The Application to Pass Accounts might be one of the least exciting court proceedings. I do not think the newest spin-off will be “Law & Order – Passing of Accounts”, nor do I think Jack Nicholson will loudly be proclaiming “You can’t handle the truth” in response to an objection over trustee fees any time soon.
Although potentially not exciting and overly technical, the Application to Pass Accounts serves a very important and useful role to both executors and/or trustees and beneficiaries. For an executor or trustee, the passing of accounts not only releases them from liability for their administration for the period that has been passed, but also provides a mechanism by which they can be paid compensation. For the beneficiaries, the passing of accounts provides them with the opportunity to see in detail what transpired in the administration of the estate or trust, potentially holding the executor or trustee liable for any alleged wrongdoing through section 49(3) of the Estates Act.
We have previously discussed at length some of unconventional uses and benefits of an Application to Pass Accounts, including potentially insulating claims which may otherwise be statute barred by the expiry of a limitation period by raising the claim through an objection in a passing of accounts using the court’s rationale from Wall v. Shaw, 2018 ONCA 929. This remains a viable and useful strategy to consider if you have a claim against someone who may owe you a fiduciary duty and you have concerns the claim may otherwise be statute barred if you brought it in a straight up claim against the individual (i.e. resulting trust claims for joint-held assets). This is not the only potential unconventional and useful use of a passing of accounts however.
One of the major stresses that frequently faces a trustee of a discretionary trust is that their decisions could later be challenged on the grounds of “bad faith”. Although these challenges are rarely successful, as the court will generally give great deference to a trustee’s discretion absent clear “bad faith”, when these challenges are successful they can have a devastating impact to the trustee as any discretionary payments could be undone and ordered re-paid to the estate. As the funds will already have been paid to the beneficiary, in the event the trustee is not able to recover the funds from the beneficiary who received the funds the trustee could face potential personal liability for the missing funds. Such a risk can cause great anxiety to a trustee who is facing a potentially difficult discretionary decision to make, not wanting to risk personal liability if the decision ultimately proves to have been wrong.
The court as a general rule will not provide pre-approval of a trustee’s potential discretionary decisions on an Application for the opinion, advice, and direction of the court. This has been made clear in cases like Keller v. Wilson, 2015 ONSC 6992, where the court states:
“The fact that trustees are expressly permitted by the Trustee Act to apply for the opinion advice or direction of the Court does not authorize the court to exercise discretionary powers on behalf of trustees, thereby shifting responsibility from the trustees, on whom the settlor of the trust placed such responsibility, to the court. This is so even though subsection 60(2) of the Trustee Act provides a specific indemnification to trustees who act upon the opinion, advice or direction of the court.” [emphasis added]”
Simply put, although court will generally confirm that a trustee “could” make a discretionary decision on an Application for the opinion, advice, and direction of the court, they will not make that decision for them, leaving the actual discretionary decision to the trustee. This creates a potential dilemma for the trustee, for although the trustee could seek legal advice about whether a particularly discretionary decision could be considered “bad faith”, the lawyer will never be able to give them 100% certainty, such that there will always be an element of risk the decision could later be successfully challenged.
The Application to Pass Accounts provides another potential forum to potentially seek pre-approval of discretionary decisions which are made by a trustee. Although as a general design an Application to Pass Accounts looks backwards and approves transactions which have already taken place, this is not exclusively the case. The use of a “Statement of Intended Distribution” has become a common tool in an Application to Pass Accounts, where the trustees include as a schedule to the Application to Pass Accounts and the eventual Judgment Passing Accounts a list of distributions which will be made should the accounts be passed. As the beneficiaries are provided with advance notice of these future distributions and provided the opportunity to object, and the transactions are included as part of the Judgment Passing Accounts, it acts as a form of “pre-approval” for the transactions.
Using a similar mechanism it may be possible to seek pre-approval of discretional decisions which have been made by a trustee before the payments have actually been made. I have previously had success including a “Statement of Intended Discretionary Distribution” as a schedule in an Application to Pass Accounts, which in a similar fashion to the “Statement of Proposed Distribution” contains a list of discretionary distributions which will be made in the event the accounts are passed.
As the Application to Pass Accounts is served upon all parties who could be interested in the discretionary distribution it would provide them with the opportunity to theoretically object to the distribution before it is even paid. If the accounts are eventually passed, as the “Statement of Intended Discretionary Distribution” is included as a schedule to the Judgment Passing Accounts, with the Judgment itself including language directing and approving the distributions, the trustee should theoretically be freed from liability regarding the distributions before they have been paid, removing the risk the trustee is unable to recover the funds if later challenged after the distribution is made. If an objection is raised which is ultimately upheld the payment simply would not be made. As the discretionary decision itself is still being made by the trustees, with the passing of account simply acting as a form of “pre-approval” for the decision which was made, the concerns noted by cases like Keller v. Wilson about the court not being willing to have discretionary decisions shifted to the court should arguably not be triggered.
Thank you for reading.