Reference Articles > Charity as Estate Beneficiary

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This article reviews the duties and obligations of a charity who is also a residuary beneficiary of an estate.   

The directors or trustees of a charity are entrusted with the duty to protect the charity’s objects and interests. It is an onerous duty. It means the directors of a charity must recognize they owe the charity a duty to protect the charity’s interest in the property it was bequeathed and should not be too quick to avoid litigation or settle if this results in a breach of their fiduciary duties.

Litigation is a unique consideration. If an estate is facing litigation the charity’s directors must exercise their duties with utmost care and diligence. How do they do this? First the directors must properly assess the litigation. Unless the amount of the bequest is not material or the matter is covered by a specific policy, the directors of the charity may need to hold a special meeting. Second, the corporate secretary should keep detailed minutes of the discussions. The meeting may result in a vote to either defend the litigation, not take a position and in effect to do nothing and see what happens, or it may renounce the gift and avoid participating in the litigation.

In order to make the most appropriate decision for the charity, the directors and staff must understand the litigation, the various potential outcomes and costs. The directors need to understand their obligations and act prudently in evaluating the matter and justify the reasonable decisions taken – to do otherwise may result in an act in breach of their duties.

Likewise the charity has a core responsibility to request and review the administration of the estate, typically through the estate accounting process (whether formal or informal). The accounting process involves reviewing all entries including legal accounts and compensation. When reviewing the accounts, a beneficiary is entitled to ask for copies of the legal accounts and other backup vouchers. The legal accounts should set out with sufficient detail the work done, by whom and the length of time taken.  With respect to compensation, all  proper deductions should be made, there should be no “double dipping” and, after review,  the amount charged should be “reasonable and fair” in the circumstances. All reasonable questions and requests for information should be answered by the estate trustee or estate solicitor. For more discussion on this topic see the accompanying article.

Eventually a residuary beneficiary will be asked to sign a release (or a release with an indemnity). As there is no prescribed legal form for a release and the language can vary, the charity (and all beneficiaries) should take these documents seriously and read them carefully. Here are some points to remember:  

• A beneficiary may modify the release to include language that better suits its purposes or the particular circumstances. A release is, legally, just another contract the terms of which can be negotiated.
• As residuary beneficiaries are the only class of beneficiary concerned with the administration of the estate, only they should be asked to review the accounts and sign a release. Legatees should just be asked to sign a receipt.  
• If there are any doubts the release should not be signed. The request to sign a release is an indulgence. The estate trustee is asking the charity to put its name on the “bottom line” - a function historically performed by a judge. Although it could be argued the beneficiary signed without understanding or without the assistance of legal counsel, these arguments are not always easy to make.  
• Quite often the covering letter requesting the “sign-off’ also states that the charity will not receive or is not entitled to receive a distribution until the release has been signed by all the beneficiaries. A charity or any beneficiary should not feel pressured into signing the release. The release relates to the administration of the estate by the estate trustee and bears no relationship to a beneficiaries’ direct entitlement to its gift. After providing for a suitable holdback, there should be no reason why an estate trustee cannot distribute a reasonable amount independent of the release.[1]  
• If there are questions, they should be asked, respected and answered.   
• In Ontario, if legal advice is sought on a formal passing of accounts, which will likely include a review of the release, some if not all of the costs (determined by a tariff) of obtaining that advice are payable by the estate.

A release may also include a request for an indemnity. Historically, when the courts reviewed most if not all estate accounts the estate trustee relied on the court’s judgment and there was no need for release and indemnity. However, as formal passing of accounts are becoming less the norm, the request for an indemnity is becoming more common.

In the usual indemnity the charity agrees that if, in the future, the estate trustee determines that there are further estate liabilities and no estate assets left to discharge them, it will, in effect, reimburse the estate trustee for that liability. By the charity agreeing to pay the liability the estate trustee is relieved of any personal liability for these debts.

Ideally a charitable beneficiary should not sign an indemnity. It is the estate trustee’s responsibility to ensure that all the debts of the deceased are paid before making any distribution. Sometimes an indemnity is simply included because it is in the precedent.

A charity should make inquiries of the estate trustee as to what in particular he or she is concerned about. Is there an anticipated liability? If no then query the need for an indemnity. If yes then the holdback could be made large enough to deal with the possibility, or, alternatively the indemnity could be particularized and limited to the potential liability. The indemnity can also be limited in time.

Finally a charity should consider the bigger picture. In effect, giving an indemnity is incurring a potential liability of an unknown amount. Unlimited, it could potentially expose all of the charity’s assets at risk (in practical contrast with an individual beneficiary). These assets are funds raised for its charitable purposes. Hence, one practical compromise position for many charities is to limit the quantum of the indemnity to the amount received from the estate. Although this limits the amount at risk it may not address the question of where the funds will come from if the charity is called upon to indemnify the estate.

For more information on estate, trust, powers of attorney or guardianship topics please see accompanying articles. Remember these articles are provided for information only and are not meant to be legal advice. Please consult with a professional.

M. Jasmine Sweatman practices at the law firm Sweatman Law Firm and can be contacted directly by telephone at (905)337-3307 or by email at jasmine@sweatmanlaw.com.