Avoid surprises

The law requires the appointed trustee of an estate to inform a charitable beneficiary that it will receive a gift.

If the gift is in a trust, notice is to be given inside of one month of the trust paperwork being signed. If the gift is in a will, notice is to be given within the same period after the death of the testator.

While notification of the charity may seem like an obvious step, there have been instances where an executor neglected to do so with tragic consequences.

In the Penna Estate case, the testator, Paul Penna, had passed away in 1996. His estate at that time had an approximate value of $24 million. His wife, Lorraine, was to get $1 million, with the remaining $23 million to form a charitable fund. Upon her death, the balance of the wife’s interest was to be transferred to the fund.

That didn’t happen (see “Avoid estate abuse”). Those two trusts were not set up following the testator’s death and no proper accounting was maintained. There were complex provisions in the will as regards to how monies from the fund were to be distributed during the wife’s lifetime and afterwards.

If certain life events took place, it stipulated that if any net income was not spent, it was to be divided between 12 charitable beneficiaries. By 2006, the majority of the estate’s assets where no longer there or were missing.

It appeared that many of the charities had not been made aware of their interests in the estate, and the few that had were not informed until many years after the testator’s death.

The distributions to which the charities were entitled hadn’t been made. And, due to conduct of the administration by the primary trustee, the monies necessary to make those distributions were no longer available.

Executor’s year

The following is generally applicable to a charitable beneficiary or to any beneficiary of an estate or trust. Administration of an estate with continuing trusts can last for many years.

Reference is often made to the term the “executor’s year” to signify that such an estate is to be administered and distributed within one year of the testator’s date of death. The “executor’s year” isn’t, however, a mandatory rule as to what must occur, but rather a common-law guideline to follow.

While administration of a relatively straightforward estate can be concluded within one year, there are reasons it may take longer. What constitutes undue or unreasonable delay depends on the nature of the estate, the assets to be administered and the issues arising in the course of administration.

Still, an executor may be faulted for not taking significant steps in the administration within the first year, such as liquidating all investments that are not proper to retain, along with other residuary property and, if not being able to complete the administration and make distributions, at least being in a position to consider making interim distributions.

Periodic information requests let a beneficiary monitor the course of the administration, identify areas of concern, and then communicate with the trustee before those issues of concern become real problems. This applies to both a continuing trust and an estate meant for outright distribution.

If a trustee fails to respond or take appropriate steps in the administration, a court can be asked to compel the trustee to act. How much a charitable beneficiary will actively monitor an administration and follow-up with the trustee will vary depending on its entitlement and its degree of confidence in the trustee.

If a charity is a residual beneficiary of an estate, particularly where it has a significant interest in the residue of that estate, it should consider monitoring and following up to a greater extent. This would typically involve consulting with a solicitor and obtaining independent legal advice.

Obtaining the documents

A beneficiary should be provided with a copy of the trust or will. Some lawyers will advise a trustee to only provide that portion of the document which sets out the interest of the beneficiary. While that may be sufficient for a simple cash bequest, a full copy is necessary if a beneficiary has an interest in the residue of the estate.

The terms will not only specify the gift to a charitable beneficiary, but may also affect when funds are received and what they can be used for. Generally speaking, a beneficiary is also entitled to copies of trust documents. This may include a letter of wishes or other directions to the trustee outside of the trust or will.

A charitable beneficiary is entitled to request information about a trust or estate and its assets, the status of the administration and, where applicable, steps being taken to conclude it.

For an estate, it is appropriate to ask for a copy of the deceased’s terminal return and the deceased’s last year’s tax return to ensure that the charitable tax credit has been properly claimed; thereby optimizing the value of a residual bequest to a charity.

Such returns also may point to assets which should have been collected by the trustee and form part of the residuary estate. It’s appropriate to ask for copies of valuations on significant assets, so that some assessment can be made as to whether the assets have been disposed of at fair market value.

It’s appropriate to ask about anticipated timing of the sale of these assets in case they’ll delay the administration and distributions to beneficiaries.

A charitable beneficiary is entitled to accounts in passing form for a trust or an estate. Accounts in passing form are like financial movie footage, with a snapshot of original assets and assets remaining at the end of the period; and detailing all capital and revenue receipts and disbursements in the interim.

A review of the entries in these accounts can reveal much about the quality of the estate administration. A beneficiary may, however, decide it is content with informal accounts in less than the prescribed form or other financial information sufficient to make some assessment of the administration.

If so, a release would typically be requested by the trustee and signed by the charitable beneficiary, provided there are no issues or errors arising from the administration.

Paying the trustee

A trustee is entitled to fair and reasonable compensation for services. A compensation schedule will typically form part of estate accounts in passing form or of informal accounts.

A charity should consider whether the compensation claimed is appropriate or if it may be reduced. If a charity is a residual beneficiary, any reduction should go toward increasing the value of the charity’s residual interest. Any losses caused by a trustee may be deducted from his compensation claim or ordered by the court to be paid by the trustee personally.

How to compensate the trustee

The amount claimed for compensation of a trustee is tested against five factors:

• the magnitude of the trust;
• the care and responsibilities involved;
• the time occupied in performing duties;
• the skill and ability displayed; and,
• the success which is attended the administration.

The informal tariff is a bench-mark for evaluation of a claim for compensation. It translates into 2.5% in, as against capital and revenue receipts; and 2.5% out, as against capital and revenue disbursements. Where there is a continuing estate or trust, a care and management fee of 2/5 of 1% (or 0.4%) can be applied against the average annual value of assets under administration. However, the application of the tariff or the entitlement to a care and management fee is not automatic.

The court should first test the compensation claim using the “percentages approach” and then cross-check or confirm the mathematical result against the five-factors approach (see “How to compensate the trustee,” right). A charitable beneficiary or its lawyer can analyze whether the compensation is fair.

There also are a variety of potential exceptions to the application of the usual percentages. For instance, compensation on a large, single transaction such as the receipt and sale of real estate may not be allowed at the top percentages. And compensation on the receipt and distribution of a bequest in kind or in specie may not be allowed at the top percentages.

A trustee is not entitled to compensation on investments made during the course of the administration, in addition to compensation on disbursements and receipts. To allow both would be double compensation.

But what if an administrator does an inadequate job but still requests full compensation? It is common to try and negotiate a compromise to a compensation claim following the receipt of estate accounts in passing form or informal accounts.

As part of that, and short of proceeding to a hearing, a Notice of Objections may be delivered detailing the charitable beneficiary’s position on any inadequate conduct or steps. In these cases, the trustee will typically deliver a response to Notice of Objections providing his or her position, and provide requested documentation or explanations.

Timing of distributions

A trustee will generally make application for a clearance certificate from Revenue Canada before completing distribution of an estate. Doing so, however, should not prevent making interim distributions.

Once all the assets have been gathered and any outstanding liabilities paid, and some assessment made by the trustee regarding possible outstanding tax liabilities, the trustee will take advice from an accountant and lawyer as to the appropriate amount of an interim distribution and hold-back for possible outstanding or future taxes and other contingent liabilities.

If a trustee over-distributes and the amount of any tax liability exceeds the hold-back, the trustee can be held personally liable for the shortfall. Accordingly, any release which a trustee asks a charitable beneficiary to sign will often include an indemnity provision.

In effect, the beneficiary or beneficiaries who have received distributions agree to indemnify the trustee pro rata to make up the deficiency in the event of shortfall. As a term of receiving an interim distribution, and since significant outstanding taxes are unlikely, they shouldn’t object to an appropriately worded indemnity provision.

A charitable beneficiary is entitled to distributions from a trust or estate, not a supplicant that has to ask a trustee to deliver the benefit. However, the practice is that a trustee will request a release in respect of any distributions made, including interim distributions, beforehand and the beneficiary will sign that release, provided it has no serious complaints.

Monitoring the course and conduct of the administration and obtaining accounts, in passing form or informal, are both important means available to a charitable beneficiary, or any beneficiary, to ensure its entitlements are protected and ultimately received.

Daniel J. Dochylo is a partner with Borden Ladner Gervais LLP.