Tag: executor’s compensation
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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An estate trustee’s right to compensation is a creature of statute in Ontario. Prior to the enactment of a statutory right to compensation, an executor or administrator could draw compensation from an estate only when authorized to do so by the will, by agreement with all of the beneficiaries, or by court order. In Ontario, compensation for estate trustees is governed by the Trustee Act, which permits “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”.
One question that arises frequently is the question of whether an estate trustee can pay his or her compensation out of the estate before it is approved by a court. Some older texts had indicated that pre-taking compensation without passing accounts was once a common practice for estate trustees. However, the Ontario Surrogate Court indicated its disapproval of the practice in the 1982 case of Re Knoch,  O.J. No. 2516, 12 E.T.R. 162, 1982 CarswellOnt 622 (Surr. Ct.). Justice Dymond took the view that pre-taking of compensation is a breach of a trustee’s fiduciary duty to the beneficiaries because it places the trustee in a fundamental conflict of interest between his or her obligations to the beneficiaries and his or her own interests, and because a fiduciary is not supposed to personally profit from his or her position. It also deprives the beneficiaries of the interest that would have been earned on the compensation, had it not been pre-taken.
There have been some cases where the Courts have been more forgiving. In Re William George King Trust, the prohibition in Re Knoch against pre-taking was described as a “general rule”, but that in cases where the administration of the trust is ongoing, the trustees are paying themselves for services already rendered, and the amount taken is fair, pre-taking might not only permissible but should be encouraged in order to avoid the expense of a passing of accounts. Courts have since disapproved of this statement, however.
Whether an estate trustee pre-takes or not, compensation is reviewable on a passing of accounts. A trustee who takes compensation without a court order, authorization in the will, or agreement from the beneficiaries risks being ordered to repay interest to the estate, or to have his or her compensation reduced for having acted improperly. The estate trustee may have to reimburse the estate for excess compensation taken if it is found that the fair and reasonable amount is less than what was pre-taken.
Although no discussion of this appears in the case law, it is interesting to speculate as to whether the decisions in these two cases were influenced by interest rates. At the time of the decision in Re Knoch in 1982, interest rates were very high. In 1994, when the King Trust case was decided, they were much more modest and the consequences of pre-taking were quantitatively smaller. This is purely speculation on my part, however.
In any event, subsequent cases have returned to the position in Re Knoch and it now seems that the weight of authority is against unauthorized pre-taking. If the will doesn’t allow for it, and the consent of all of the beneficiaries cannot be obtained, pre-taking of compensation will generally be improper and is to be discouraged.
Errands & Time Spent in Connection with a Disabled Beneficiary by an Estate Trustee: Compensable Work or Simply a Kindness?
The recent Manitoba decision of Estate of Marion Warren Gandy and Estate of Frank Richard Gandy, 2011 MBQB 78 (CanLII) considered whether running errands, entertainment, and time otherwise spent in connection with a disabled beneficiary was compensable work for an estate trustee.
In the matter, the trustees of the estates of Frank Gandy (“Frank”) and Marion Gandy (“Marion”) applied to the court to pass the accounts of their respective estates, and the motions to pass the accounts were heard together. This was a second passing of accounts for both estates.
By way of background, Frank and Marion were married to each other, and died within months of each other. Their adult son, Ian, was mentally disabled and under the jurisdiction of the Public Trustee of Manitoba. Frank appointed his nephew Donald, Donald’s wife, and his lawyer as the trustees of his estate. Marion appointed the same trustees for her estate. By the second passing of accounts application, Frank’s estate was valued at less than $300,000 and Marion’s estate was valued at less than $140,000.
At the hearing, Donald sought $5,000 in compensation for time expended in respect of Frank’s estate and a further $5,000 in compensation for time expended in respect of Marion’s estate. No objection was filed by the Public Trustee of Manitoba. However, one of the beneficiaries objected to the compensation sought. The beneficiary stated that the time spent by Donald in connection with the estates for which he claimed compensation was spent largely on: "Running errands, entertainment and time spent in connection with lan". In the circumstances, the Court held that these concerns relating to the compensation were valid. The Court stated that “While it is commendable that Donald undertake various tasks for Ian, he does so as a family member, and there is no justification for the type or amount of remuneration sought.” Further, despite dockets maintained by Donald, the Court stated that “It is impossible in the circumstances to ascertain with any degree of accuracy how much time was spent by Donald on work for which he might appropriately be recompensed in each estate.” Accordingly, the Court reduced the compensation payable to Donald to $2,000 in the case of Frank’s estate and $2,500 in the case of Marion’s estate.
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