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.

Can a trust avoid tax on a deceased person’s RRSP?

A trustee’s tax liability has limits, a court case suggests

In February 2010, a woman learned she had only months to live and took steps to put her financial affairs in order. She executed a codicil naming one of her three daughters as executor of her estate. She named the same daughter the beneficiary of her RRSP, the only significant property she owned.

The woman told her daughter to use the RRSP proceeds to pay for the funeral, related family travel costs, final bills and estate administration expenses, and to distribute any residual funds equally with her two sisters.

When she died, the woman owed more in back taxes than the $76,616 in her RRSP. On receiving the RRSP proceeds, the daughter paid the expenses and distributed the rest as instructed. The Canada Revenue Agency (CRA) later assessed the daughter personally for the RRSP’s full amount.

In February 2021, the Tax Court handed down its ruling of the daughter’s appeal in Goldman vs. the Queen 2021 TCC 13.

How the CRA follows a tax debt

When someone who owes tax gratuitously transfers property to a non-arm’s length person, the CRA may use Section 160 of the Income Tax Act (ITA) to collect the tax debt from the recipient.

Consider a deceased taxpayer with an insolvent estate and an RRSP with named non-arm’s length beneficiaries. An RRSP is included in income in the terminal tax year when someone dies. The CRA will use Section 160 to collect from each beneficiary the proportionate share of tax owed from the RRSP income.

The Goldman case had an additional element: there was an existing tax debt that was larger than the entire RRSP even before the mother’s death. What is the extent of the liability for a named beneficiary in such a situation? And would receiving RRSP proceeds as a trustee make a difference?

Effect of a trust

The judge found that the three certainties for creating a trust had been met: the mother’s intention and identification of her daughters as beneficiaries were both clear, and her death caused the RRSP proceeds to fund the trust. The daughter received those proceeds in her capacity as trustee and was legally bound to carry out the terms of the trust as laid out by her mother.

As to the CRA’s contention that the daughter used her discretion to pay certain expenses instead of paying the CRA, the judge stated that she “received the RRSP proceeds to hold for the benefit of certain beneficiaries. The CRA was not one of those beneficiaries. However, that does not cause the trust to fail for certainty of object. The fact that the [government] dislikes the terms of a trust is not enough to declare it void.”

Even so, the court made it clear that Section 160 isn’t defeated by a trust. Rather, the question is whether the tax liability rests with the trust itself or with the trustee in their personal capacity. The judge said the trustee’s responsibility is to use the trust assets to satisfy tax debts, and that if those assets are insufficient, the tax collector “cannot simply seize the trustee’s personal assets.”

So who bears the tax?

Though the daughter wasn’t liable as trustee for the full RRSP proceeds, she was liable for three amounts:

A total of $8,139 was paid out of an account originally opened jointly for the daughter to care for her mother. Though these payments were in the nature of final expenses contemplated by the trust terms, they weren’t paid out of the RRSP proceeds. While the judge suggested that a reimbursement might have qualified per the trust’s terms, there was no evidence of any such reimbursement to this account from the RRSP proceeds.
The daughter was liable, as she conceded, for her $10,460 distributed portion of the RRSP residue.
Lastly, the daughter claimed $5,000 for legal expenses for the tax appeal. The judge ruled this was the daughter’s personal expense and not an estate expense.

The judge commented that, under a different ITA section that applies to trustees, the daughter could possibly be liable for the residue distributions to her two sister beneficiaries. However, that was not pleaded by counsel for the CRA. The court didn’t assess the two sisters’ liability.

In the end, the daughter was liable for $23,599. If the two $10,460 amounts (the residue to each of the other two sisters) were added, the total would be $44,519. Deduct that from the original $76,616 in the RRSP, and that leaves $32,097. Depending on your perspective, that’s either lost tax revenue or a tax-effective way to pay final expenses.

As this case proceeded under the Tax Court’s general procedure, it could stand as a precedent, so it will not be surprising if the government appeals. Regardless, if you have a client who is the executor for someone with tax debts, it would be prudent for them to clarify their obligations with legal counsel in order to steer clear of potential personal liability.

Application of the two witness rule for Wills

At issue

Having two witnesses to a testator’s signature is an important component of the execution process for a person’s Will. In particular, the presence of witnesses provides a level of comfort that assists in dispelling concerns about potential coercion, undue influence or outright fraud, though it is certainly not a guarantee against those concerns.

On the other hand, where this witnessing requirement is not met, it does not necessarily mean that the Will is always invalid.

Wills Act 1837, (U.K.) 7 Will. 4 and I. Vict. C. 26, s. 9.

The source of the witness requirement in common law is the Wills Act 1837 from the United Kingdom. In the original incarnation (courtesy of Wikipedia), in addition to the testator’s own signature, section 9 requires that “the will is made or acknowledged in the presence of two or more witnesses, present at the same time; and each witness attests and signs, or acknowledges, his signature in the presence of the testator.”

Canadian common law provinces

Our common law provinces have legislative provisions similar to this UK law, but differ in their approaches.

‘Strict compliance’ with witnessing (and other execution requirements) remains the state of the law in Newfoundland and Labrador and Ontario (though see an exception below).

‘Substantial compliance’ may be sufficient in provinces where courts have been given power under legislation to admit a non-compliant Will that a judge is content reflects the testator’s wishes. These provinces are British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Prince Edward Island and Nova Scotia.

Re Wozciechowiecz (1931 Alta. CA)

The testator signed the Will while in an ill state of health in bed. The first witness signed in front of the testator, but the second witness signed while at the foot of the bed outside of the testator’s field of vision. The execution was determined to be invalid as the testator could not see the second witness at the critical point of signature. Physical presence in the room was not sufficient.

In 2012, the Alberta Wills and Succession Act, SA 2010, c W-12.2 came into force, preserving the witnessing requirements. However, section 37 now allows a court to accept a Will that is not in compliance with execution requirements if there is clear and convincing evidence that it reflects the intentions of the testator.

Re Brown (1954 Ont. SC)

The testatrix executed the Will in the presence of one witness, and the two of them then moved to another room where a second witness was located. The testator and the first witness identified their signatures, and then the second witnessed signed.

The Will was found invalid as the witnesses had not been in the presence of the testator and one another when the testator signed.

Sisson v. Park Street Baptist Church [1998], 24 E.T.R. (2d) 18 (Gen. Div.) (Ontario)

In this case, the lawyer swore that he had prepared a Will in accordance with the written instructions of the deceased. The testator signed in front of the lawyer and his secretary as witnesses. The secretary signed as witness but the lawyer inadvertently did not sign.

In an unopposed court application, the judge confirmed that there was no substantial compliance provision in the Ontario legislation but felt that the court was entitled to develop the common law where there has been substantial compliance with the legislation. In the judge’s opinion, the dangers which the two witness requirement guarded against were not present, and thus the Will was admitted to probate.

Practice points

Though the executor may have broad authority pursuant to provincial law, this is not absolute in nature. There remain a number of obligations under common law that an executor must bear in mind when exercising the authority, the nuances of which can be discussed with a lawyer if problems appear to be arising:

One can see why lawyers can be sticklers about what may seem to be innocuous details, including who may be a witness, order and placement of signatures, concurrent physical presence and focused attention to the task.
Even in provinces with substantial compliance rules, it can still be uncertain (and costly) to have to make a formal court application to prove a non-compliant Will.
Though the exceptions are very rare, all may not be lost in provinces where strict compliance is the rule. Still, it would be best for the Will to have been carefully and properly executed in the first place, without need to resort to the court.