It is not uncommon for the lawyer who drafted a testator’s will or codicil to subsequently be retained by the Estate Trustees after the testator’s death to assist with the administration of the estate. The rationale behind the drafting lawyer being retained to assist with the administration of the estate appears fairly self-evident, for as the drafting lawyer likely has an intimate knowledge of the testator’s estate plan and assets they may be in a better position than most to assist with the administration of the estate.
While retaining the drafting lawyer to assist with the administration of the estate is fairly uncontroversial in most situations, circumstances could become more complicated if there has been a challenge to the validity of the testamentary document prepared by the drafting lawyer. If a proceeding has been commenced challenging the validity of the testamentary document, there is an extremely high likelihood that the drafting lawyer’s notes and records will be produced as evidence, and that the drafting lawyer will be called as a non-party witness as part of the discovery process. If the matter should proceed all the way to trial, there is also an extremely high likelihood that the drafting lawyer would be called as a witness at trial. As the drafting lawyer would personally have a role to play in any court process challenging the validity of the will, questions emerge regarding whether it would be proper for the drafting lawyer to continue to represent any party in the will challenge, or would doing so place the drafting lawyer in a conflict of interest?
Rule 3.4-1 of the Law Society of Ontario’s Rules of Professional Conduct provides that a lawyer shall not act or continue to act where there is a conflict of interest. In the case of a drafting lawyer representing a party in a will challenge for a will that they prepared, an argument could be raised that the drafting lawyer is in an inherent position of conflict, as the drafting lawyer may be unable to look out for the best interests of their client while at the same time looking out for their own interests when being called as a witness or producing their file. There is also the potentially awkward situation of the drafting lawyer having to call themselves as a witness, and the associated logistical quagmire of how the lawyer would put questions to themselves.
The issue of whether a drafting lawyer would be in a conflict of interest in representing a party in a will challenge was dealt with in Dale v. Prentice, 2015 ONSC 1611. In such a decision, the party challenging the validity of the will brought a motion to remove the drafting lawyer as the lawyer of record for the propounder of the will, alleging they were in a conflict of interest. The court ultimately agreed that the drafting lawyer was in a conflict of interest, and ordered that the drafting lawyer be removed as the lawyer of record. In coming to such a conclusion, the court states:
“There is a significant likelihood of a real conflict arising. Counsel for the estate is propounding a Will prepared by his office. The preparation and execution of Wills are legal services, reserved to those who are properly licensed to practise law. Counsel’s ability to objectively and independently assess the evidence will necessarily be affected by his interest in having his firm’s legal services found to have been properly provided.” [emphasis added]
Decisions such as Dale v. Prentice suggest that a lawyer may be unable to represent any party in a will challenge for a will that was prepared by their office as they may be in a conflict of interest. Should the circumstance arise where the drafting lawyer is retained to assist with the administration of the estate, and subsequent to being retained someone challenges the validity of the Will, it may be in the best interest of all parties for the drafting lawyer to indicate that they are no longer able to act in the matter due to the potential conflict, and suggest to their clients that they retain a new lawyer to represent them in the will challenge.
Thank you for reading.
Section 37 of the Trustee Act provides the Ontario Superior Court of Justice with the power to remove and replace an Estate Trustee “upon any ground upon which the court may remove any other trustee.”
However, as we have previously blogged, the Court is generally not inclined to interfere with a testator’s wishes. In Chambers Estate v Chambers, 2013 ONCA 511, Justice Gillese confirmed that the removal of an Estate Trustee should only be granted on the clearest of evidence, with the welfare of the beneficiaries as the fundamental guide for the Court’s exercise of its discretion.
The Honourable Justice Fairburn’s recent decision in Ricci v Ricci Estate, 2016 ONSC 6614, reaffirms the high threshold that must be met before the Court will take the extraordinary step of removing an Estate Trustee.
In Ricci, the Deceased died leaving her husband (“Livio”) as the Estate Trustee of her Estate. The Deceased’s Will provided Livio with a life interest in her property, with their children as the residuary beneficiaries upon Livio’s death.
However, in 2015, Livio took personal possession of the home and obtained a new mortgage without notifying the residuary beneficiaries. Michael, one of the sons and the alternate Estate Trustee under the Deceased’s Will, brought an Application for Livio’s removal as Estate Trustee.
On the Application, Michael asserted that the transfer of title and the new mortgage resulted in a breach of Livio’s duties and obligations as Estate Trustee. Michael argued that Livio’s actions had put him in an untenable conflict of interest.
Given that the property was in Livio’s name, Michael also cited a letter from Livio’s lawyer that suggested that Livio would consider disinheriting Michael to demonstrate that his interest in the Deceased’s Estate was at risk.
Conversely, Livio argued that he had only acted to increase the value of the Estate by entering into a more favourable mortgage. It was Livio’s evidence that he had transferred title to the property into his name so that the mortgage on the property could be renegotiated on more favourable terms, allowing him to start paying down some of the principal amount of the mortgage. Livio also executed a declaration of trust after receiving enquiries from Michael’s counsel, confirming that he was holding the property in trust for his children in accordance with the Deceased’s Will.
Ultimately, Justice Fairburn held that while Livio should not have transferred the property into his personal name or remortgaged the property without notice to the beneficiaries, his actions were not “fatal” to his position as the Deceased’s Estate Trustee. Placing Livio’s actions in context, the Court found that the beneficiaries had benefited from the remortgaging of the property. The Court also held that the declaration of trust showed that Livio intended to abide by the Deceased’s testamentary intentions.
In the result, Michael’s Application was dismissed. Instead of ordering Livio’s removal, the Court ordered that the declaration of trust be amended and registered on title to the property.
Justice Fairburn’s decision once again reiterates the high bar for the removal and replacement of an Estate Trustee. The Court may be reluctant to exercise its discretion in the absence of clear evidence, even if there may have been a technical breach of the Estate Trustee’s duties.
Thank you for reading,
Umair Abdul Qadir
Estate Trustees play a critical role in administering an Estate. Their role can give them great decision making power. Yet this power can be abused. A conflict of interest may arise between the Estate Trustee in their role as representing the Estate and their personal interests. This conflict risks favouring their personal interests over the Estate, to which they owe fiduciary obligations. Conflicts of interests, actual or potential, raise significant concerns. An application to remove a trustee may be warranted in circumstances where there are significant allegations made.
The Court in Borisko v Borisko, 2010 ONSC 2670 found it appropriate to grant a removal application where significant allegations aroused the distrust and hostility of the beneficiaries. In doing so, the Court in that decision stated that an application for removing a trustee was not a fact finding process. In its reasons, the Court considered a number of allegations indicating a breach of duty or conflict of interest. The Trustee was alleged to have tried to buy shares from the beneficiaries when he knew they were valued at nearly twice what he offered. He was also alleged to have withheld this information from the beneficiaries. The Trustee was said to have refused to transfer the shares and dividends in a company to the family trust, but instead included the assets in the Estate to increase the Estate’s value and his compensation. These allegations, which were substantiated with evidence, were sufficient for the Court in this case to order the removal of the trustee.
As has been previously blogged, the Court takes such an application very seriously. The Court will prioritize the welfare of the beneficiaries as the governing principle when considering whether to grant such an application. It will also consider whether the administration of the Estate will be delayed should the Estate Trustee remain in office. If the Estate Trustee is named in the Last Will and Testament, this will also be of some importance to the determination of whether to grant the application for removal.
The mechanism for removing an Estate Trustee is by recourse to section 37(1) of the Trustee Act. This section requires that the Court, when removing a trustee, appoint a replacement. The Court may also exercise its inherent jurisdiction to remove the Trustee without appointing a replacement. The authority to do so is confirmed by the Court of Appeal Decision, Evans v Gonder, 2010 ONCA 172 where it was held that no single provision or the Trustee Act, when read as a whole, ousted the inherent equitable jurisdiction of a Superior Court.
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A recent decision of the Ontario Court of Appeal, Chambers Estate v. Chambers, 2013 ONCA 511, deals with the concepts of renunciation, resignation, removal and passing over of an estate trustee, and the sometimes subtle distinctions amongst the concepts.
There, a “renunciation” is defined as the “formal act whereby an executor entitled to a grant of probate (or person having the right to a grant of administration) renounces such right.” Renunciation is not available if a party has been appointed as estate trustee under a Certificate of Appointment, or has already intermeddled with the estate, or, put another way, where a party has dealt with an estate without having been formally recognized as estate trustee. Once an estate trustee has accepted the office, he or she cannot disclaim it by renunciation. In such a case, if the estate trustee no longer wishes to act, he or she must resign.
With respect to removal or passing over, the proper terminology is that an estate trustee is “passed over” before a Certificate of Appointment is issued, or before he or she has acted as estate trustee, and “removed” if a Certificate of Appointment is issued or he or she has intermeddled.
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In the recent case of Figley v. Figley (77 E.T.R. 3rd 1), the Saskatchewan Court of Appeal considered the removal of an executor in circumstances where he failed to comply with Orders to provide an accounting in respect of his actions under his Father’s power of attorney from the date of his appointment until the Father’s death. As the Court noted: "This is a troubling failure on [the Executor’s] part because the accounting concerns the very assets which comprise the estate he is charged with administering."
While the Court considered various authorities that spoke to the principle that a Court should "not act too readily to remove an executor", evidence was also tendered that demonstrated what the Court found to be "an active intention on [the Executor’s] part to “punish” his siblings. The Court observed: "It is difficult to understand how he will be able to fairly and even-handedly administer the estate when he starts from this highly partisan point of approach."
The Court concluded that the appellants demonstrated, “a want of proper capacity to execute the duties, or a want of reasonable fidelity” on the part of the Executor and he was accordingly removed and replaced by the Public Trustee.
While removal cases are always dependent on the facts, the overriding objective of the Court remains to see that the trust property is not endangered and the beneficiaries are protected.
David Morgan Smith – Click here for more information on David Smith.
In Langston v. Landen, a recent decision of the Ontario Court of Appeal, one of three co-executors of an estate having a value of some $24 million (in the words of the Court) "managed to shunt the other two executors to the sidelines. He started to loot the estate." Among Landen’s transgressions was his use of estate assets to purchase a home in Forest Hill which he had put in his wife’s name. On a motion for summary judgment, Justice Greer had imposed a constructive trust on the house for the benefit of the estate.
Landen’s wife appealed. However, the Court easily concluded that the fact that legal title was in her name was irrelevant in circumstances in which the entire purchase proceeds came from the estate. Adopting a quote from the Reasons for Decision of Justice Greer, the Court stated: "Since the money came from Landen in his capacity as a fiduciary, the constructive trust or express trust flows from him and the money can be traced from him to the house purchase and renovation."
So too, for the same reasons, the wife’s entitlement to any share of the property as the "matrimonial home" was negated. Of passing interest to the profession was the Court’s additional conclusion that Justice Greer was well within her jurisdiction by imposing a vesting order on the house for the benefit of the estate in the absence of a motion seeking such relief.
David M. Smith
A person with more than one set of distinct interests or roles in the same estate may have a conflict of interest. This can create all sorts of problems and issues in an estate administration and is a driving concept in much estate litigation.
Say Joe Smith is the executor of an estate but also received gifts from his mother the testator during her lifetime. One of these gifts, say, came in the form of a transfer of a bank account into joint ownership between the two of them.
Wearing his executor’s hat (to use some traditional vernacular), Joe may have a duty to determine whether the bank account transfer was not a gift at all and actually subject to a resulting trust in which case the estate might have a claim to the asset. Joe may need to do so because, as executor, his duty is to identify estate assets and bring them into the estate.
However, wearing his hat as a recipient of the bank account, Joe is unlikely to want to give the bank account back to the estate.
In short, Joe may have a conflict of interest.
In such circumstances, Joe may need two lawyers, one to advise him as estate trustee, the other to protect him personally. Sometimes an executor’s conflict is such that he cannot continue to act as estate trustee.
While this example may be simple enough, there is a tremendous range of conflicts that can creep into estate matters.
Thanks for reading.
You know a trust has the potential to run off the rails when the beneficiary refers to the trustees as "The Three Musketeers".
After his untimely death in 2003, Dr. Robert Atkins’ widow sold his business netting proceeds of some $420 million. In his will, the famous diet guru set up two trusts: (i) a spousal trust that would benefit his wife, holding 90% of his assets, and (ii) a research foundation which would get the remaining 10%.
Cue the sword clanging of the three musketeers: a self-described entrepreneur, an accountant, and a lawyer, who befriended Ms. Atkins and became the widow’s closest advisors as well as trustees for the spousal trust (replacing the two trustees who had been appointed by Dr. Atkins). It is reported that Ms. Atkins subsequently agreed to pay each of them $1.2 million per year (excluding bonuses), signed them to 10-yr contracts, and allowed each of them to take out a $5 million life insurance policy on her life, naming themselves as beneficiaries.
Fast forward to a Wall Street Journal online report that a lawsuit had been filed by the Musketeers accusing Ms. Atkins of improperly firing them. Ms. Atkins and her new spouse asked for the trio to be removed as her trustees and further sought reimbursement of some of their fees. The relationship between the Musketeers and Ms. Atkins began to disintegrate in 2006 when Ms. Atkins met her new spouse to be, who himself then became increasingly involved in her finances. When the Musketeers balked at her new spouse’s demands to encroach for an additional $100 million for Ms. Atkins (above and beyond her $15 million annual income), he started making noise about having them removed as trustees.
That’s a lot of bread.
Have a great weekend,
With the end of the week comes my final blog in my series this week on considerations to take into account when changing trustees.
Negotiated structures dealing with the retirement, removal and replacement of a trustee may include, or be a combination of, a deed, court order, preparation of accounts, a passing of accounts application, a release, indemnification, Judgment on the passing and Minutes of Settlement (Agreement) dealing with the resolution of the disputes arising therefrom.
A situation where a trustee wishes to retire and the administration of the trust has been simple, straightforward and has been substantially completed by the trustees to the satisfaction of all beneficiaries, who are sui juris, and there are no outstanding liabilities of the trust, will be completely different than one where beneficiaries are seeking to remove and replace a trustee for misconduct and/or in the context of a very complex administration.
Today’s blog is the third in my series this week dealing with considerations to take into account when changing trustees.
Whether a trustee or co-trustees have properly administered a trust is obviously a crucial factor in negotiating the removal and replacement of a trustee, and will effect the manner in which a new trustee may be appointed.