Investment Account Issues and Considerations
Listen to Investment Account Issues and Considerations
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about how good trustees deal with accounting issues in volatile markets and other investment considerations.
Comments? Send us an email at email@example.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
Investment Account Issues and Considerations – Hull on Estate and Succession Planning Podcast #120
Posted on July 8, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #120 of our podcast on July 8th, 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.
Suzana Popovic-Montag: Hi there, Ian, how are you today?
Ian Hull: I’m great, Suzana.
Suzana Popovic-Montag: That’s good. Before we get into the formal part of our podcast, let’s just remind our listeners of our call-in line which is 206-457-1985.
Ian Hull: And of course, e-mail us at firstname.lastname@example.org, and if you want to get some access to the show notes and other things, go to estatelaw.hullandhull.com. We look forward to hearing from people and I know we got an e-mail last week with a question about the investment accounts that I thought was sort of helpful and we’re going to try to work through that today in our podcast.
Alright, so historically, we have been looking at some of the sort of fundamental accounting issues and the thing that we want to talk about today in this volatile market as oil tends to be riding a wave of speculation in the investment community. It’s a good time to think about how we present our investment accounts, and that was the question we got in the e-mail this week, and that was, how do good trustees deal with what is (a) a volatile market and (b) investments that are seen to be potentially speculative such oil stocks. And as we said in previous podcasts, the key here really is to conduct yourself as a prudent investor. And proof is in the pudding when you put together your investment account because that’s when you have to actually set out in specific detail what you did and what you bought and sold. So I think for that question and that listener, I would remind them to, and obviously the easiest way to track this is just go into our key word search on our podcast page and you can find out investments and discussions we’ve had in the past. But the easiest way to deal with this, I find, is go to Section 27 of the Trustee Act and read it, because it is in plain English. It sets out the steps that are required and the short answer is, maybe stocks in the oil business are a good thing, maybe they’re not. But if you followed the code of conduct, you’re going to be a lot safer in terms of your behaviour.
Suzana Popovic-Montag: And all of that, of course, is going to be tempered with the actual provisions of the trust whether it’s a trust document or a Will that sets out what rights, if any, to the extent that it actually speaks to it, a trustee has when it comes to investing the trust assets.
Ian Hull: That’s so important and the Act is only part of it. You can be essentially contracted out of some of these obligations, so you’ve got to look at the trust document or the Will, that’s a great point.
Suzana Popovic-Montag: And when we’re actually analyzing the entries in an investment account, one of the things that I try to keep in mind and try to make sure are properly reflected are the actual profits and losses that are earned on the disposition of the transactions or the investments that are made by the trustee so that they’re actually properly recorded. And I wanted to talk a little bit, Ian, about that presentation of profits and losses.
Ian Hull: Well it’s a good one because this is again the investment account, as we said last time, in a formatted set of accounts, the investment account is set out as a separate entity in and of itself. It is really, truly just a summary of transactions, so it has to balance. And this can be very difficult with bonds and things like that. It gets a bit complicated but we find, and I’ve certainly seen in the past, where people try to put together the investment account in a haphazard way by, for example, just simply dealing with capital only and not dealing with the transactional aspect of it, that being the profits, the losses, the commissions, all of what are tied into the investment account itself.
Suzana Popovic-Montag: And depending on whether or not there’s a breakdown of the income and the capital entitlement, there’s also going to be that further breakdown of capital whether it’s a capital receipt or a capital disbursement or a revenue receipt or a revenue disbursement at the end of the day when you’re looking at the allocation of profits and losses.
Ian Hull: So what’s a good…let’s just talk about a specific example of a particular investment and how we might deal with it.
Suzana Popovic-Montag: Well, let’s start maybe with a discussion of a mortgage, something that everyone’s kind of familiar with. If the estate is actually invested in mortgages, then you would look to see whether or not the investment account properly records the receipt of the principal of that portion of the mortgage as a capital receipt and then the interest portion would be reflected most properly in the revenue receipts account.
Ian Hull: So again, this is an illustration, not that the purpose of this podcast series is to become experts on how to prepare court accounts, which I think we’re hoping that at least it takes you toward it, but there’s a great example of what is a simple investment, what is often found in portfolios and that is, a mortgage investment and how those would be identified and the complexities that come out of just that simple investment. So you really have to roll your sleeves up, I find, to prepare these investment accounts with accuracy.
Suzana Popovic-Montag: And they really tend to be the easiest thing for people who are trying to tear apart accounts or analyze them more critically than just from an overview kind of sense that this is the one account where it’s most open to scrutiny by people who are analyzing it.
Ian Hull: One question that came up and this was actually from a discussion on a chat line forum that I was involved with last week and it was, I was following the train, I didn’t get involved, I was just watching it through a U.S. site that was interesting on investment portfolio analysis and this was a site through the group at Merrill Lynch. But what I thought was interesting was, is there some, in Canada, we have this sort of unique use of investments with the investments of $60,000 and the insurance that comes with that. I thought we might have a little discussion about that today and how that might be dealt with in a fiduciary context.
So first of all, what it is, is in Canada, the first $60,000 invested in one financial institution, the CDIC insures that investment up to $60,000 per institution inclusive of interest itself. And sometimes we find estate trustees will split the cash positions across the board on different banks to give you that essentially free insurance. And it’s an interesting fiduciary step to undertake and one that I can’t, off the top of my head, really find much criticism in because if you are in a cash position with an estate, splitting it into, say you have $180,000, splitting it into three different banks seems to me to make some sense. And as I say, it’s free insurance.
Suzana Popovic-Montag: I agree with that, Ian, and it just seems to me whenever accounts are actually criticized, it’s with the benefit of hindsight. And I guess the only possible criticism someone could say after the fact is to say you weren’t obtaining the best possible return by keeping it in a liquid form in a bank account as opposed to putting it into something more not necessarily secure, but with a better rate of return. Again, hard to criticize because you’ve protected it to the extent possible but there’s always a way if somebody’s insistent on trying to do that.
Ian Hull: Yeah and I agree. One way too, is to throw it into a GIC under $60,000, that keeps it protected and if there’s good reasons to be in a cash position, then it’s harder to criticize. But it’s an interesting idea and it’s one of these unique investment tools that, you know, I mean I’m not suggesting that we’re in an economy that we should have to worry about our banks going under, but it is sort of a useful consideration. So there’s a couple, last couple of points we just want to cover on the investment account today.
Suzana Popovic-Montag: And I guess, just turning to the personal representative, the actual person who is the estate trustee or the trustee and who they are, because when you’ve got a trust company for instance, there may be some temptation by that institution to invest the estate assets or the trust assets in its own investments. And a question then arises, you know, whether or not that’s appropriate in terms of making that kind of investment on behalf of the assets.
Ian Hull: We just have to be so mindful of the strict and almost unrelenting rules of self dealing. Any time we’re in a fiduciary position and we even have a sniff of some benefit that we’re getting, beyond getting paid which is something that the system certainly allows and expects. But the profit beyond that, by using an investment, using resources in your own investments or something like that, you leave yourself so open to exposure for criticism that I will typically be cautioning my clients to watch themselves and in fact, if it’s got even a sniff of self interest in it, to abandon investments of that nature.
Suzana Popovic-Montag: That’s right, otherwise you’re really exposing it to having an impact ultimately on the trustee’s compensation because there’ll be an argument that’ll likely be made that they ought not to be receiving compensation for having invested in their own instruments or mutual funds to their own benefit, especially if there’s a management fee component that’s actually included in the mutual fund itself.
Ian Hull: And sometimes people will take the investment accounts and criticize them on the basis that if you are paying the investment advisor, that should come off compensation. So say there is that fee that you’re talking about on the mutual fund account. Is there an argument to say that that should be deducted from compensation? And the case law certainly in Canada is a bit mixed on that so, again, we just leave ourselves exposed to a possible criticism and something to keep in mind in the process of these investment accounts if we’re attacking them or if we’re defending them.
Suzana Popovic-Montag: Well I think that sort of wraps this up for us, Ian. I just want to take you back to a point that you mentioned a little bit earlier today and that is, ultimately the investment account has to balance. And so all the receipts that have come in and all the disbursements that have gone out have to balance in order for that account to properly reflect what has gone on.
Ian Hull: Well that’s great, Suzana. Thanks very much for this discussion today and hope you enjoy what is, I’m told, going to be a nice summer weekend.
Suzana Popovic-Montag: Thanks, Ian, you too.
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.
To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.
Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.