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.
Trustees often run into difficulties when they pay themselves compensation prior to passing their accounts. They are said to have "pre-taken" compensation, meaning having paid themselves compensation prior to passing their accounts. Fortunately for guardians of property (and attorneys), section 40 of Ontario’s Substitute Decisions Act allows guardians to pay themselves compensation at intervals during the guardianship before passing their accounts:
(2) The compensation may be taken monthly, quarterly or annually.
Amounts taken monthly or quarterly could be divisions of a calculated "annual" amount, but this provision contains no element requiring equal divisions. Regardless of how the property guardian takes compensation, any payment is subject to court approval. Clients applying for guardianship should always be advised specifically of this point: if the court later disagrees with the compensation taken, the guardian may have to repay such amounts. This holds true even where the Management Plan pursuant to which the guardian is managing the incapable person’s property authorizes the compensation the guardian has taken.
This raises another important consideration for lawyers in the application for guardianship stage. Any compensation taken, or claimed later on a passing of accounts, should not be inconsistent with the provisions of the Management Plan. Because the right to compensation is statutory, as are the prescribed percentages (though subject to discretionary reduction by the court), there is no need to declare an intention to take compensation in the Management Plan. But if the Management Plan contains a provision disclaiming compensation, for instance, no compensation should be taken during the guardianship.
Have a great day,
Christopher M.B. Graham – Click here for more information on Chris Graham.
Listen to Deductions from Compensation.
This week on Hull on Estates and Succession Planning, Ian and Suzana finish up the discussion on the question of accounting by reviewing deductions from compensation and briefly sum up the procedure of the passing of accounts.