Most people take on the role of executor because they think it’s an honour to be selected, or because they feel a duty to act. In other cases, potential executors are motivated by the sometimes lucrative compensation that may be available.
But before agreeing to an appointment or assuming the role, clients should understand both the inherent responsibilities and the compensation rules—how much and how to claim.
A thorough understanding of the rules involves reference to common law and statute. Factors to consider include whether:
- there’s a compensation agreement in place;
- any co-trustees are involved;
- any agents were retained to assist with the administration; and
- beneficiary or court approval is required.
It is possible for the testator (person making the will) and executor to agree on the level of compensation (or no compensation) at the time the will is made. This can be done via a clause in the will, or by a separate compensation agreement that is “incorporated by reference” into the will.
The latter approach is generally preferred by trust companies, as it promotes transparency and typically eliminates the need to seek court approval. But exercise caution if the will leaves a legacy to the executor—beneficiaries could argue that the legacy was intended to be in lieu of compensation.
Where a lay executor is involved, it’s less common to see compensation referenced in the will. In the absence of a compensation agreement, executors shouldn’t assume they’re automatically entitled to 5% of the value of the estate, for instance. Any fee taken prior to approval is known as “pre-taking” and is generally not permitted.
Instead, executors should obtain approval for any proposed compensation before charging a fee to the estate. Executors can obtain approval in one of two ways: from the beneficiaries, or via court review. Beneficiary approval is possible as long as all beneficiaries are sui juris (have attained the age of majority and are mentally capable) and consent to the amount proposed.
To ensure the consent is informed and not open to future challenges, the executor should provide the beneficiaries with full disclosure—a complete account of the estate administration, including details of how the compensation was calculated. If one or more beneficiaries are unwilling or unable to approve, the executor may seek court approval for the compensation claimed.
So how do courts determine appropriate compensation? While the Trustee Acts of several provinces (British Columbia, Nova Scotia, Prince Edward Island and Newfoundland and Labrador) establish maximums, no further legislative guidance is provided. In the absence of a set statutory fee, a percentage-based approach has evolved. Courts generally start with what are now termed the “usual percentages,” then access the result against a set of criteria established through case law.
The usual percentages are up to 5% on the value of capital assets, and up to 5% on the value of income collected in the estate. (If trusts are established under the will, an annual care and management fee also applies.) While the result is similar, the practice differs in Ontario, where the general rule is to further categorize between receipts and disbursements, and charge 2.5% on each entry.
After applying the usual percentages, the result is reviewed to determine whether it is fair and reasonable in the circumstances. The court considers five factors in making this decision:
- size of the estate;
- care and responsibility involved in administering the estate;
- time spent by the executor;
- the skill and ability displayed by the executor;
- the success of the administration.
The court has wide discretion to adjust, or even disallow, the amount of compensation claimed. An executor who fails to properly deal with the estate assets, who commits a breach of trust, or who causes a loss to the estate, will no doubt receive lower compensation. Courts also have authority to review any expenses claimed by the executor. Only those expenses deemed to be reasonable will be approved for reimbursement.
The perceived attractiveness of compensation for would-be executors is subject to a few additional realities.
1. The court will not become involved in dividing the fee among co-executors. This can be a point of contention if the work was not equally shared. Likewise, compensation agreements generally address the corporate executor’s entitlement only. Should a lay co-executor wish to be paid, he must negotiate separately with the beneficiaries.
2. Fees paid to an agent (lawyer, accountant, trust company) retained to perform duties on behalf of the executor must be deducted from any fees otherwise payable to the executor.
3. The amount received by a lay executor is treated as taxable income in his hands. Also, all applicable taxes (GST/HST) must be charged and withholdings, such as CPP payments, may apply.
The vast majority of estates are administered by lay executors without being subject to court review. However, clients acting or considering acting as executor should bear in mind that they are entitled to seek court approval of their accounts and compensation (in most provinces), subject to the terms of any compensation agreement, and that beneficiaries have the right to require them to present their accounts and proposed compensation to the court for approval.
Acting as an executor can be highly demanding and time-consuming. Following the rules can help ensure that clients who are acting as an executor receive fair and reasonable compensation for their work.
Context for compensation laws
Key duties are central to the administration of an estate or trust.
The fundamental duty of loyalty holds that an estate or trust must be administered in the best interests of the beneficiaries, and that there must be no conflict of interest between the executor or trustee’s duties and their own personal interests.
Payment of compensation to an executor has traditionally been deemed to be a conflict of interest and, therefore, not permissible.
Common law precedent, however, makes exceptions if the document explicitly provides for executor compensation, all beneficiaries are adults and consent, or the compensation is approved by the court. This remains the law. The common law power of the court to award compensation is now codified in the trustee acts of each province. While the specifics and terminology vary from province to province, the gist of each provision provides for a court to allow compensation to an executor that is “a fair and reasonable allowance for the care, pains and trouble and the time spent in administering the estate or trust.”
This provision doesn’t mean that an executor must always apply to court in order to receive compensation. But it does mean that, in the majority of cases, recourse to the court is available to determine the appropriate fee.
Elaine Blades is a Toronto-based trust and estate professional.
Originally published in Advisor's Edge Report