This month’s blog post was written by Daniel M. Paperny, Partner and Co-Lead of the Estate Litigation Practice Group at Loopstra Nixon LLP.

1. The Duty and Authority of Estate Trustees

Last month, my partner Matthew Rendely wrote about the vital and onerous job of an estate trustee (also known as an executor) and the complexities, responsibilities, and – oftentimes – conflict and litigation that an executorship can attract.

Above all, an estate trustee is a fiduciary: an individual or corporation charged with the solemn duty to act in the best interests of an estate and its beneficiaries, and to maintain, manage and, eventually, distribute the assets of an estate in accordance with the terms of a deceased’s Will (or pursuant to the rules of intestacy if there is no Will).

In addition to being a job that is laden with responsibility and potential personal liability, the role of an estate trustee also comes with an immense amount of power (yes, great power and great responsibility, just like the line from Spiderman). An estate trustee steps into the shoes of a deceased person, and (subject to the terms of the Will) is bestowed with exclusive and sweeping authority to exercise its discretion in administering estate property. This can include the power to run businesses, manage investments and real estate, and oversee the universe of estate assets until such time as the estate can be wound up and ultimately distributed to its beneficiaries.

2. The Utility of Applications to Pass Accounts

Beneficiaries with a financial interest in an estate will naturally inquire as to how such broad powers can be checked: how can we make sure that an estate trustee is administering estate assets prudently, with requisite level of diligence? Conversely, estate trustees will inquire as to how they can ensure they are compensated for their work, and released or discharged from any personal liability that might otherwise flow from their conduct as estate trustee.  The answer in both cases is a Passing of Accounts: the ultimate check and balance on estate trustee powers.

One of the many responsibilities of an estate trustee is to keep continuous and ongoing, comprehensive records (also known as “accounts”) of all actions taken and transactions entered into on behalf of an estate or in relation to any estate property during its administration. A “Passing of Accounts” application is the judicial process by which an estate trustee’s accounts are formally scrutinised by estate beneficiaries and the Court. It is the process by which estate trustees may seek to have their accounts approved, or “passed”, by the Court.

3. Passing of Accounts: The Process

There is no statutory requirement or timeline for estate trustees to pass their accounts. Passing of Accounts applications can either be commenced voluntarily by an executor or at the demand of those with a financial interest in an estate. In Ontario, the process for Passing of Accounts applications is governed by Rules 74.16 through 74.18 of the Rules of Civil Procedure; it begins with the estate trustee filing an application containing their accounts (which must be filed in specialized court-mandated format), verified by affidavit, and accompanied by supporting documentation and receipts or voucher material.

On a Passing of Accounts application, the presiding judge has the authority to “make full inquiry” into the whole property that a deceased person was possessed of or entitled to upon their passing, and the way such property has been administered or distributed since the date of death. Additionally, the judge can look into any complaint or claim launched by a beneficiary that the estate trustee has mismanaged property and, upon the proof of any such claim, order that the estate trustee repay the estate to make it whole for any misconduct (see sections 49(2) and (3) of the Estates Act).

Once an estate trustee files an application to pass its accounts, beneficiaries or others with a financial interest in the estate can file Notices of Objection to the accounts, outlining any perceived deficiencies or alleged fiduciary misconduct. In such cases where Objections are filed, a mini trial often ensues that focuses on the estate trustee’s accounting and the alleged misconduct. Section 49(4) of the Estates Act gives the Court the authority to set the scope of such a trial and make any procedural directions or orders necessary for the trial to proceed.

The conclusion of such a contested Passing of Accounts will usually include either the Court’s approval (or “passing”) of the accounts or order that the estate trustee pay the estate for any damages or losses that may have been caused by its conduct.

4. Assessing Compensation

The Passing of Accounts application can also determine appropriate compensation payable to the estate trustee. Sections 23(2) and 61 of the Trustee Act set out an estate trustee’s right to collect compensation, with section 61 specifying that an executor’s compensation is to be based upon a court’s determination of what is “fair and reasonable allowance for his care, pains and trouble and his time expended in or about the estate”.

On a Passing of Accounts application, a court will generally consider the following 5 key factors when determining an appropriate amount of estate trustee compensation:¹

1. The size of the estate;
2. The care and responsibility involved in the administration;
3. The time occupied in performing the duties;
4. The skill and ability shown by the estate trustee; and
5. The success resulting from the administration.

In addition to the above 5 factors, courts will also consider the rule of thumb “tariff” system that applies percentages in determining appropriate levels of compensation. The tariff system generally holds that an estate trustee can charge the following fees in taking compensation:²

i.    2.5% on all capital receipts;
ii.   2.5% on all capital disbursements;
iii.  2.5% on all revenue receipts;
iv.  2.5% of all revenue disbursements; and
v.   2/5 of 1% of average market value of the capital in the estate every year for an overall care and management fee.

Usually, when setting estate trustee compensation in any given case, courts will consider a combination of the 5-key factors together with the tariff system noted above.

5. Conclusion

Passing of Accounts applications are an invaluable tool for estate trustees and beneficiaries alike.

For executors, they offer a route toward court-approval of their conduct and compensation claims, which may be needed in hotly contested estate matters and/or to shield the executor from potential future liability.

For beneficiaries, Passing of Account applications provide an opportunity to hold a forensic accounting of an executor’s administration, before the Court, to see that an estate is made whole for any misconduct or abuse of the vast powers afforded to the estate trustee.

While Passing of Accounts applications can be useful, and even necessary in select circumstances, these proceedings are notoriously expensive and complex. Experienced estate litigation counsel is always recommended for estate trustees or fiduciaries faced with the prospect of a Passing of Accounts application.

In many instances, appointing a professional estate trustee like Cidel Trust Company can limit the need for, or cost of, Passing of Accounts applications, since corporate trustees are often better equipped to keep estate accounts and file such accounts with the Court if needed.

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References:

¹Re Toronto General Trust v. Central Ontario Railway Co. (1905), 6 O.W.R. 350 (H.C.), at page 354.

²Farmers’ Loan and Savings Co (Re) (1904), 3 O.W.R. 837, at page 389.

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