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.

Who pays the tax on mom’s RRIF at death?

Sibling stressors, legal rules, moral dilemmas

Some of the largest dollar value estate planning decisions we make are the naming of beneficiaries on registered plans.

With this in place, the plan proceeds will go directly to the named beneficiary/ies, rather than falling into the estate of the deceased. This bypasses exposure to estate creditors and probate tax, and reduces any delays obtaining the net funds if they had to pass through the estate.

But while making a beneficiary designation on a RRSP/RRIF may streamline both time and cost of distribution, the tax result could present an unexpected dilemma for the recipients.

Why is there tax on registered plans at death?

A registered retirement income fund (RRIF) is the payout form of what originated as a registered retirement savings plan (RRSP). Together they are legally-authorized income deferral arrangements. When a person dies, there is no more future deferral time, so the arrangement is generally terminated and the remaining balance taxed.

The main exception is a tax-deferred rollover to a spouse (or possibly to a dependent child), but otherwise the account value is brought into the deceased’s income in the terminal year.

Who is responsible for paying the tax?

Absent a rollover, and assuming for the moment no named beneficiary, a deceased’s RRSP or RRIF will be paid to the estate.

It is the executor’s job to deal with the deceased’s debts, with tax liabilities and creditors being top of the list. The registered plan proceeds are applied to those obligations, including paying the tax associated with the terminal income inclusion. After the tax obligation and creditors have been satisfied, the net remaining funds can then be distributed to estate beneficiaries along with other estate assets.

Does a beneficiary designation avoid income tax?

If the deceased had named a beneficiary on the plan, the gross proceeds would be paid in accordance with that designation. However, despite that no money flowed into the estate, the value of the RRSP or RRIF would still have been included in the deceased’s terminal year income, the tax on which remains the estate’s responsibility.

But who actually bears the tax?

If the estate has insufficient assets to pay tax, the Canada Revenue Agency (CRA) can force plan beneficiaries to pay a proportionate share of the deceased’s tax on the amount each received. Otherwise with a solvent estate, if the RRSP/RRIF beneficiary/ies and the residual estate beneficiary/ies are different, then the latter effectively bear the tax on the former’s RRSP/RRIF receipt. Notably, this Income Tax Act rule only applies to CRA; other estate creditors cannot pursue registered plan beneficiaries if there are insufficient estate assets to meet the deceased’s debts.

Is it the same for beneficiaries of registered pension plans?

When a named beneficiary of a registered pension plan (RPP) is entitled to a lump sum payment on death of the plan annuitant, the plan administrator withholds tax at source, and pays the net amount to the beneficiary. The administrator then issues a T4A slip to the beneficiary indicating the gross amount and the withheld tax, which the beneficiary then uses to report the income in the year of receipt. The withheld amount may be more or less than the actual tax due on the lump sum, which will either increase or reduce the recipient/beneficiary’s ultimate tax bill.

In sum, both the payment and tax liability land with the beneficiary on a lump sum RPP payment.

What did mom know, and what did she want? – Jeffrey’s dilemma

Jeffrey and his brother were named as beneficiaries of their mom’s RRIF, while they and their sister were the three estate beneficiaries. It was openly known that mom intended the brothers to get the RRIF, but it was unclear if she was aware of the tax rules.

While everyone got along fine, the sister could potentially have questioned mom’s knowledge and intention at the time of making the beneficiary designation. Whether that would be successful before a judge would depend on the facts and available evidence, but it would be certain to hurt family relations and cost money if they were to end up in court together.

The brothers, who were also the executors, looked into whether there was an accepted practice in such cases. Ultimately, it came down to a moral decision, and they decided that they two would bear the tax.

In all, it’s a reminder that even apparently simple decisions could have unexpected effects. While it’s impractical for you to have each RRSP or RRIF designation legally reviewed as made, the topic should be on the agenda next time you’re with your estate planning lawyer, to be sure all beneficiary designations properly reflect your intentions and expectations.

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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