The next few decades will see Canadian baby boomers bequeath trillions of dollars. And many of those dollars will be left to charities.
But a recent cautionary tale of an estate left to charity provides a vivid picture of how the best of intentions can go awry.
Paul Penna was the founder of Agnico-Eagle Gold Mines Ltd., a Canadian-based gold producer with exploration properties in Finland, Mexico, Canada and the U.S. He passed away in 1996, leaving the majority of his $24 million estate to charitable causes.
A Globe and Mail article published earlier this year, detailed how, even though he took plenty of precautions, 15 years after his death none of the named charities have seen a penny. Even Penna’s wife, Lorraine, who was bequeathed $1 million in his will, received nothing from the estate before she died in 2003 from Alzheimer’s.
At the heart of the estate mismanagement is Barry Landen, the trustee Penna hired to oversee his fortune, who was also a valued colleague and a long-time banker with Penna’s company. Landen, currently serving a 14-month sentence for his part in the missing money, confirms he withdrew close to $3-million from Penna’s bank and brokerage accounts in the late 1990s because he wanted “to borrow some money to pay for a house,” the Globe and Mail reported.
Shortly after Penna’s death, the estate lawyer met with the trustees—Landen, Agnico chairman Charles Langston and Lorraine Penna—to discuss the will. The lawyer recommended that the will be probated, meaning a court official would ensure beneficiaries receive their bequests, but the trustees declined.
Langston died last year and when Lorraine Penna’s Alzheimer’s made her unable to continue as a trustee in 2004, Penna’s nephew Ernie Sheriff was appointed. Sherriff, however, said he never asked for any financial statements because he assumed matters had been handled properly.
To date, no one has a clear idea of where Penna’s money has gone. About $8.7 million has been accounted for, which leaves approximately $12 million still missing. Landen says he doesn’t have complete records of estate’s transactions and Penna’s main bank, CIBC, no longer has records of the account before 1999.
What went wrong
The Penna case clearly demonstrates how people in a position of trust can abuse that trust, says Margaret R. O’Sullivan, a partner with O’Sullivan Estate Lawyers in Toronto, calling it a worst-case scenario and an egregious example of fraud and financial abuse.
Heather Evans, managing partner, Toronto Tax, at Deloitte, says the case points out the unexpected problems that can crop up, even in relatively simple estate situation where the wishes of the deceased are clearly documented in a valid will.
In the Penna case, there was significant potential for financial abuse from the start, says O’Sullivan. It was a very large estate with two passive trustees who do not appear to have provided the check and balance function to ensure one person is not in total control of the estate and its finances. “It’s hard to comment with certainty as to why these were the ‘wrong’ trustees,” says Evans, “but it appears that one succumbed to temptation and the others were not sufficiently active.” As well, since the main beneficiaries weren’t family members (or people who would be expecting to be named in the will), they were not in a position to ask questions about the distribution of the money.
“The traditional safeguard is probate,” says Evans, referring to the process whereby a court-appointed, neutral representative would ensure the will was distributed exactly according to the deceased person’s wishes. “This process brings with it costs associated with Ontario estate administration tax, but it also brings the assurance of court scrutiny,” says Evans. In Penna’s case, the decision not to probate the will helped create a situation where inappropriate behavior went unnoticed.
Both Evans and O’Sullivan recommend appointing multiple executors and trustees to avoid a situation where one person has absolute control. “Even trusted colleagues may succumb to temptation where no oversight is in place,” points out Evans. Three is a good number, says O’Sullivan, who also suggests the use of a “majority clause,” which would require at least two of the three appointed executors to agree on a course of action if there is an impasse.
Experts suggest it is not the size of the estate but its complexity that should determine how many executors to appoint. Typically, the number of executors ranges from one to five. In very simple estates where there is only one primary beneficiary and the distribution is straightforward with no trust provisions, one executor is often enough. Where there are ongoing trusts, generally there should be at least two trustees to ensure continuity and manage the details. “The key is to balance the desire for appropriate governance with the practical aspects of administering an estate,” says Evans.
Carefully selecting your estate trustees can make or break the execution of an estate plan–a fact vividly illustrated by the Penna case. It is important to consider what each executor and trustee will bring to the table. If the estate is complex and has business assets, the need for executors and trustees with good business acumen will be important. It is often helpful to have family representation in the mix as well, to ensure there is a closer tie to the deceased and his or her final wishes. Responsible, interested and proactive trustees are ideal. “It is important that trustees act independently, take an active role and exercise oversight,” says O’Sullivan, rather than act passively and delegate their authority, as did two of Penna’s three trustees.
When it comes to choosing the best trustees for an estate, says Evans, “the key issue is one of trust and character, rather than formal qualifications.”
Melissa Campeau is a Toronto-based freelancer.
This article was originally published on capitalmagazine.ca.