Executor personally liable for estate taxes; beneficiaries not obligated to return estate monies to indemnify

Beneficiaries generally want to receive their shares of the estate as soon as possible. Executors may feel pressured by beneficiaries to distribute estate assets prematurely, before all of the estate liabilities have been confirmed and paid. In particular, it often takes time to determine the final tax liabilities of the deceased person and their estate, and obtain clearance certificates from the Canada Revenue Agency confirming that no further taxes are owing. As executor, you may be considering payout of estate assets prior to obtaining a clearance certificate, perhaps with a holdback which you intend to apply to any outstanding tax (or other) liabilities as they arise.

There is a risk to this. Section 159 of the Income Tax Act requires that a personal representative obtain a clearance certificate before distribution of an estate and imposes personal liability for the tax liability of the estate on a personal representative who does not do so.

In Muth Estate, 2019 ABQB 922, the executor held back funds for income tax obligations of the estate and then distributed the balance to herself and the other beneficiaries. The holdback turned out to be less than what the estate owed to CRA (calculated by the executor at approximately $24,000), and the executor sought reimbursement from the beneficiaries of their proportionate shares.  Her estimate for the amount of the holdback was based on advice from an accountant that turned out to be incorrect.

If a trustee is seeking indemnity from the beneficiaries, such an indemnity may be available when the beneficiaries instigated or requested that the payment to the beneficiaries be made. However, it follows that if the beneficiaries did not instigate or request the payout with an insufficient holdback (i.e. the trustee/executor made their own decision to payout the monies), then the beneficiaries cannot be obligated to indemnify the trustee.

In Muth Estate, the Court concluded that the other beneficiaries were under no obligation to indemnify the executor for income tax or penalties imposed as a result of her failure to obtain a clearance certificate before distributing the estate.  The executor was personally liable for the tax liability.

This should serve as warning to executors to not be pressured by beneficiaries (even if they are family!) to distribute assets before it is appropriate to do so, or without adequate holdback or security, such as indemnity agreements signed by all of the beneficiaries.

Power of attorney abuse discovered after death: what can a beneficiary do about it?

We are often contacted by beneficiaries who have become aware of actions taken by the person managing the deceased’s affairs under a power of attorney which have diminished the value of the deceased’s estate. The attorney may have transferred some of the deceased’s assets into their own name (solely or jointly with the deceased) or into the names of others.  The attorney may have spent the deceased’s monies or property for their own benefit.  This has occurred without the knowledge of the beneficiaries, and only comes to light after the deceased’s death, when the deceased’s estate is much less than expected or is missing certain assets. What options are available to a beneficiary who seeks to investigate or commence an action against the attorney of a deceased person?

There is often a further complicating factor: the attorney under suspicion may also be the person named as the executor of the estate. An executor has a duty to shepherd estate property and commence appropriate claims against any third parties in possession of estate property.  If the executor was also the attorney, this would require an executor to investigate their own conduct as attorney.  This is an obvious conflict of interest.

Even if the executor is not the attorney, the executor may still refuse to take action against the attorney. The executor may believe that the claim against the attorney has no merit, or the expense to pursue the claim is unreasonable or an unnecessary risk. What happens when a beneficiary wants a claim to be pursued against the attorney, but the executor, on behalf of the estate, refuses to pursue that claim?

In Mortimer v. Bender 2020 BCSC 483, a beneficiary sought to solve this problem by arguing that an attorney of a now-deceased person owes fiduciary duties to the beneficiaries of that deceased’s person’s estate.  As a result, it was argued that the beneficiary had standing to bring her own claim against the attorney.  The court did not agree.  An attorney is obliged to account only to the donor who gave the power of attorney while they were alive.  Once the donor is dead, the attorney is obliged to account only to the donor’s estate.  A beneficiary lacks standing to allege breach of fiduciary duty by the deceased’s attorney or seek a declaration of resulting trust in favor of the estate. The court also did not agree that there was an exception to an executor’s exclusive statutory authority to commence proceedings on behalf of an estate, when the would-be defendant is the personal representative.

As a result, a beneficiary who believes that the estate has a claim against its executor (or some other person) cannot simply bring that claim in their capacity as beneficiary.  However, there are options.  A beneficiary may seek the removal and replacement of the executor if the executor is in a position of conflict or refuses to take adequate steps to pursue proper claims to recover estate assets.  Removal and replacement of executors is considered in a separate post found here.

A beneficiary may also seek leave from the court to bring proceedings to recover property or enforce a right, duty or obligation owed to the deceased person that could be brought by the personal representative, when the personal representative fails to bring that claim, under s. 151 of the Wills, Estates and Succession Act [SBC 2009] Chapter 13.  The beneficiary must show that they have made reasonable efforts to cause the personal representative to commence the proceeding, and that they are acting in good faith, and it must appear to the court that it is necessary or expedient for the protection of the estate or the interests of the beneficiary that the proceeding to be brought.

B.C. Courts may Remove an Executor to Protect the Welfare of the Beneficiaries

The court may pass over a person entitled to become the personal representative if the court considers that the person should not be granted probate or administration. This was discussed in a previous post which can be found here.

However, the more common complaint that we hear from our clients is one of frustration with the personal representative after the personal representative has obtained a grant and has started to administer the estate. They want the personal representative to be removed and replaced.

We’ve heard a range of complaints about an executor’s conduct. The concerned party may allege fiscally irresponsible or even criminal conduct by the executor that puts the estate property at risk. Often, however, the concerns may not be as serious on their face. A beneficiary is concerned that the executor is favoring other beneficiaries and not treating all beneficiaries with an even hand. A beneficiary doesn’t agree with certain decisions made or steps taken by the executor, such as a listing price for real estate owned by the estate, or the decision not to pursue legal claim to recover assets on behalf of the estate, when the outcome of the litigation is uncertain. A beneficiary isn’t happy with how long it is taking to wind up the estate. A beneficiary simply doesn’t get along with the executor, and doesn’t want to have to deal with this person until the estate is wound up. At what point will the court agree to step in and remove the executor?

The court has the jurisdiction to remove and replace a personal representative after the grant of probate or administration has been obtained and the personal representative has started to administer the estate. The grounds for removing and replacing a personal representative are the same as the grounds for passing over a personal representative. Any person having an interest in an estate may make the application to remove the personal representative.

Section 158(3) of the Wills, Estates and Succession Act sets out some of the grounds for removing an executor or administrator, including the personal representative’s refusal to act, incapability, conviction of an offence involving dishonesty, or bankruptcy. It also provides that a personal representative may be removed if that person is “unable to make the decisions necessary to discharge the office of personal representative, not responsive, or otherwise willing or unable or unreasonably refuses to carry out the duties of a personal representative to an extent that the conduct of the personal representative hampers the efficient administration of the estate.”

To succeed in removing and replacing a personal representative on the basis of misconduct, the applicant must convince the court that the executor acted in a manner that endangered the estate, or acted dishonestly, without reasonable fidelity or without the reasonable capacity to execute the duties of the office. The fundamental consideration is the welfare of the beneficiaries.

The court will not disturb the deceased’s choice of executor lightly. The existence of friction between the personal representative and one or more beneficiaries is usually not enough, on its own, to justify removal of the personal representatives. If a beneficiary doesn’t get along with the personal representative, or doesn’t agree with a step taken by the personal representative, or doesn’t believe the personal representative is acting quickly enough, this will likely not be enough to justify the removal of the personal representative. There must be some risk to the estate which will arise if the personal representative is not removed.

There may be other consequences for lesser conduct that does not reach a level that justifies removal of the executor, such as (1) a reduction in the executor’s fee that is ultimately approved by the court, or (2) refusal by the court to approve payment from the estate for unnecessary expenses claimed by the executor.

We have also been consulted where there is disagreement or hostility as between the co-executors themselves, and as a result estate administration grinds to a halt or is otherwise hampered. In such a case, the Court may remove one or more of them to ensure proper and timely administration of the estate.

COVID-19: B.C. court closures and estate litigation

On March 30, 2020, the B.C. Supreme Court posted an updated notice regarding suspension of court operations. A copy of the notice can be found here.

Effective March 19, 2020 and until further notice, regular operations of the Supreme Court of British Columbia at all of its locations have been suspended. All civil and family matters scheduled for hearing between March 19, 2020 and May 1, 2020 have been adjourned, unless the court otherwise directs. Courthouses are still open, but all persons are strongly discouraged from attending at the courthouse unless absolutely necessary or ordered by the court. In person registry services have been suspended.

It remains the case that limitation periods have been suspended, as discussed in a previous post found here.

The court will now hear only essential and urgent matters. The notice outlines the procedure to request a hearing of an essential or urgent matter. Certain listed matters are presumed to be “essential” or “urgent”, and the court has discretion to hear other matters not listed (or decline to hear a matter presumed to be essential or urgent). A judge will decide whether a matter is essential or urgent and is to be heard.

Some elder law and estate litigation matters may fall within certain of the “essential” or “urgent” categories, which include:

  1. Refusal of treatment and end of life matters;
  2. Emergency adult guardianship and committeeship orders, including under the Adult Guardianship Act and Patients Property Act. A substitute decision maker may need to be appointed to manage the financial and personal affairs of an incapacitated person on an urgent basis; and
  3. Urgent injunction applications or preservation orders. While these are relatively rare in the estate litigation context, as an example there may be a real likelihood that a personal representative or other person intends to cause irreparable harm by disposing of or destroying estate assets.

In certain circumstances, a beneficiary may seek the urgent removal of an executor, to protect the welfare of the beneficiaries. However, there must be a strong case for urgency if the matter is to be set for hearing at this time.

Most estate litigation matters will not be considered urgent or essential, and so any court hearings will have to wait until the court resumes regular operations.  In the meantime, parties can take other steps in the litigation, such as filing and serving pleadings, exchanging documents, and conducting examinations for discovery, so that legal proceedings continue to move forward and are ready to go to a hearing when the courts reopen to all matters. Parties are also still free to negotiate or mediate (including by video) to attempt to resolve matters.

These circumstances are quickly changing (and the state of emergency will eventually be cancelled), and so any affected party should regularly check the B.C. Supreme Court website.

COVID-19: B.C. Suspends Time Limits for Commencing Legal Proceedings

On March 26, 2020, the Minister of Public Safety and Solicitor General took the exceptional step of suspending limitation periods to commence court proceedings in British Columbia. Ministerial Order no. M086 can be found here.

The Order was made in response to the COVID-19 pandemic and the declaration of a state of emergency throughout the Province of British Columbia on March 18, 2020.  This has affected access to the courts.  Supreme Court registries are not currently providing in-person registry services (which includes the filing of pleadings) while the Court’s regular operations are suspended. Electronic filing is still available, as are other means which do not require in-person interaction with the registry (the B.C. Supreme Court announcement can be found here).

The Order provides that every mandatory limitation period and any other mandatory time period that is established in an enactment or law of British Columbia within which a civil or family action, proceeding, claim or appeal must be commenced in the Provincial Court, Supreme Court or Court of Appeal is suspended.  The Order applies from the date of the Order (not from the March 18, 2020 declaration of a state of emergency) until the declaration of emergency (or any extension) expires or is cancelled.

This is an extraordinary measure.  Limitation periods provide for a deadline for bringing a claim.  Failure to commence a claim within the limitation period will usually result in dismissal of the claim as statute-barred.  Limitation periods are intended to encourage the timely pursuit of claims, and reduce prejudice to the administration of justice.  If a plaintiff is allowed to delay the commencement of a claim, the defendant may be put in the unfair position of having to disprove a claim when key evidence and witnesses have been lost due to the passage of time.

Persons with potential claims should be aware of the Order.  They now have more time to bring claims, and should not be concerned if they are unable to file pleadings during the state of emergency due to court closures.

Executors should also consider the effect of the Order on estate administration matters, most notably distribution of estate assets to beneficiaries.  The Wills, Estates and Succession Act [SBC 2009] Chapter 13 provides that the personal representative of a deceased person must not distribute the estate of the deceased person within 210 days following the date of the grant of probate or administration, absent a court order or the consent of the beneficiaries.  This is so that potential claimants can bring claims before estate assets have been distributed, some of which must brought within 180 days of the issuance of the grant (most notably wills variation claims).  Executors should obtain advice before distributing assets even after 210 days, if the 180 day deadlines have been suspended.

These circumstances are quickly changing (and the state of emergency will eventually be cancelled, ending the suspension), and so any affected party, or party seeking to rely upon the suspension to delay filing a claim, should regularly check the websites of the B.C. Courts and the B.C. Attorney General.

Passing over the Executor: What BC Law Says About Executor or Administrator Conflicts of Interest

What if you are a beneficiary under a will, and you have concerns about the person named as executor in that will? Maybe you believe the named executor is in a conflict of interest or may not treat the beneficiaries with an even hand (especially if the will allows for the exercise of some discretion by the executor). Maybe you suspect that the named executor will engage in impropriety or misconduct once they obtain a grant of probate. Maybe you simply do not get along with the named executor. At what point is it appropriate to ask that the court pass over a person as executor or administrator of an estate?

The Wills, Estates and Succession Act, S.B.C. 2009, Chapter 13 [“WESA”] allows for a person having an interest in an estate to apply to remove or pass over a personal representative. To “pass over” means to grant probate or administration to a person who has less priority than another person to become a personal representative. This means passing over a named executor where there is a will, or passing over the person entitled to become administrator if there is an intestacy (no will).

The court may pass over a person entitled to become the personal representative if the court considers that the person should not be granted probate or administration. Section 158 of WESA includes a non-exhaustive list of circumstances that the court may consider. Some of them are clear, such as if the person refuses to accept the position, or is incapable of managing his or her own affairs, or has been convicted of an offence involving dishonesty.

Subsection 158(3)(f) is more general, and allows the court to consider whether the person is (1) unable to make the decisions necessary to discharge the office of personal representative, (2) not responsive, or (3) otherwise unwilling or unable to or unreasonably refuses to carry out the duties of a personal representative, to an extent that the conduct of the personal representative hampers the efficient administration of the estate.

The court will consider the following principles when deciding whether to pass over an executor named in a will:

  1. Recognize that the testator’s choice of estate trustee should not be lightly disregarded. A deceased’s right to nominate his executors is not to be lightly interfered with;
  2. Require clear evidence of necessity;
  3. Focus on the main consideration of the welfare of the beneficiaries; and
  4. Require proof that the executor’s acts or omissions are of such a nature as to endanger the administration of the estate.

In the recent case of Gawdun v. Lord 2020 BCSC 266, the court considered an application to pass over the person named as executor of the deceased’s will. The deceased and the proposed executor (“Ms. Lord”) were in a common law relationship at the date of death. The applicants were the deceased’s children from a previous marriage.

The plaintiffs argued that Ms. Lord should be passed over for the following reasons:

  1. The plaintiffs doubted that Ms. Lord would maintain an even hand between her own children and the plaintiffs, all of whom were residuary beneficiaries;
  2. The plaintiffs alleged that Ms. Lord had continually demonstrated hostility and animosity towards them and the deceased’s sister (who was named as co-executor);
  3. The plaintiffs alleged that Ms. Lord was involved in the deceased’s estate planning in 2010 and 2011, which resulted in the execution of the will providing the majority of the estate to Ms. Lord and her children, which conduct was at issue in an underlying wills variation application;
  4. The plaintiffs alleged that Ms. Lord offered to pay the deceased’s sister $50,000 from the estate during the course of the action which the plaintiffs found suspicious;
  5. Foreclosure proceedings had been initiated to recover funds owing to the estate, which was being funded entirely by the plaintiffs, and Ms. Lord had refused to assist in collecting the debt owing; and
  6. The plaintiffs alleged Ms. Lord entered into a share exchange agreement as attorney for the deceased. The terms of the share exchange agreement were alleged to have conferred an improper benefit on Ms. Lord.

The court dismissed the application, concluding that passing over Ms. Lord was not justified. There was no evidence demonstrating misconduct by Ms. Lord that was capable of supporting a decision to pass her over. Even if the court accepted there was misconduct as alleged, it is past misconduct and was not done in her capacity as executor.

If may be difficult to convince a judge that a person will endanger the welfare of the beneficiaries or commit misconduct as executor or administrator before they have even been appointed. If you have concerns about the person who is entitled to be personal representative, but don’t believe that you can succeed with an application to pass over, you may also bring an application remove and replace a personal representative if those concerns become a reality. This will be discussed in an upcoming post.

Executors and Trustees May Seek Advice From the Court

Executors and trustees may be hesitant or indecisive when administering estates and trusts, especially when the will or trust deed gives them some discretion in carrying out their duties or when they are concerned about balancing the interests of competing beneficiaries – keeping everyone happy.

The Trustee Act permits a trustee, executor or administrator to apply “for the opinion, advice or direction of the court on a question respecting the management or administration of the trust property or the assets of a will-maker or intestate.”  The court also has the inherent jurisdiction to supervise trusts, to protect the welfare of the beneficiaries.

It may be tempting for an executor or trustee to seek court approval for any decision or exercise of discretion.  It would be comforting to have a judge give his or her blessing to a proposed course of action.  However, it is not the court’s job to consider and approve every decision of an executor or trustee.  When is it appropriate to involve the court in decisions that should be made by executors and trustees?

Prior court decisions suggested that section 86 of the Trustee Act allowed an executor or trustee to seek the advice, opinion or directions of the court on a legal question, and then act on that advice.  The section was not intended for the court give advice, for example, in a situation where there was a conflict between interested parties, such as competing beneficiaries.

However, the Court went beyond merely advising on legal questions in Toigo Estate (Re) 2018 BCSC 936.  In Toigo, the deceased created a spousal trust which provided that the net income of his estate would be paid to his wife during her lifetime.  The will also permitted the trustees to encroach on the capital of the estate in favour of his wife, in the trustees’ uncontrolled discretion.  The residue of the estate was to be divided between the deceased’s children and grandchildren after his wife’s death, but in a manner which would provide that that there would not be an equal distribution amongst the grandchildren.

The wife asked the trustees for a significant encroachment into the capital (tens of millions of dollars), in order the engage in her own estate planning, which would provide for a more equal distribution of the deceased’s estate amongst the grandchildren.

The trustees were clearly permitted to make the encroachment (and had uncontrolled discretion to do so).  However, they still wanted the court’s “opinion, advice or direction” as to whether they should proceed.

The court held that it had the jurisdiction to approve the encroachment under s. 86 of the Act or the inherent jurisdiction of the court to supervise trusts, and they approved the encroachment.  The court held that because of the magnitude of the encroachment, the court could provide advice on this “momentous decision”.

In making the decision, the court asked the following questions:

  1. Does the trustee have the power under the trust instrument and the relevant law to make the “momentous decision”?
  2. Has the trustee formed the opinion to do so in good faith and is it desirable and proper to do so?
  3. Is the opinion formed by the trustee one that a reasonable trustee in its position, properly instructed, could have arrived at?
  4. Is the Court certain that the decision has not been vitiated by any actual or potential conflicts of interest?

Executors and trustees should consider whether they ought to apply to the court for a stamp of approval when taking drastic or “momentous” action in relation to the administration of estates or trusts.  There are other options to protect executors and trustees, such as requiring that all beneficiaries sign release and consent documents before taking the proposed course of action.  However, this may not always be practical or possible, especially if some beneficiaries refuse to sign such a document.