Reference Articles > What You Need To Know About Estate Administration: In Three Parts- Part 3 

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PART III – THE ACCOUNTING RESPONSIBILITY AND PROCESS

One of the core responsibilities of an estate trustee (or any fiduciary) while administering an estate is to keep accurate records of the steps taken, the assets collected and the payments made. This process is called an ‘accounting’. It starts from listing the ‘original assets’ (i.e. the assets as of the date of death or when the trust was established) under administration. Each and every receipt or revenue (i.e. interest on bank accounts) that comes in (the “ins”) and each and every disbursement (the “outs”) transaction during the course of the administration should be recorded as it happens.

Although this obligation exists generally only residuary beneficiaries are concerned with and accordingly are only entitled to this accounting. Once a legatee (a person or organization that receives a specific gift) receives what they are entitled to under the will that should conclude their involvement.

At some stage during the administration of the estate, the estate trustee delivers his or her accounts. If the estate is one where the assets are to be distributed outright to the residuary beneficiaries then the accounts are usually delivered once the assets are under control and claims ascertained. This does not mean that a residuary beneficiary should wait until that time to get a list of original assets. It is helpful to review the nature of the assets to determine whether, if permitted, there are any benefits to in specie (i.e. in-kind) distributions. If the estate is one where there is an on-going trust (i.e. the will establishes a trust with the income payable to the spouse during her lifetime and the capital being distributed to charity after her death) the accounts are usually delivered on a periodic basis (i.e. every 3-5 years) for the duration of the trust. It is important to remember that once the assets establish the trust the estate trustee now assumes the role of trustee with the same obligations. The transition is seamless. When the trust terminates, the trust and the estate are wound up.

When accounts are received it is extremely important that the time be taken to review them. The accounts provide a wealth of information concerning the administration of the estate. It is particularly incumbent upon charitable residuary beneficiaries to review the accounts properly. Of typical interest are the entries relating to legal fees, compensation and taxes. After the account review process is complete a step back should be taken to consider the accounting as a whole and to review the release which usually accompanies the accounts.

The discussion about legal fees, compensation, taxes and releases merit detail discussion which is not possible in this article. However, the following guidelines may be found helpful.

Legal fees

In Ontario today there is no tariff for legal fees. Whatever is reasonable for the legal services provided keeping in mind the experience of the solicitor, the hourly rate and the rate of success. Most solicitors charge the time spent multiplied by their regular hourly rate. It is very hard to know what is ‘reasonable in the circumstances’ however such things as litigation or complications in dealing with assets or claims will result in higher fees. Completing most of the initial paperwork is not complicated.

A residuary beneficiary is entitled to ask for copies of the legal accounts rendered. These accounts should set out with sufficient detail the work done, by whom and the length of time taken. If the legal fees seem ‘high’ a review of the legal accounts may show that, in fact, the solicitor was performing estate trustee duties in the place of their client, and charging their regular hourly rate. If this is the case then the amount charged for this work should be deducted from the compensation claimed (and taken) by the estate trustee. Otherwise, we have the situation known as “double-dipping” where the estate (i.e. the residuary beneficiaries) is paying twice for the same work. This can be a contentious area at account time as some solicitors do not always make this clear to their clients at the beginning.

Compensation

At common law, before statutory enactment, an estate trustee was not allowed to ‘profit’ from his or her position. This meant they had to perform their duties without compensation. The common law has been overruled by statute so that now an estate trustee is entitled, but not required, to take compensation for services rendered. Compensation is a matter of provincial jurisdiction so that rules differ across the country.

In Ontario, the principles for taking compensation are set out in the Trustee Act. This Act provides for a ‘fair and reasonable allowance’ for the ‘care, pains and trouble, and the time expended in and about the estate’, unless the compensation is fixed by the will (i.e. the will itself fixes the compensation or a compensation agreement is incorporated by reference). It is at the stage of presenting the accounts that the claim for compensation will be set out for the period in question. It should be detailed. Once approved by the beneficiaries (or a court) the estate trustee is entitled to take the compensation. Otherwise, we have the situation known as ‘pre-taking’ compensation which is not generally allowed. If this happens and it is found that the compensation taken is excessive not only will the estate trustee have to reimburse the estate for the excess amount but also pay interest on the excess amount.

If compensation is not fixed by the Will, then in Ontario, the courts have held that determining what is ‘fair and reasonable’ is a two step process. Roughly speaking, the process is like this: first, 2.5% of the receipts and 2.5% of the disbursements is calculated. If it is an on-going trust situation then an additional 2/5 of 1% of the average amount under administration is calculated. The mathematical result is then compared to the ‘five-factors’ of size of the estate, the care and responsibility involved, the time spent performing the duties, the skill and abilities shown, and the result obtained or degree of success in the administration. It should be remembered that the Court of Appeal suggested the mathematical result is not to be considered the ‘floor’ but rather the ‘ceiling’ when determining the appropriate amount.

It should also be remembered that corporate trustees (i.e. trust companies) have their own compensation agreements that tend to result in greater compensation then the process described above. However, even in these situations, the mathematical result should be checked.

Accordingly, the appropriate amount of compensation will vary from estate to estate. Each claim must be looked at on its own merits each and every time.

Taxes

The greatest liability often of an estate is the outstanding income taxes. The estate trustee must ensure that the income tax liability is discharged. The Income Tax Act provides that the estate trustee is jointly and severally liable with the estate for the tax liability and may become personally liable for outstanding taxes in certain circumstances. This is why before all the assets are distributed a prudent estate trustee will obtain a Clearance Certificate from Canada Revenue Agency. This certificate certified that all income taxes owing by the deceased and/or his or her estate have been paid.

There are various income tax returns that must or can be filed. The most common are what are known as the terminal return (T1) the trust return (for the estate or the T3). As well, income tax returns prior to the year of death must also be filed, if the deceased during his or her lifetime failed to file them. There are certain time limits for when the various returns need to be filed. The failure to file on time is unfortunately fairly common and can result in penalties and interest being charged. If this happens, the residuary beneficiaries should insist that the estate trustee bear the expense of the penalties and interest. Another unfortunately common error is the failure to account for the charitable interest and taking advantage of the donation credit. Sometimes it is also not understood that the returns can be filed indicating the charitable interest even if the charity has not yet issued the receipt (as the distribution has not get been received).

Releases and Indemnities

This topic is also one which merits a detailed discussion which is beyond this article. A release can be a deceptively important document. A signed release binds the residuary beneficiary’s acceptance of the estate trustee’s administration (absent fraud) of the estate.

An indemnity now usually forms part of the release. By signing an indemnity a residuary beneficiary agrees that if, in the future, the estate trustee determines that there are further estate liabilities and no estate assets to discharge them, then the residuary beneficiary agrees to reimburse the estate for that liability. In effect, the estate trustee is relieved from personal liability. Ideally these should not be signed especially if the residuary beneficiary is a charity. As it is sometime difficult to get the estate trustee to accept this position, a practical compromise (but not one that the author necessarily advocates) has been to limit the indemnity either to a specific liability, in time or to the amount received from the estate. Another solution is for the estate trustee to ensure that the holdback (from an interim distribution) is sufficient.

This document must be carefully reviewed each and every time. There is no standard form of release (although they all look somewhat familiar) or indemnity. If it relates to an interim distribution the document should make that clear. A residuary beneficiary does not want to be releasing the estate trustee from all of the administration of the estate when it is not yet complete – especially if the Clearance Certificate has not yet been received. Finally, remember that in Ontario, if a residuary beneficiary retains counsel to assist them in reviewing the accounts then even if the passing of accounts is uncontested the legal costs for the review are usually covered by a tariff.

The estate accounting process is extremely important and should be taken seriously by all parties. The time should be taken to review the accounts provided and in particular review the areas that tend to raise the most questions. If insufficient answers are given to the questions asked then the accounting process may be resolved through the courts through a ‘passing of accounts’ process.