Memo on Passing of Accounts Care and Management Fee or Special Fee. Kimberly A. Whaley February 2008

Transcription

1 Memo on Passing of Accounts Care and Management Fee or Special Fee Kimberly A. Whaley February 2008 Question: When will the court in Ontario make an award for a Care and Management Fee, or Special Fee on the claim of a trustee or estate trustee on a passing of accounts? Applicable Legislation: Subsection 61(3) of the Trustee Act, R.S.O. 1990, c. T.23 reads as follows: The judge, in passing the accounts of a trustee or of a personal representative or guardian, may from time to time allow a fair and reasonable allowance for care, pains and trouble, and time expended in or about the estate. General Criteria: The general criteria with respect to compensation were set down in Toronto General Trusts Corp. v. Central Ontario Railway (1905), 6 O.W.R. 350 (H.C.). The judge should first test the compensation claims using the rule of thumb: two-fifths of one per cent per annum of the average market value of assets being administered, and then crosscheck or confirm the mathematical result against the five-factors approach. The Five Factors are: 1. the magnitude of the trust; 2. the care and responsibility springing therefrom; 3. the time occupied in performing its duties; 4. the skill and ability displayed; 5. and the success which has attached to its administration. Short Answer Special circumstances are required for the application of a care and management fee above the usual compensation calculated on a percentage basis. An extra fee for care and management or a special fee is not routinely or automatically applied. Accordingly, there are no Ontario cases in the past 5 years that have awarded an extra care and management or special fee.

2 However, in William George King Trust, Re (1994), 113 D.L.R. (4th) 701 (Ont. Gen. Div.), Justice Misener did award a care and management fee. Justice Perrell in Re Archibald Estate distinguished William George King Trust, Re on the basis that there the administration of the subject trust was linked to the administration of not one but two separate trusts through a common holding company but with different trustees of each trust. Recent Case Law: Re Archibald Estate, Re (2007), 36 E.T.R. (3d) 219 (Perrell J.) involved a contested passing of accounts. The bulk of the estate consisted of common shares corporation that the testator used to make investments during his lifetime. The daughter of the testator, who was named as estate trustee, managed and administered the investment portfolio. The accounts were for two periods: (1) August 26, 2003 to December 23, 2004; and (2) December 23, 2004 to December 31, The estate trustee claimed compensation of $166,437.63, including $41, as a care and management fee. Justice Perrell held that the care and management fee of $41, was not justified. The evidence established that the estate trustee dedicated considerable time and effort to responsibly administer her late father's estate, and apart from the suggestion that she spent more time than was necessary, little criticism is made about her efforts or the results of them. However, a fee for care and management requires some special circumstance, and the care and management fee will not be allowed automatically or routinely. The percentage approach already provides a predictable way to measure a quantum meruit compensation for the wide range of duties performed by executors including the management of the estate's assets. In other words, routinely or automatically awarding a care and management fee would be double counting for the quantum meruit encompassed by the percentage award made on the incoming and outgoing of capital and revenue. In Irwin v. Robinson, 2007 CarswellOnt 6368, (Horkins J.), seven years had passed and the estate trustees had still not completed the distribution of a simple estate. The executor claims compensation of $21, This consists of $14, for the usual compensation based on 2.5% of capital receipts, capital disbursements, revenue receipts and revenue disbursements and a care and management fee of $7, Justice Horkins denied the request for a care and management fee on the basis that care and investment of the money in the executor's year does not entitle the estate trustee to a care and management fee. The fee is intended to compensate after the executor's year where the will creates a continuing trust that requires ongoing investment and management. Alternatively, there may be justification for the fee when litigation prevents immediate distribution for an appreciable period of time and management of the monies is required.

3 In Rade Estate, Re, 2005 CarswellOnt 5257 (Greer, J.), the sole estate trustee of deceased was his former solicitor and was ordered to pass his accounts. The estate was not easy to administer since deceased had not filed Income Tax returns since 1990, taxes were in arrears on real property, rental property had tenant problems, and sale of property involved expenses and some litigation. The total value of the estate was $785, The Estate trustee kept no accounts and few vouchers to support any expenditure, and he rendered legal bills to himself as trustee. The trustee asks for Trustee's Compensation in the amount of $51,114, in addition to the Care and Management fee of $1, per year for 10 years, for a total compensation of $63,818. The Justice Greer denied the request for a care and management fee. In order to calculate the Trustee s compensation, the judge deducted various book entries, bank charges, refunds, payments to the Trustee, himself, and others as noted. In addition, Her Honour deducted the charges for the work done by others for him, which was Trustee's work, as well as one-half the value of the legal accounts for which he pre-took compensation and called it legal work. Given that the Trustee kept no dockets and had to manufacture legal bills to present to the Court, Her Honour based this amount on what she could see in the legal accounts rendered by others to him. Historical Treatment (Widdifield): In cases where the will provides for a postponed rather than an immediate distribution, the 5% income compensation may be inadequate to compensate for the continued supervision of the estate assets. To compensate for these activities, the courts will generally allow a management fee calculated at 2 / 5 of 1% or. 4% per annum on the average market value of the assets. The courts may insist on some evidence of active rather than passive management and where it is concluded that the executor has planned his investments solely with a view to his own convenience the management fee will be disallowed (Rule 4, Berkeley's Trusts, Re). As can be seen in Jeffery Estate, Re, the concept of a management fee is not seen by the courts to be an absolute right, but rather one that must be justified in the circumstances. However, in the case of on-going trusts, it is rare for a care and management fee to be refused. The basis for the calculation of the care and management fee is the average market value of the assets under administration during the period of the account, see Kenmey, Re (1966), 56 D.L.R. (2d) 674 (Ont. Surr. Ct.). For the purposes of calculating the executor's management fee as a percentage of the value of assets, real property should be assessed as the equity net of the mortgage in that piece of property. However, debts (which do not compromise the value of any particular asset) generally should not be taken into account: McLennan Estate, Re (2002), 48 E.T.R. (2d) 59 (Ont. S.C.J.). The genesis of allowing management fees may be found in Berkeley's Trusts, Re (1879), 8 P.R. 193 (Ont. Chy. Chrs.), where it was said it is not unreasonable to make some allowance for services not covered by the commission.

4 In Kneitl, Re (1927), 32 O.W.N. 301, Rose J., increased the compensation allowed by the Master. He said: "Moreover the case because of the long duration of the trust and the more or less constant care required, was typically one that called for an annual fee for management." The recent case of Shifrin Estate, Re (1993), 49 E.T.R. 191 (Ont. Gen. Div.), ruled that a care and management fee was not dependent upon special circumstances, and was properly calculated on the average market value of the assets under administration. In Bluestein Estate v. Bluestein (2000), 2000 CarswellOnt 1054 (Ont. S.C.J.) which discusses the issue of special fees:... claims for special fees are justified where extra or specialized work by the estate trustee is necessary as a result, for example, of the complexities in the administration arising from the nature of the assets, taxation problems, numerous categories of beneficiaries or litigation by or against the estate. The estate trustee must establish that the special work performed was outside the "average" estate such that the estate trustee would not be compensated adequately for all the work required to be done. In Boje v. Boje Estate (2006), 2006 CarswellAlta 1032 (Alta. Q.B.):... a trustee claiming additional fees must establish that they engaged in estate-related tasks and not contemplated by the headings of core compensation. The claimant must demonstrate that without the award of additional fees, they would be under compensated for the work performed while administering the estate. In Park, Re (1924), 27 O.W.N. 285 an executor was allowed an additional fee for "very exceptional services rendered by him". See also Bedford, Re, [1936] O.W.N. 243 (Ont. H.C.) and Kennedy, Re, [1944] O.W.N. 734 (Ont. H.C.). Where the trustee has entered into an agreement to accept a certain sum for his services, he is not entitled to a further sum for management of the estate: French v. Toronto General Trusts Corp. (1923), [1924] 1 D.L.R. 288 (Ont. S.C.). Although care and management fees are routinely awarded in Ontario, in Archibald Estate, Re (2007), 2007 CarswellOnt 3872 (Ont. S.C.J.), the court determined that a care and management fee will not be awarded routinely or commonly and requires special circumstances: "... routinely or automatically awarding a care and management fee would be double counting for the quantum meruit encompassed by the percentage award made on the incoming and outgoing capital and revenue." In coming to its conclusion, the court considered para. 10 of Webb Estate, Re, [1993] O.J. No (Ont. Gen. Div.):

5 Compensation for executors is based on percentages which are applied to amounts realized and amounts distributed by the estate. The compensation is for all duties performed by executors including not only realizations and distributions of estate assets, but also ascertaining estate assets, valuing estate assets, preparing an inventory, applying for probate, paying debts, paying legacies, preparing income tax returns, obtaining income tax clearances and preparing and maintaining accounts and reporting to beneficiaries. In Irwin v. Robinson (2007), 2007 CarswellOnt 6368 (Ont. S.C.J.), the Court identifies that a care and management fee is intended to compensate a trustee for the work and responsibility arising from the duty to manage and invest the assets of the estate beyond the executor's year. Care and investment of funds during the executor's year does not entitle an executor to claim a care and management fee. A care and management fee is meant to address the situation where the will requires the management of ongoing trusts where distribution of the estate is delayed because ongoing litigation requires ongoing care and investment of estate funds. As for special fees, in exceptional cases, the courts will consider special claims for compensation over and above "the usual" percentages. (Rule 4, Berkeley's Trusts, Re, supra). Examples of this are bankrupt estates or estates of nominal value where there is nevertheless a lot of activity. In Thoburn Estate, Re, [1945] O.W.N. 895 (Ont. H.C.), the Ontario High Court on appeal, allowed a special fee where the executor conducted litigation successfully to the enhancement of the estate. In McQuay, Re, [1948] O.W.N. 304 (Ont. Surr. Ct.), the Surrogate Court declined to allow a special fee in connection with an application for advice and direction. In MacDonald v. Eastern Trust Co. (1957), 12 D.L.R. (2d) 92 (N.B. Q.B.), the court refused to award a special fee to the trustee for maintaining custody of the securities of the estate in its vaults or for arranging and supervising mortgages. As to the compensation allowed an executor for carrying on business, see Park, Re (1924), 27 O.W.N A special fee was awarded for the additional work required of an executor in managing a company, the shares of which were wholly owned by the estate in Bellomo Estate, Re (1989), 36 E.T.R. 123 (Ont. Dist. Ct.), in part because the care and management fees were depressed due to low values attributed to assets held within the company structure. A special fee was also allowed in the case of Jones, Re (1973), 1 E.T.R. 88 (Ont. Surr. Ct.), to cover the costs incurred by the Executor in researching what was then a new area of income tax, namely capital gains taxation. The court allowed that new responsibilities justified additional compensation. A special fee was also allowed to guardians of an incapable adult, who had to take on substantial obligations regarding company interests and land ownership of the incapable person in the first year of the guardianship, in Creelman, Re (1973), (sub nom. Creelman Estate, Re) 40 D.L.R. (3d) 306 (N.S. T.D.).

6 In Bluestein Estate v. Bluestein (2000), 2000 CarswellOnt 1054 (Ont. S.C.J.), the court set out when claims for special fees are justified: Claims for special fees are justified where extra or specialized work by the estate trustee is necessary as a result, for example, of the complexities in the administration arising from the nature of the assets, taxation problems, numerous categories of beneficiaries or litigation by or against the estate. The estate trustee must establish that the special work performed was outside the "average" estate such that the estate trustee would not be compensated adequately for all the work required to be done.