Executor of an estate

Naming one, being one

You’ve been asked to be the executor of someone’s estate, and you feel honoured. It’s understandable and appropriate to feel that way, as it shows trust and confidence in you to be asked to take on such an important role. Now, let’s think practical.

Executor means to ‘execute’ the instructions in a Will, though in your province the formal term may be something like personal representative, liquidator, administrator or estate trustee. Whatever the phrasing, it is a large responsibility and significant personal commitment.

This article provides an overview of what executorship entails,

- For a testator – the person who makes a Will – to determine who best to name, or
- For a potential executor to decide whether to accept.

The job ahead

Conceptually, there are three stages to the administration of an estate, with some overlap among them:

1. Identifying and collecting the deceased’s property,
2. Securing and managing the property (including converting to cash as required), satisfying debts to creditors, corresponding with government departments and fulfilling tax obligations from the assets, and
3. Distributing property to beneficiaries.

A proposed executor will want to find out whether to anticipate complications. These may relate to the testator personally, characteristics of beneficiaries or the nature of the property.

Whether or not such complications are apparent, it will be helpful to an executor if the testator has kept a summary of key property and important relationships. Forms for this purpose may be obtained from the testator’s estate planning lawyer, financial advisory firm or a trust company.

Candidate characteristics

As that broad range of tasks suggests, it is indeed a job to be an executor, one that can take a lot of time and effort. In simple situations it can run for a year or two, extending out according to the size and complexity of the deceased’s property and scope of people involved.

An executor must be physically available to take care of tasks personally, and/or to meet with professionals who may be hired to provide assistance. It’s not constant, but will be concentrated at times, particularly in the first months after death.

Comfort with financial, legal and tax matters is an asset, at least sufficient to instruct those professionals. And in the arena of non-technical skills, a diplomatic disposition will go a long way, particularly when there are agitated (and agitating?) beneficiaries to deal with.

Legal nature of a fiduciary

With those practical matters in mind, let’s turn to the legal aspect of the role.

The executor is the trustee of the property in the deceased’s estate. A trustee is a legal owner, but must not take or use the property personally. The testator’s Will lays out the beneficiaries to whom the property will eventually pass once the administration of the estate is complete. Often the executor is one of those beneficiaries, which adds a layer of complexity to carrying out the role.

As trustee, the executor has what is known as a fiduciary duty. This includes acting in good faith, personally doing or overseeing the work, and not playing favourites among the beneficiaries. It’s summed up as always acting in the best interests of the beneficiaries as a whole.

Accepting the role

Sometimes a testator may name an executor without having previously discussed it with that person. Just because you were named, you don’t have to accept. The Will is not invalidated if you decline to act as executor, but it does leave it unclear who will be exercising those executor powers. This emphasizes why communication between the testator and the desired executor is so important, without which there could be uncertainty.

If you are unsure, be aware that if you begin acting as executor, you may be compelled to continue the work. If the beneficiaries will not release you from the obligation, a court application may be necessary.

A formal appointment?

It is the Will that gives legal authority to the executor. Even so, those holding the deceased’s property may require proof of the Will’s validity before releasing it to the executor. Historically, this was known as a probate application, though each province now has its own terms for this approval process.

Most provinces charge a tax or fee to process the application, which can run from a few hundred dollars up to about 1½% of the estate property. There are some simple ways to avoid this cost such as making gifts while living, naming insurance & registered plan beneficiaries, and holding real estate in joint ownership. These avoidance steps may lead to other costs and concerns, so it’s best to first consult a lawyer.

Ready to distribute

Once all debts and claims have been settled and taxes filed, the executor is then able to distribute to those beneficiaries. Before doing so, it may be prudent to obtain a clearance certificate from the Canada Revenue Agency confirming there are no further taxes owing. While the tax attaches to the deceased’s property, if that property has been distributed then the executor may be personally liable for the tax.

Once satisfied, the executor may proceed with distribution to the beneficiaries. The order is bequests of specific items first, legacies of specific dollar amounts next, and finally distribution of the residue. Usually, the residue is the bulk of the estate, but a testator may choose to set it up otherwise.

Investing trust funds

Due to the relatively short duration of an estate, an executor’s main priority is to preserve estate assets for distribution to beneficiaries. Appropriate options may be a cash account or guaranteed interest deposit.

However, if a Will directs a beneficiary’s entitlement is to be held in trust for a number of years, inflation could erode that value. A trustee should obtain a lawyer’s opinion as to whether active investing is called for. If so, a recommended next step would be to retain an investment advisor.

Executor compensation

An executor is entitled to compensation, unless the Will explicitly prohibits it. More likely the Will is silent on the issue, or possibly states an amount or formula for determining compensation. If there is no reference to compensation in the Will, the executor may claim compensation when making the final report to the beneficiaries. Since this is a direct reduction of their inheritances, if they approve the amount then that’s the end of it.

If the Will says nothing and there is disagreement about the compensation, a court application may be necessary. The executor will have to provide dockets and records of the work performed. A court officer will evaluate this based on factors such as how much time was required to do the work, the size & complexity of the estate, and whether the executor delivered exceptional results, for example a premium price on selling a business.

Based on case law (or a published fee schedule in some provinces), potential compensation may be as much as 4-6% of the value of the estate, though the court officer may award less based on the specifics of the situation.

Alter ego and joint partner trusts

Privacy, probate minimization and more for those 65+

In estate planning, your Will is the central document for controlling what happens with your property at death. It could be argued though that having a Will alone could, in a sense, be too much management held in one place.

As odd as that may sound, a Will is a product – albeit a very important one – of you thinking through your own needs and those of the important people around you, and deciding how best to take care of them. That’s the estate planning process, and your Will’s role is to set out who is to receive the property you own when you die.

However, sometimes it may make sense to make changes so that select property does not flow through your Will, and therefore is not part of your formal estate. That is where alter ego and joint partner trusts can offer greater flexibility and control.

Mechanics of alter ego & joint partner trusts

Alter ego and joint partner trusts are inter vivos trusts, meaning they are set up while you are living.

You must be at least age 65 to set one up, with an alter ego trust for one person and a joint partner trust for a couple.

Commonly you will be both trustee and beneficiary, though you can also include one or more others as trustees with you. That will provide some flexibility should you become incapacitated while living, as discussed further on. Trustees have all the legal powers to buy, sell and manage the property that you have decided to transfer into the trust. As the beneficiary, during your life you are entitled (and actually required) to receive any income, and you have full use and enjoyment of the capital, just as you did before the trust was created.

You can name one or more residual beneficiaries. If it is an alter ego trust for yourself then those residual beneficiary rights will arise on your death. In the case of a joint partner trust, the survivor of the two of you will continue on as beneficiary on a first death, and then the entitlement of those residual beneficiaries will take effect on the survivor’s death. Commonly the residue would be paid out upon death of the primary beneficiary/ies, but it is also possible to draft it so that the trust will continue on for a period of time if you wish.

Income tax issues

These trusts may be used with any property you may own, but most often the focus is on real estate and non-registered investment accounts. With the exception of your principal residence, a property transfer usually triggers a taxation disposition.

Fortunately, you may roll capital property into these trusts at their cost base. Thereafter, income and capital gains realized in the trust are taxable to you (or both of you for a joint partner trust), in proportion to the assets you contributed.

At death, in the case of an alter ego trust (or at the second death with a joint partner trust), all remaining property is deemed to be disposed, with any resulting capital gain/loss is reported on the trust’s tax return. The trust’s capital gain/loss cannot be netted against capital gains/losses realized on your death by you personally. For this reason, you must carefully consider what initially goes into the trust and what you will continue to own personally, and carefully monitor all pending tax liabilities.

As an incapacity substitute, and for continuity of management

You should still have powers of attorney (POAs) for property and personal care drawn up in case you become incapable in future. Bear in mind though, that POAs can only deal with property that you own yourself, meaning that the named attorneys would not have legal power over the trust property.

With this in mind, whether it’s an alter ego or joint partner trust, you can name one or more co-trustees who can act with you now, act for your benefit later, and continue to act after your death as trustees for your residual beneficiaries. It is possible and common to name the same people as trustees and attorneys, or you may prefer to name different people as a way to spread out responsibility and oversight.

Estate liquidity, and time & cost savings of avoiding probate

On your death, the continuing trustees will have control of the trust assets without having to wait for a probate application. Not all provinces levy probate tax, and should not be a driving concern in your estate planning anyway. However, if the other features of these trusts serve your needs, then this cost saving is a bonus.

Privacy and insulation against estate litigation

Unlike a probated Will that can become part of a court file, trusts of this sort do not have to be made public. Apart from maintaining your privacy, this can be especially important if you or your beneficiaries are concerned about creditors. And even if those creditors pursue their claims, there are narrower means to attack a trust than may be available with a Will challenge.

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How much will my executor cost my estate?

Qualification and components of estate trustee compensation

One of the most important decisions in your estate planning is to name an estate trustee. That’s the technical title in Ontario, but you’re probably more familiar with the term “executor”, the person who executes the instructions in a Will.

It’s a huge responsibility to take on this job – and make no mistake about it that this is a job. You want someone who has the right skills, availability and integrity so that your estate is managed and distributed the way you intend.

After that, your next question is likely how much the executor will cost.

Executor’s claim goes before the beneficiaries

In theory, an executor can claim whatever amount the beneficiaries may agree upon. Specifically it’s the residual beneficiaries – the residue being what’s left after specific items and dollar gifts have been paid – as it comes out of their entitlement. Note however that if any residual beneficiaries are minors or if there is a question about someone’s mental capacity, government agencies or a court may have to weigh in.

Is it a straight 5%, or is there more involved? (… it’s the latter)

If they can’t agree, the executor will have to pass the accounts before a court officer. The starting point is a formula originating from old case law: 2.5% of income & capital gathered, 0.4% of average annual estate assets, then 2.5% of income & capital distributed. Roughly that’s where that 5% figure comes from.

That official will then conduct a qualitative review of time spent, estate size, care called for, special skills required, and what success or results came about. Each of these may be an addition or detractor, but overall it is very rare that the final determination goes past that 5% figure.

Lastly, while an executor can and should employ appropriate professionals to assist in specialized tasks, to the extent that the executor’s own responsibilities have been handled by someone else who has been paid out of the estate, the executor’s compensation will be reduced accordingly.

Can I use my Will to limit or deny compensation?

If you are concerned that executor fees may eat away at your estate, you may be contemplating placing a term in your Will to deny compensation. The difficulty here is that your nominee may decline taking on the time-consuming role with its related liabilities, leaving the estate administration a bit uncertain.

A better option may be to cap the compensation, preferably with a reasonably flexible formula rather than a fixed dollar figure that will become stale over time. Alternatively if you name a corporate executor, usually that organization will allow (or likely require) that its compensation policy be appended to the Will. Apart from knowing you’ve hired a qualified professional, you’ve taken the mystery out of the cost.

Tax treatment for executor

A final consideration is the fact that compensation is taxable to an executor as income from an office. That’s not your concern with a professional trustee, but you may see it differently if it’s a family member.

You might consider a gift out of the estate to that executor, designed to be in lieu of taking compensation. That kind of estate distribution is not taxable, so if it is structured properly – on advice of a qualified estate lawyer – both estate and executor could be better off by the amount of the tax savings.