Friday, January 20, 2017

Trustee Compensation: Small Numbers That Add Up


Some might feel that being an Estate Trustee is an utterly thankless job. I'm here today to tell you that
isn't totally accurate.

Trustees are entitled to a small 'thank you' in the form of a tariff on the work they do. Unfortunately, calculating the size of the tariff and getting in paid out often means more work for the Trustee, and sometimes can lead to conflict between Trustees and beneficiaries.

Ontario law does not explicitly specify exactly how much compensation Estate Trustees are to be allowed for their work. Section 61 of the Trustee Act calls the amount "a fair and reasonable allowance", as determined by the Court.

A series of cases, however, have discussed what precisely the appropriate amount is for an estate trustee to be given for the work of managing the Estate. For some time, the accepted tariff has been:
2.5% on all property (of any kind) and income that is deposited into the estate 
2.5% on all property (of any kind) and income that is paid out of the estate, including payments to beneficiaries of their inheritances
During a year in which the estate is being managed by a trustee, 2/5 of 1% (0.4%) of what the value of the estate was, on average, over the whole year.
(See Denofrio Estate (Ont. Superior Court 2012) and Freeman Estate (Ont. Superior Court 2007) to cite just two recent rulings)

Those numbers might look miniscule, but they add up. Consider the following scenario:

1. An estate took in $1,000,000 in a year: it cashed in a RRIF worth $50,000, received the proceeds of a life insurance policy worth $250,000, and sold a house worth $700,000. 
2. The Estate paid $20,000 that year for professional fees, $20,000 for funeral expenses, $60,000 in various taxes that year. A total of $100,000 in expenses paid out. 
3. At the end of the year, the Estate was preparing to pay out legacies worth $900,000, minus whatever was to be paid in trustee compensation. 
4. The average value of the estate over the whole year was $850,000.
The trustee, for the trouble it went to, could feasibly present the following account to the Estate's beneficiaries:
Total receipts: $1,000,000 @ 2.5% : $25,000
Total distributions (including legacies to be paid): $1,000,000 @ 2.5%: $25,000
Average annual value: $850,000 @ 0.4%: $3,400
That's $53,400, to be paid to the trustee before the trustee pays out the balance of the money in the estate to the beneficiaries.

Bear in mind that a trustee might have brought in that $1,000,000 by signing all of three cheques, and delegated all its other work to white collar professionals, and may need to write all of two cheques to pay the beneficiaries. On the other hand, the Trustee might have spent 20-30 hours a week doing tax returns, renovating property, locating assets, selling investments and dealing with the family. (On top of his or her regular job.)

But, regardless how much effort that took on the trustee's part, if in the end an estate brought in $1,000,000 in a year, and disbursed out $1,000,000 that same year, the trustee compensation would, at least in theory, be level.

That means, relative to the actual effort put in to manage the Estate, that $53,400 or so might be absolute peanuts or an absolute mint.

If indeed someone thinks the number is "off", and the Trustee and beneficiaries can't come to a reasonable agreement about compensation, the Court may examine the Trustee's accounts, and revise that figure of trustee compensation as appropriate.

To come to its conclusion, the Court is certain to apply this formula: 

(a)               size of the Estate;
(b)               care, responsibility and risks assumed by the trustee;
(c)               time spent by the trustee in carrying out his/her responsibilities;
(d)               skill and ability required and displayed by the trustee;
(e)               results obtained and degree of success associated with the efforts of the trustee

This basic formula has been in existence since Toronto General Trusts and Central Ontario Railway (1905, Ontario High Court). Here is an excerpt from Pachaluk Estate (Ontario Superior Court, 2009) that gives a general idea of how the Court applies the formula in practice:

(63) In my view, a reduced percentage ought to be applied [...] insofar as the condominium transfer is concerned.  The administration of the Estate in respect of this primary asset was fairly straight forward.  I would reduce the applicable percentage  from 2.5percent to 1.5 percent regarding the capital receipt of the condominium unit valued at $184,500 by the Estate Trustee.  Regarding the balance of the capital receipts, [the Trustee] Mr. McManemy was involved in disposing of specific bequests to adult beneficiaries in specie [in the same form they were in when the deceased died].  This was straight forward.  More complex was the trust transactions involving the DiFebo children.  All of these transactions deserve compensation.  However, the rate applied should be two percent.  [...]  In respect of the compensation on final distribution, the applicable percentage should be 1.5 percent as two cheques need to be prepared on final distribution to Donna Roughley and Darlene DiFebo in equal amounts as residual beneficiaries.
The end result was the Court slashed the Trustee's account on an estate worth about $400,000 from $19,400 to $12,923.56. 

When the Courts apply this formula, the resulting figure for Trustee Compensation may well be a figure that will be "measly" in the eye of the Trustee, "exorbitant" in the eyes of the beneficiaries and, you guessed it: "fair and reasonable" in the eyes of the Court.

- Paul B. Adam, Toronto
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