Tag: Compensation of Estate Trustees
On Monday, Jordan Atin chaired the 2017 Wills and Estates Practice Basics CPD program and presented a paper, “Drafting Protection of Trustees”. His paper provided an important reminder of some ways a testator and drafting solicitor can protect a trustee from litigation ahead of time. Trustees are often friends or relatives of the testator, with no particular expertise in estate administration. The testator may wish to protect such trustees from liability and ensure they are compensated for their time and effort. Sometimes, more sophisticated individuals or trust companies will require certain protective provisions before accepting appointment as trustee.
Trustee compensation is an issue that commonly leads to litigation. Section 61(1) of the Trustee Act states:
A trustee, guardian or 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.
Usually, trustee compensation is based on 2.5% of receipts and disbursements, subject to the court’s exercise of discretion. Testators may wish to include provisions in the will that provides certainty and protection for their trustees. Testators can control how much trustees receive as compensation by fixing compensation or making a legacy in lieu of compensation.
Testators can make a provision determining the exact amount of compensation a trustee will receive. Such provisions must be carefully drafted so that s. 61(1) does not apply. If there is any ambiguity in the provision, trustee compensation will be subject to the court’s exercise of discretion. Testators can also fix compensation by properly incorporating a previously executed compensation agreement into the will. The requirements for incorporation by reference can be found here.
Testators can also make a legacy to the estate trustee and specify that the estate trustee is not to receive compensation. Such an approach will avoid the estate trustee “double-dipping” by claiming both compensation and a legacy. There is, however, no certainty that a legacy that is made apparently independent of compensation will survive scrutiny from CRA. Simply put, if the legacy is considered by CRA to have been given in exchange for services, it may nonetheless be considered as income and taxable in the hands of the estate trustee.
The full text of Jordan’s paper can be found in the CPD materials on the LSUC website.
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However, in calculating compensation, there are certain expenses that will be deducted from the compensation to which an estate trustee would otherwise be entitled. As a general rule, expenses paid to a third party for tasks that are properly a part of the main duties and expected expertise of the estate trustee (i.e. “executor’s work”) will be deducted from compensation.
Tasks that are Generally Deducted from Compensation
Generally, the determination of whether the amount will be deducted will depend on the complexity of the task and the circumstances of the particular estate.
If an estate trustee delegates any of his or her general duties to professionals, it is usually a personal expense for which he or she will not be compensated. Examples of this may include preparing the estate tax return, investing the estate assets, and preparing accounts.
Maintaining proper accounts is the primary duty of a trustee and the preparation of accounts has generally been deducted from estate trustee compensation. If an estate trustee acted improperly, the fees to have accounts prepared will be deducted. While accounts are specialized and the argument has been made that an estate trustee may not have the requisite knowledge to prepare proper accounts, the preparation is still excluded from estate trustee compensation.
An estate trustee is not entitled to be compensated for legal fees paid for their own personal benefit; however, the case of Geffen v Goodman, 1991 2 SCR 353, established that an individual may be compensated for any legal fees incurred to defend the interests of the estate.
If an estate trustee’s actions resulted in a loss to the estate through mismanagement of the estate assets, the amount will likely be deducted from compensation. An example of mismanagement is if the estate trustee fails to prudently invest the estate assets.
Tasks that are Generally Not Deducted from Compensated
In Young Estate, 2012 ONSC 343, the court found that investment management was beyond the skill of an estate trustee, and it was proper to retain and pay private investment counsel out of the assets of the estate. An investment or financial manager may be necessary to hire and pay through estate assets if the expertise is reasonably outside the expertise of the average estate trustee.
An estate trustee can also hire consultants, investment managers, property managers or operating managers if an estate has a corporation as an asset, and can pay their fees out of the estate if it would not be reasonable to expect an estate trustee to have reasonable knowledge of the topic.
In summary, it bears repeating that whether an expense is deducted from compensation will depend on the particular circumstances of the estate and the particular expertise of an estate trustee.
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Sometimes an executor or trustee is also a director of a company in which the estate or trust has an interest. We have written before about how acting as both a trustee and company director may create a conflict of interest, as each role includes inherent fiduciary duties that may conflict. Another issue that may arise once an individual has decided to act in both roles is whether a trustee may collect director’s fees in addition to the compensation received from the estate or trust for acting as executor or trustee.
The general rule is that a trustee may not put him or herself in a position in which his or her interest and duty conflict. The position of trustee must not be used to obtain a benefit: the trustee that obtains a benefit by virtue of his or her position of trustee will be required to account for the profit.
As explained in chapter 23 of Probate Practice, the heart of the issue is whether the trustee became director as a result of the trusteeship. If the trustee accepted the position of director by virtue of acting as trustee, he or she is not entitled to receive a salary in addition to remuneration received as trustee. If, on the other hand, the trustee’s position with the company is clearly independent from the position of trustee, he or she will likely not be required to account for any directors’ fees obtained.
A trustee/director need not expect to be under-compensated. Pursuant to section 67 of the Trustee Act, a testator or settlor may provide in the will or trust document that the executors or trustees may hold salaried positions in companies controlled by the estate or trust without being required to account.
Each case, of course, will turn on the particular facts. In certain instances, the Court may award a special fee when the duties of director are not otherwise appropriately compensated by the corporation (see: Bellomo Estate, Re, 36 ETR 123 (Ont Dist Ct)).
If the will or trust document does not include a provision as referenced above, the skill and time required to administer a trust that also requires the trustee to act as director of a company may be considered to increase the quantum of compensation the trustee receives. Section 61(1) of the Trustee Act provides that a trustee or executor “is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate.”
We have written before about how the courts determine what is “fair and reasonable.” Generally speaking, the skill and responsibility required by the trustee is directly commensurate with the quantum of compensation.
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In my blog yesterday, I mentioned that on April 27, 2011, I had the pleasure of presenting a paper at the LSUC’s Six Minute Estates Lawyer program. My topic was Conflicts involving the Role of Estate Trustee and Estate Solicitor. While my paper dealt with the lawyer who acts as estate trustee and estate solicitor, the case of Bott v. Macaulay,  O.J. No. 3493, 76 O.R. (3d) 422, was of interest as it is also instructive on the manner of compensating an estate trustee and the estate trustee’s solicitor.
In Bott, a solicitor assisted an executor with his duties as estate trustee. The solicitor ultimately sent two invoices, the first for his services as estate solicitor (for legal work), and the second charging a value amounting to five percent of the value of the estate, plus GST for services on behalf of the executor (even though the solicitor was not the executor). The solicitor wished to have the second account addressed on a passing of accounts.
The Judge held that the estate trustee, and not the estate, was the solicitor’s client and was personally liable to the solicitor. The Judge further held that should the estate trustee wish to challenge the solicitor’s legal fees, the proper avenue was through an assessment procedure pursuant to the Solicitor’s Act, except in the case where the beneficiaries have called into question the reasonableness of the accounts as an expense of the estate trustee on a passing of accounts, or unless the estate trustee desires an order approving the right to an indemnity or reimbursement.
These principles also were said to apply in cases where solicitors perform executor’s work. In such instances, the estate trustee cannot claim compensation for that work done; compensation will be reduced accordingly. Ultimately, the Judge held that the solicitor in the Bott case was not permitted to charge a fee amounting to compensation that might be awarded to the estate trustee (the 5% approach by the solicitor was disapproved) and that any amount to be awarded as a fee for the services intended to be covered by the second invoice must be determined on a quantum meruit basis. Even if there had been an agreement as between the estate trustee and estate solicitor regarding the payment of services rendered in such a manner, which there was not, such an agreement would bind only the estate trustee and not the “estate” or the beneficiaries.
Thanks for reading this week.
Craig R. Vander Zee – Click here for more information on Craig Vander Zee.
READ THE TRANSCRIBED PODCAST
During Hull on Estates Episode #27, we continued our discussion on the compensation of an estate trustee, including the pre-taking of compensation and the exclusion in Section 61 of the Trustee Act regarding fixing compensation in the instrument creating the trust.