Executor and Trustee Compensation

April 6, 2015 Hull & Hull LLP Executors and Trustees, Litigation Tags: , , , , 8 Comments

Executors and trustees are entitled to compensation for their efforts; however, the quantum of such compensation can often become a contentious issue where the beneficiaries perceive the amount claimed by the executor or trustee to be excessive.

If the Will granting the executor his or her authority does not expressly outline the extent of the compensation claimable or the means by which any compensation should be calculated (and most wills do not) the executor will be required to turn to statute and case law for guidance and in support of his or her claim for compensation.

Section 61(1) of the Trustee Act states that a “personal representative is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice”.

However, unlike guardian and attorney for property compensation, which has a calculation expressly provided for in section 40 of the Substitute Decisions Act and section 1 of Regulation 26/95 (as amended), there is no statute in Ontario that specifically outlines how executor compensation must be calculated.

As a result, a percentage tariff calculation has been developed through case law, which now serves as the baseline for the calculation of executors’ compensation. The tariff sets claimable executor’s compensation at 2.5% of the value of each of the capital receipts, income receipts, capital disbursements and income disbursements, and also permits an overall care and management fee of 2/5 of 1% of average annual value of the assets.

However, estates can vary widely depending on the type and value of assets, the number and location of beneficiaries, whether there are claims against the estate and the expertise required of the executor. As the tariff percentages do not consider the actual time and efforts exerted by the executor, sole use of the tariff percentage calculation can result in inadequate compensation in the case of a complex estate or disproportionate compensation in the case of a simple estate.

Therefore, in determining whether the tariff calculation is in fact “fair and reasonable”, the courts will generally have regard to the five factors set out in Re Toronto General Trust v. Central Ontario Railway Co. (1905), 6 O.W.R. 350 which provides a factual analysis of the actual work completed by the executor or trustee. These factors include:

  1. the size of the trust,
  2. the care and responsibility involved,
  3. the time occupied in performing the duties,
  4. the skill and ability shown by the executor or trustee, and
  5. the degree of success resulting from the administration.

Potential challenges to proposed executor or trustee compensation are much less likely to arise if the amount of compensation is thoughtfully considered.  Executors should consider both the percentage tariff and the above noted five factors before proposing his or her compensation to the beneficiaries in order to ensure the amount claimed is truly fair and reasonable.

Thank you for reading,

Ian Hull

8 Comments

  1. S. Dyck 4 years Reply

    Is this a one-time fee, or is this paid yearly until the estate is settled?

    • Hull & Hull LLP 4 years Reply

      Thank you for your comment. The frequency with which compensation is paid will depend on a number of factors, including the terms of the Last Will and Testament appointing an estate trustee. Depending on the circumstances, compensation calculated using the tariff percentage approach could be payable only once or multiple times during an estate administration. Since the compensation claim for a given period reflects the capital receipts and disbursements and revenue receipts and disbursements during that same period, the frequency with which compensation is calculated on tariff should not impact the total quantum of the compensation paid to the trustee.

      If a trustee is entitled to a care and management fee (which will depend on the nature of the assets and the trustee’s management of same), a care and management fee is typically calculated on an annual basis. Similarly, a care and management fee could be paid out only once or on a more frequent basis, depending on the circumstances.

      You can read more about trustee compensation here.

      Thank you,
      Ian Hull

  2. Anthony Hoff 4 years Reply

    When calculating executor compensation for disbursements, are the disbursements that are made to the beneficiaries included in the calculation?

    • Hull & Hull LLP 4 years Reply

      First, let me just clarify one term. Rather than “disbursements”, we talk of “distributions”. Executor compensation does indeed account for all capital distributions to the beneficiaries. It is a little more complicated for administrations that are carried out over a number of years in which a care and management fee is charged but where there are also interim distributions. We would be happy to consult on any problems that you may be facing respecting such matters. You can read more about executor compensation here http://www.huffingtonpost.ca/suzana-popovicmontag/executor-of-estate_b_3092213.html

      Thank you,
      Ian Hull

  3. Bob 4 years Reply

    Hi there, just wondering if you could briefly define the terms: capital receipts, income receipts, capital disbursements and income disbursements. Seems like money in and money out. Would the executor get 2.5% on money into the estate account, and then 2.5% on all disbursements? Is that what this means? Thanks for any clarification.

    • Hull & Hull LLP 4 years Reply

      Thank you for your comment, Bob.

      In response to your question, the percentage tariff developed through case law provides for 2.5% on money in (Revenue Receipts/Capital Receipts) and 2.5% on money out (Revenue Disbursements/Capital Disbursements). Accordingly, it is sometimes said that executor compensation is roughly 5% of the value of the estate. However, you should keep in mind that not all items are subject to inclusion in these calculations and therefore, the amount may actually be lower. For instance, overdraft charges, payments for penalties, and/or transfers between accounts are just a few examples of items that may be exempt. Furthermore, as the blog post points out, the courts will also look at other factors to determine if the amount reached is fair and reasonable.

      As requested, here are some definitions that you may find helpful:

      Capital Receipts: Funds that are realized upon the sale, redemption, or maturity of original assets.
      Income (or revenue) Receipts: Funds that are earned on original assets, such as interest, dividends, and/or income from investments made after death.
      Capital Disbursements: Payments made from the estate towards debts that are charged against the capital assets.
      Income (or revenue) Disbursements: Payments made from the revenue account.

      For more information, we invite you to listen to our Podcast on “Accounting Concepts and Definitions”: https://hullandhull.com/accounting-concepts-and-definitions-hull-on-estate-and-succession-planning-121/

      Thank you,
      Ian Hull

  4. stan gevaert 4 years Reply

    if an estate has rrsp,s involved and they go directly to the beneficiaries but there are taxes to be paid on the final income tax so a clearance can be issued does the rrsp,s or the taxes fall under the 5% rule as compensation for the executor

    • Hull & Hull LLP 3 years Reply

      Thank you for your comment Stan. Assets that pass outside of an estate, such as an RRSP or life insurance policy with a designated beneficiary, are not normally included when calculating an estate trustee’s claim for compensation. Compensation claims are typically calculated on the basis of 2.5% of each of capital receipts, capital disbursements, income receipts, and income disbursements with respect to the assets of the estate following death. An asset like an RRSP that passes to a designated beneficiary ceases to be an asset held by the deceased person as of the date of death. While a terminal tax return may deal with income generated by such an asset that was owned by a person while he or she was still living, this does not mean that it qualifies as an estate asset to be considered when calculating the compensation to which a trustee may be entitled.

      Kind regards,
      Ian Hull

Leave a reply

Your email address will not be published. Required fields are marked *

SUBSCRIBE TO OUR BLOG

Enter your email address to subscribe to this blog and receive notifications of new posts by email.
 

CONNECT WITH US

CATEGORIES

ARCHIVES

TWITTER WIDGET