What is “Estate Trustee” & “Beneficiary”
Being named a beneficiary in a will means that the deceased has chosen you to inherit some or all of their estate and they particularized in their will how much or what you are to inherit.
A testator (person making the will) may put conditions in their will that must be met for a beneficiary to receive inheritance (e.g., beneficiary reaches 18 years of age). As well, the testator can choose to have a “Contingent Beneficiary”: this is a “back-up” person to be a beneficiary if something were to happen to the primary beneficiary (e.g., the primary beneficiary dies before the testator).
The failure to name beneficiaries in a will can prolong the probate process (carrying out the will).
What are my rights as a Beneficiary?
A beneficiary is owed duties by the estate trustee. The estate trustee must follow the law and the deceased’s will (if there is a will) or the Rules of Intestacy (if there is no will).
This duty includes giving beneficiaries a proper accounting of the estate and keeping the beneficiary updated. An accounting of the estate is essentially a documentation log indicating, for example expenses, values of assets, any money received by the estate trustee, what has been distributed, etc.
A beneficiary may wish to object to the appointment (legal confirmation) of an estate trustee or object to their accounting in a formal passing of accounts.
Objecting the Appointment of an Estate Trustee
The appointment (legal confirmation) of an estate trustee is based on the principle that this is a responsible individual who recognizes their duties, responsibilities, and liabilities as estate trustee.
If a beneficiary does not wish for a person to be appointed as the estate trustee or wishes to challenge the will, they may wish to file an objection. This objection comes in the form of filing a “Notice of Objection” before the appointment is granted (allowed).
A beneficiary must be able to provide relevant evidence as to why they are objecting to the appointment of the estate trustee. Example of evidence may be:
- The potential estate trustee has already taken too long to start the probate process
- The potential estate trustee has a history of financial abuse such as fraud
- The potential estate trustee has a conflict of interest that would affect their ability to fairly perform their duties
- The will seeking to be probated and/or appointing the potential estate trustee is being challenged or will be challenged in court as not a valid will
Simply not liking a potential estate trustee is not a valid (legitimate) reason for a potential estate trustee to be rejected.
Usually, the courts will prioritize the deceased’s wishes if the potential estate trustee was requested by the deceased in their will.
A beneficiary designation is when you are a beneficiary named in a financial plan the deceased holds (eg. TFSA, RRSP, RRIF, life insurance, pension, etc).
This would pass and fall outside of the deceased’s estate meaning that they are not "ruled" by the will. These funds do not need to be included in the calculation of the Estate Administration tax and they do not need to be declared on the probate application. As well, as these monies pass outside the estate, an estate trustee does not manage these funds on the behalf of the deceased.
The named beneficiary would deal directly with the financial institution (bank or insurance company) to receive their funds. Any funds in these financial plans should be directly transferred to the beneficiary.
If the deceased did not name a beneficiary in their financial plan (eg. TFSA, RRSP, RRIF, life insurance, pension, etc) then the default beneficiary is their estate. The monies would fall inside the estate, and be subject to Estate Administration Tax, would need to be declared on the probate application, and would be managed by the estate trustee.
Yes! A minor (someone of non-legal adult age) may be named as a beneficiary in will. However, the minor will not have the ability to manage or control any property they might receive until the minor reaches the age of majority (age at which you are considered an adult legally) or the age indicated in the will, whichever comes first.
Their entitlement (money) will be held in trust (meaning held on their behalf) by the estate trustee. It may also be paid into court.
The minor’s guardian for property (who may be appointed by the court) may apply to the court to access the minor’s share of the estate, with the estate trustee’s permission, for expenses regarding the care and education of the minor. This may require a guardianship application.
An estate trustee is a person who has the legal power (authority) to give out (distribute) or manage the estate. Sometimes this person is known as an “executor” as well.
In the case when there is a will, the will usually appoints (names) the individual whom the deceased wants to be their estate trustee. This named individual is usually the one who acts as estate trustee and applies for probate.
The essential job of an estate trustee is to manage and distribute (give out) the estate to beneficiaries.
Estate trustees owe a fiduciary obligation to the estate, meaning that they owe the legal obligation of acting in the best interests of the estate. Responsibilities estate trustees hold commonly include:
- Find the will (if any)
- Start the probate process by applying (if needed)
- Make funeral arrangements
- Pay taxes and liabilities, file all taxes, apply for and receive a clearance certificate (it is recommended to hire an accountant!)
- Sell property for the maximum value (get the best price)
- Distribute (give out) the property to the beneficiaries per the will or laws of intestacy and ensure the distribution of the estate is done in a reasonable time frame (typically around one year)
- Keep an accounting (documentation of financial transactions) and provide updates to beneficiaries
It is the responsibility of the estate trustee to keep accurate accounts of the estate assets (for example, money coming in and out, and/or what property is being sold, kept, paid for, etc.).
Passing of accounts is a “court audit” of the handling of the estate finances by the estate trustee and are presented to the court and beneficiaries. The accounts are examined by the court and:
- “Passed” in form presented
- Amended by court order and passed (in amended form); or
- Not passed (because court not satisfied with accounts).
There are certain accounting requirements and various methods that the estate trustee may use to maintain proper accounts for the estate, such as having a separate ledger book (book of financial records) with a record of all receipts and disbursements (payments) being recorded in these books.
Is a passing of accounts required?
There is no requirement in law for an estate trustee (or any other fiduciary) to pass his/her accounts. That being said, an estate trustee is required to maintain (keep) estate accounts and may volunteer or be compelled (forced) to have their accounts audited (inspection) by the court.
There are two ways for an estate trustee to have his/her financial actions approved before they pay themselves compensation and satisfy themselves that they are not liable for their actions:
- The beneficiaries approve (Note: if any beneficiary has a legal incapacity, such as being a minor/mentally incapable, then their approval cannot be obtained; it is also recommended for the estate trustee to seek the beneficiaries to sign a release which releases the estate trustee of their liability); OR
- The accounts are passed in court via a passing of accounts application brought by the estate trustee.
The estate trustee also must seek approval/agreement from the beneficiaries or pass their accounts before they are to pay themselves their compensation for acting as estate trustee.
Proceedings
If there is a dispute (disagreement) over the accounts, the estate trustee may be required to attend a hearing (courtroom proceeding) and provide viva voce(oral) evidence under oath (promise of honesty). The estate trustee may be questioned in chief (asked questions by your lawyer) and the estate trustee is then subject to cross-examination by parties in dispute (questioning by lawyer for the other side). Like other proceedings, the court may make a decision immediately or reserve to consider the matter at a later time.
Having personal liability means that you are personally responsible (accountable) for mistakes you make. In the context of being a estate trustee, this means that you are responsible for your actions in your role as an estate trustee. If any loss of property (e.g., homes, money, etc.) occurs due to specifically your actions, you may be held personally liable for paying any loss of money or any monetary loss caused by your actions.
Liability with Taxes
The estate trustee is responsible for ensuring that all taxes owed by the estate (e.g. incomes taxes of the deceased or estate) are filed and paid before a distribution to the beneficiaries.
If a distribution of the estate occurs before the taxes are paid, the estate trustee is liable to pay taxes personally up to the amount in the estate.
Clearance Certificate
An estate trustee should consider seeking a “Clearance Certificate” from the Canada Revenue Agency (CRA), which is a letter indicating that the estate does not owe any income taxes, before distributing an estate. It is common for the estate trustee to “hold-back” a portion of the estate in anticipation of potential taxes required to be paid by the estate.
As the Clearance Certificate is the final step and may take a considerable amount of time (and the beneficiaries may wish to receive their money). Upon filing and paying the taxes, and after applying for the Clearance Certificate, the estate trustee may consider distributing most of the estate, but hold back a portion pending receipt of the Clearance Certificate. An accountant can advise the estate trustee the recommended amount to hold back. Once the Clearance Certificate is received and the taxes are satisfied, the estate trustee would distribute the remaining hold back, if any.
Although this is not required, some estate trustees may choose this to do this to minimize the risk of personal liability.
Acting as an estate trustee is a time-demanding and important job for an individual to take on. In general, estate trustees have the right to be paid for their work, unless otherwise stated by the will. A will might indicate the testator’s (person writing the will) own wishes as to how they would like for an estate trustee to be, or not be, compensated (to be paid).
Usual Percentage Approach
A “usual percentages” approach has been widely adapted (used). It is a yardstick – not implemented in legislation (not actually written into law) and can be increased/decreased/disregarded for another approach, such as fees based on docketed time (amount of time spent documented).
In Ontario, the general rule is to categorize:
- Capital receipts (e.g., savings bank account) at 2.5%
- Capital disbursements (e.g., payout to beneficiary) at 2.5%
- Revenue receipts (e.g., income from deceased’s investments) at 2.5%
- Revenue disbursements (e.g., Cheque charges) at 2.5%
which is roughly 5% of the estate’s value. There is also an estate management fee as 2/5 of 1% (0.004%) per annum of the average annual value of the assets.
The court is increasingly looking for evidence to substantiate (justify) the amount of compensation estate trustees are seeking. This evidence includes time dockets, length of administration (how long it took to give out the estate), complexity of estate, skill needed, and results obtained.
Other compensation
For a complex estate, the estate trustee may consider requesting a “special fee” which are usually asked for if there were business interests among the estate assets or the estate has been involved in litigious matters (matters requiring arguing in court) and the estate trustee has had to make decisions on behalf of the estate.
For an estate trustee to receive compensation, it is must be either agree upon by all beneficiaries or approved by the court through a passing of accounts application brought by the estate trustee.
Pre-taking of compensation is considered to be subject to judicial sanction (legal punishment), unless there is testator (will writer) authorization in the will or a compensation agreement made with the executor prior to death (Re Knoch). Generally, an estate trustee who pre-takes compensation that is more than the amount the court ultimately approves will be ordered to repay the estate with interest.
Once an estate trustee is granted probate (appointed) by a court, the process to remove them becomes more difficult.
Evidence showing that the estate trustee is failing to act in line with the law or instructions of the will, or improper actions (misconduct) is required to be shown. You may seek for them to pass their accounts (ask for them to bring a court application and show the court their financial actions) in order to verify if there are any irregularities or errors with the accounts.
In some scenarios, removal is not always necessary. For example, if there is a disagreement between a beneficiary and the trustee, it is possible to request for a person not related to the dispute (third-party) to temporarily step-in as the estate trustee while the dispute is ongoing; also known as an Estate Trustee during Litigation. This ETDL is not able to make any distributions from the estate.
Some reasons why removal of an estate trustee might be requested:
- The Estate Trustee is not able to act in the best interest (fiduciary duty) of the estate
- Conflict of Interest: The estate trustee is biased in their decisions because they are unable to be impartial (e.g., they are a creditor of the estate and are owed money although this doesn't always mean they can't still be neutral)
- Failing to maintain proper accounts and records.
Applying for the Removal
Any individual that holds a financial (monetary) interest in the estate is able to apply for the Court for relief such as removing the estate trustee as per s.37(3) in the Trustee Act. The Court will consider factors such as whether the estate trustee was specifically requested by the deceased’s will and if the best interests of the beneficiaries are being represented in the estate trustee’s actions, as expressed in Johnston v Lanka Estate, 2010 ONSC 4124.