s the best way to deal with that scenario?
Suzana Popovic-Montag: I’ll typically tell executors or trustees that I’m advising, Ian, that they should make sure that they’ve got sufficient back-up, just like the payment of any debt. You want to make sure that it is a legitimate expense of the estate and that at the end of the day, you have the voucher to substantiate the payment. And particularly in this situation where you’re suggesting someone not at arm’s length, because there is already a supposition that perhaps it’s not a legitimate expense. And so you want to make sure that there is a promissory note or there is some form of evidential proof of the fact that there was amount owing and that it was properly paid by the executor or the trustee.
Ian Hull: What about unusual entries? What do we do with those? And maybe you can talk a little bit about what unusual entries are and how we deal with them.
Suzana Popovic-Montag: I think sort of as a one-off when you’re looking at accounts and you see that there’s perhaps a continuing payment of rent or mortgage on a piece of real estate, and then the question is, how long should those payments be made. If it is, for instance, the real estate, should the home have been sold quicker or the cottage have been sold faster so as to have stopped the mortgage payments or the rental requirements or something to that effect.
Ian Hull: And the second unusual payment that I think about is when you have improvements to the capital property that is being directly given to a beneficiary, for example, the family cottage. Say it’s going to one of the beneficiaries, but you start using estate expenses to pay for those. And I think those two illustrations are perfect examples of where an executor really needs to step in and communicate with the beneficiaries. Because it may be that the beneficiaries say, “yes, we do actually want the cottage roof fixed right away because although it’s going to Johnny, Johnny’s not 100% sure that he wants it, and we’re talking amongst the family as to whether or not Betty wants to buy it instead; and so we need to preserve the cottage, we don’t want water leaking through the roof, so, sure, take it out of the estate”.
But the other approach might be, geez, Betty says, “what are you spending my money, or $50 of my money on fixing the roof?” So, that kind of problem, what happens is, if an executor moves forward in what I would describe as a non-communicative, and sometimes even an arrogant way on these issues, then you create the potential problem of a beneficiary stepping in and being questioning, but also being frustrated with your conduct as an executor. So this is an easy illustration of where it sure pays off to talk early and talk often with your beneficiaries.
Suzana Popovic-Montag: That’s a great illustration, Ian, because we know just from our own experience that, especially a cottage property, there’s a lot of situations where there’s emotional undercurrents lying attached to that property. And when one child or one beneficiary is favoured and others aren’t, it can be a real flashpoint. And then, as you say, to suggest that someone else’s money is being used to take care of an asset that’s going to someone else, it could be a real problem.
Ian Hull: Well that’s great. I think what we’ll do is we’ll wrap up on that point. We started this podcast talking about the investment account and clarifying from the input we got from our listener. And again, we didn’t actually at the outset make it clear that we have call-ins, but we’re going to give you that detail right now, quickly. And also, next podcast I think we’ll turn to the whole question of the investment account, because the capitals account is one, capital disbursements, money coming out is one topic that we’ve sort of covered in pretty good detail. But in the next topic, I think we’ll want to work through is this separate category of the investment account and how it’s set out in estate accounting. But I just remind everyone, feel free to call in at 206-457-1985.
Suzana Popovic-Montag: And in case you didn’t catch that, you can find that number in our show notes along with our e-mail address which is email@example.com, or of course, you can feel free to visit our blog at estatelaw.hullandhull.com. Thanks very much, Ian.
Ian Hull: Thanks, Suzana.
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