On March 30, 2020, Noah Weisberg blogged about the estate trustee’s duty to invest during COVID-19, a time when market fluctuations have become the norm. Today, I consider how pandemic-induced changes in the housing market may impact an estate trustee’s management of real property held by an estate.
Real properties – including primary residences, cottages, and vacation properties – are often some of the largest assets an estate trustee will deal with during the course of their administration of an estate. Unless otherwise stated in the deceased’s will, the estate trustee has a fiduciary duty to sell the estate’s real property for its fair market value and is expected to do so in a timely manner.
However, the exact timing for the market and sale of real property can depend on many factors. It is common for a will to grant an estate trustee the discretion to choose whether to sell or retain assets. As it pertains to real property, this power allows the estate trustee to hold onto a property until such time as they can achieve the best possible sale price on behalf of the beneficiaries. At the same time, the estate trustee needs to be mindful of the costs incurred by the estate in having to maintain the property. Beneficiaries of the estate may also put pressure on an estate trustee to sell the property and convert it to money sooner rather than later.
Like most industries, the real estate market has been impacted by COVID-19. An estate trustee should be attentive to whether recent changes in the housing market make it an ideal or inopportune time to market a particular property for sale, while also bearing in mind the factors described above.
If an estate trustee decides to list a property for sale in today’s uncertain housing market, there are a few things they can do to help protect themselves against future claims from beneficiaries. First, the estate trustee should have the property appraised for its fair market value by a professional appraiser who is an independent third party. For added protection, the estate trustee may want to have the beneficiaries sign off on the property’s price. The estate trustee should also make an effort to keep the beneficiaries apprised of each step of the sale process. Lastly, the estate trustee should take care to keep detailed records of all advice received and steps taken in the event that they need to justify their actions at a later date.
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At the recent 19th Annual Estates and Trusts Summit, Jordan Atin, counsel to Hull & Hull LLP, gave a very useful talk about how to change trustees. Jordan explained the significant difference between an executor and a trustee. He also emphasized the importance of the trust instrument as a tool to avoid running into trouble when a trustee wishes to retire.
Trustee or Executor?
In a will, a testator often appoints the same one or two individuals to act as both executor and trustee. What’s the difference? An executor is the personal representative of the testator; he or she stands in the shoes of the testator and exercises the testator’s rights and fulfills the testator’s obligations. The role of the executor is often a simple one: to settle debts and administer the property of the estate. Once those tasks are finished, the role of the executor is finished. On the other hand, a trustee of a testamentary trust holds the trust property for another, pursuant to s. 43(2) of the Trustee Act. In McLean, Re, the court explained the difference: once a testamentary trust begins, the executor`s duty is complete. The duties of a trustee often last for a longer period than those of the executor.
Why does this distinction matter? Once an executor takes steps to administer the estate, he or she may not retire from the position without a court order. A trustee, on the other hand, may resign pursuant to sections 2 and 3 of the Trustee Act. Someone may also resign as trustee while continuing to act as an executor.
Remember the Trust Instrument
If there are three or more trustees, one trustee may retire without the appointment of a replacement trustee. Where there are one or two trustees, a trustee can retire pursuant to section 3 of the Trustee Act. The rules in the Trustee Act are complex, and an application to court may still be necessary, if there is any disagreement about whether the conditions listed in section 3 apply to the facts at hand.
Accordingly, Jordan emphasizes the importance of considering replacement of trustees when drafting the trust instrument. Section 67 of the Trustee Act states that the powers bestowed by the Act are in addition to and subject to the terms of the trust document. Thus, a drafting solicitor may opt out of sections 2 and 3 of the Trustee Act. The document itself should be the first place co-trustees and beneficiaries look in replacing a trustee. By providing a clear procedure for the removal and replacement of trustees in the trust document, potential confusion and uncertainty about whether section 2, 3, or 5 of the Trustee Act should be used can be avoided.
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Testators choose their executors. The choice of executor is commonly assumed to be a very personal choice predicated on trustworthiness. But in the face of this assumption, can the beneficiaries of an estate ever agree amongst themselves to oust an executor in the absence of any recognized basis for removal? A pending case in the U.K., as reported in The TimesOnline, addresses this question.
A firm named Will Drafters in the U.K. was named executor in the Will of a deceased. The beneficiaries named in the Will are not happy with the compensation Will Drafters is entitled to under its contract with the testator. The beneficiaries have brought this so-called "test case" to see if the Court will order the removal of the named executor based simply on the fact that all beneficiaries seek its removal in favour of another company, Final Duties, which will apparently charge a lesser rate of compensation. Not surprisingly, Will Drafters takes the position that they contracted with the testator for their services at an agreed rate of compensation and ought not to be removed. Certainly there is no indication that there are any of the factors that give rise to the removal of an executor (in Ontario, this would proceed under s.37 of the Trustee Act)
Quite apart from the legal issue of when the Court ought to remove an executor, the case has sparked a debate respecting whether "will-writing companies" (as they are called in the U.K.) such as Will Drafters and Final Duties, ought to be regulated. As the Times notes: "The only will-writing association to offer accreditation — the Fellowship of Professional Willwriters and Probate Practitioners — says that its research shows that two thirds of people wrongly thought the willwriters they used were all trained solicitors. A recent report on regulation of legal services by Lord Hunt of the Wirral expressed concern about the “fringe legal market” in will-writing, probate and claims handling."
On a final note, to all who read yesterday’s blog, please see this link for a revised version of that blog now posted in its place on our website
David M. Smith
David M. Smith – Click here for more information on David Smith.
As a WWII pay officer in the Canadian military, my paternal grandfather met a British woman on the beach when he was stationed in the south of England. They married soon after the War and retired in England in the mid-1960s. My grandfather died in the early 1990s; when my step-grandmother, Tessa, died in 2008, in her Will she left her house to my father and aunt.
If there were no Will, Tessa’s estate could have contributed to the British government’s coffers. In that circumstance, a probate research firm could have played a role.
Title Research is one of the firms highlighted in yesterdays blog about "heir hunters". Its services include: searches for missing beneficiaries, heirs, and legal documents (such as marriage, birth and death certificates back to the 1800s); asset research to value, verify and find missing or unknown assets; missing beneficiary indemnity insurance; probate valuations; and will searches to determine that the Will is the deceased’s last will.
If Tessa had died intestate, Title Research, and other firms, could have located her heirs around the world. Alternatively, if the estate trustee had questions about the value of the estate assets, or had the trustee not known the whereabouts of the beneficiaries, it could have enlisted a search firm’s services as some anecdotes suggest.
Potentially trustees can protect their personal liability by engaging a firm that has a best practices endorsement of Britain’s Law Society. It seems that an estate need not just have ties to the UK, but the extent of a firm’s expertise in a specific jurisdiction would have to be assessed.
Interestingly, some of the detective work can be done by amateur sleuths: www.findmypast.com and www.ancestry.co.uk allow access to census data from the 1800s and a host of other historical information. If genealogy is in your blood, it’s a place to start. And, as one UK law firm suggests, it might be advisable to do some of your own investigating.
In Scotland for my honeymoon, I encountered a few different “estates”. Hiking the West Highland Way – averaging about 12 miles a day – we passed Blackmount Lodge, in the Bridge of Orchy. The lodge, owned by the Fleming family (of James Bond fame) sits on the edge of an idyllic loch. It took a day to walk across the estate.
Fellow walkers from Britain were interested to learn that I work in estate litigation. After sorting out differences in our terminology, they asked if “heir hunters” exist in Canada. I was intrigued.
While I still do not know the extent of “heir hunting” here, I learned that Heir Hunters is a BBC series that follows probate detectives who look for distant relatives of people who have died without making a will. I have not heard of a similar program in North America.
Several UK firms track down missing relatives: Fraser and Fraser and Title Research are two examples. About 545,000 people die in Britain every year and half of them do not have a will. As in Ontario, there are rules in Britain which dictate that when people die intestate, their estate passes to the deceased’s legal next of kin. In Britain, if there is no family, the estate falls to the Crown. The Guardian claims that £10 million to £20 million falls to the government every year because there is no one to claim the estate. Heir hunters locate the next of kin and alert them to their inheritance; there is a finder’s fee of up to 25% of the amount.
Many people in Canada can trace their roots to the United Kingdom. Estate practitioners, if advising estate trustees, would be well served to keep “heir hunting” firms in mind.
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It’s just about tax time, so I thought I would briefly discuss the taxation of executor compensation.
The basic premise is that executor compensation is taxable in the hands of the recipient. It is either income from an office or employment (if the executor is not in the business of being an executor) or income from a business (if the executor is in the business of being an executor, or if such a function is in the executor’s usual course of business). Various consequences flow from the distinction, such as allowable deductions, and withholding requirements for EI and CPP.
CRA takes this obligation to report executor compensation quite seriously. An example of the lengths to which CRA will go is found in the decision of Oolup v. The Queen. There, Ms. Oolup, the executor held a joint account with her grandmother, the deceased. She was advised by her lawyer that upon the death of the deceased, the joint account became hers, by right of survivorship. However, for “reasons of family harmony”, she decided to keep only $10,000 from the joint account, and divided the rest with the deceased’s next of kin.
CRA took the position that the $10,000 was executor compensation, and was therefore taxable, and they assessed Ms. Oolup accordingly. To get to this point, they argued that the joint account was held on a resulting trust for the estate. The CRA argued that the presumption of resulting trust applied, and was not rebutted. Accordingly, they asserted that Ms. Oolup received the $10,000 from the estate, as executor compensation.
Luckily for Ms. Oolup, she was able to rebut the presumption, and the court found that the joint account funds became her property upon the death of the deceased. She received the money by right of survivorship. Therefore, her keeping $10,000 was not receipt of compensation by her, and was not to be included in her income.
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"It’s unacceptable to the average person that you can just turn up with a bunch of heavies and steal the coffin."
Coen brothers? Nope. No, not Tim Burton either. In fact, this is a statement put forth by an MP in New Zealand after the third case of body snatching in less than a year.
As reported in the BBC news yesterday, the body of a 76-yr old woman was hijacked right out of the back of the hearse by four carloads of people including her estranged daughter. The bizarre, but not unprecedented, scene sparked a bitter family row over the deceased’s last wishes with respect to her funeral arrangements. The deceased had been married to a Maori man but separated from him in the 1970s. Clashes over where people are buried are apparently not uncommon in Maori society, particularly in marriages of mixed descent (e.g. Maori and European).
Incredibly, a spokesman for police national headquarters said they had limited power to intervene: "Body snatching is not against the law" since, in contrast to Ontario, a body cannot be legally owned in New Zealand. The recent cluster of body snatching cases may lead to an overhaul of New Zealand law regarding who owns a body.
David M. Smith
The meaning of life is that it stops. — Franz Kafka
If you are familiar with Kafka and his short literary works, you will know that he was a tortured literary genius who was unsure of his own talent to the point of torment. In 1924, dying of tuberculosis, Kafka wrote to his friend of 20 years and fellow novelist, Max Brod. Kafka had made a list of his three novels and a number of stories and gave strict instructions to Brod to destroy all his manuscripts ‘unread and in their entirety’ and to ensure that already published works would never be re-printed. These instructions were not contained with a formal last will and testament, rather they were a penciled note found in a drawer after his death.
Kafka’s lover, Dora Diamont, partially executed his wishes by stashing away letters and notebooks until they were seized by the Gestapo in 1933. Sidebar: These papers are the subject of an ongoing international search. Brod, however, ignored his friend’s wishes and instead oversaw the publication of the works in his possession. Brod’s defence was that if Kafka had really wanted the works destroyed, he would have appointed another, more ruthless executor. Kafka, had, according to Brod, trusted Brod to not burn his writings.
Interesting question, perhaps not in the legal sense, but in a moral and ethical sense: Is it possible that Kafka undermined his own intentions by the very nature of the relationship he had with his executor?
The orderly administration of a parent’s estate will often revolve around the family home. All too often, the children of the deceased parent will not see eye to eye on the best way to liquidate the home or whether the home should be liquidated at all. The situation is often compounded when one of the children resided with the parent and may have developed an enhanced emotional attachment to the home. If the home is sold, it may become a challenge to empty out the contents in a timely fashion.
Such difficulties have led some commentators to espouse the viewpoint that a family member ought not to be an executor of an estate in which the family home is the most significant estate asset. To my mind, such recommendation is a bit extreme: each family is different and while there is no certainty as to how the children will interact with one another on the death of the surviving parent, it is worth noting that the vast majority of estate administrations are not referred to litigation counsel.
As noted in a recent article in the New York Times, the difficulties that may arise in the sale of the family home are often best resolved through the advice of a good listing agent and effective communication between the executor and his or her siblings. Such issues that may arise include: the appropriate list price, how to show the home to attract the most optimum sale price, and what upgrades (if any) to engage in and whether to use estate assets for this purpose.
David M. Smith
Listen to The Process of Administering an Estate
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about the first, pre-probate stages of administering an estate.