An Estate Trustee/Executor Role Comes With Some Liability
If you are asked to be someone’s estate trustee/executor, you may wonder what liability you are assuming. That is on top of the regular workload, as settling the testator’s financial affairs and distributing the remaining assets to their beneficiaries usually takes a year, involving visits to banks, lawyers and other relevant parties. Much can happen in that time, and beneficiaries may be pressuring you to quickly pass along their share of the estate.
Here are some important points to keep in mind with personal liability.
Many Last Wills and Testaments contain phrasing meant to protect loved ones as they carry out their executor duties, usually along the lines of: “No trustee acting in good faith shall be held liable for any loss, except for loss caused by his or her own dishonesty, gross negligence or a wilful breach of trust.”
That type of clause is important, but there is still some liability that comes with the position.
First, let’s make it clear that an executor does not incur personal liability for the debts and liabilities of the deceased. However, it is the executor’s duty to ensure that financial obligations are paid from the estate before any money goes to beneficiaries.
The potential liability here is particularly significant with respect to taxes. Most estates will have taxes owing, so it is the executor’s duty to ensure that all outstanding tax matters are resolved. Section 159 of the Income Tax Act requires executors to obtain a clearance certificate. This document confirms that the taxes of the deceased have been paid in full. If the executor does not obtain this certificate and the funds from the estate have already been distributed, they will be personally liable for taxes owed.
There is always a chance that an executor could discover the testator was not meeting their tax obligations to the Canada Revenue Agency (CRA). There are a number of reasons this may arise, ranging from simple carelessness to deliberate tax evasion. No matter the situation, the executor is responsible for rectifying that shortcoming using the estate’s funds, before money is given out to beneficiaries.
The CRA has created a Voluntary Disclosure Program that allows executors to come forward and voluntarily correct any errors or omissions without being subject to penalties or prosecution.
Personal liability for executors also arises if they spend money on professionals to help with the administration of the estate. That could include such people as lawyers, accountants, investment advisors, real estate agents, or art appraisers. Estates can be complex, so it is well within the scope of diligent executors to seek professional guidance. Accordingly, the cost for these services will be borne by the estate, not by the executor.
Detailed records must be kept of any money spent, as executors have a duty to account to the beneficiaries. These records must show all expenses paid by the estate and what money the estate received, from insurance benefits, banks or other sources.
In most cases, beneficiaries of an estate will approve, or consent to, the accounts as kept by the estate trustee. But if they feel finances were not properly managed, they can ask for court approval of the records, known as a “passing of accounts.”
Since executors have a duty to maximize the recovery, and value, of estate assets, they are personally liable for any losses they cause. That could include being reckless with the assets, which causes a loss in monetary value. Examples of this would be if an estate has to pay penalties on a tax return that the executor filed extremely late for no good reason, or if a home was sold for much less than market value.
The good news is that if an executor performs their duty diligently and honestly, any financial liability they assume will be paid by the estate.
Be safe, and have a great day.