Introduction [1]

It is not uncommon for a client to ask a professional advisor to act as his or her executor. For the advisor, this request may be an honour, as it speaks to the level of trust the client has in the advisor’s professional knowledge and judgment. The appointment may also be lucrative for an advisor: clients may agree that the advisor should be compensated from their estate by way of an hourly wage, or by a set percentage of the value of their estate (advisors should note, however, that not every jurisdiction allows for executors to take compensation[2]). However, the appointment as executor is not without risk to the advisor. It is important to consider both the potential challenges, risks and rewards associated with such an appointment, before agreeing to take on the role.

Broadly speaking, the challenges associated with administering an estate arise from one of two sources: the assets of the estate, and the beneficiaries (or would-be beneficiaries) of the estate. Today’s blog will consider some of the risks associated with the assets of the estate.

Complexity of assets

While a full review of every potential challenge and risk faced by the executor is beyond the scope of this blog, it is fair to say that the more complex the nature of the estate assets, and the greater the value of the estate assets, the greater the challenge and risk to the executor. It is, for example, far simpler, and requires less expertise, to have to consolidate Canadian bank accounts and distribute some personal articles, than it is to wind-up a multi-national corporation in a tax-effective manner that maximizes returns to beneficiaries. Before agreeing to act as a client’s executor, the professional advisor would be wise to ensure that he or she has a full understanding of what will ultimately comprise the client’s estate: What are the client’s assets and liabilities? Do these assets have risks associated with them, like environmental risks? Where are the client’s assets located? What tax regimes are the client’s assets subject to? Has the overall plan been structured to give the advisor the needed rights, powers, and authorities to act?

Debts and taxes

The executor is responsible for ensuring that all debts and taxes of the estate (including taxes owing during the deceased’s lifetime) are satisfied before distributing any assets to estate beneficiaries. If the executor distributes the estate before ensuring debts and taxes are satisfied, the executor will be personally liable for the shortfall, up to the value of the estate assets.

It can be challenging for the executor to satisfy his or her duty to determine all the debts and taxes of the estate, wherever taxes may be owing, particularly if the executor does not have a full picture of the deceased’s assets and liabilities prior to the deceased’s death. However, there are steps the executor can take to fulfill this duty and mitigate his or her risk. For example, the executor may wish to post a “notice to creditors” in a newspaper or online publication, to allow creditors of the deceased to come forward to make a claim against the estate. An executor should also obtain a Clearance Certificate from Canada Revenue Agency, certifying that no further taxes are owed by the estate, before making a final distribution from the estate.

Trustee as Fiduciary

The executor is a fiduciary, and must always act in the best interests of the beneficiaries. As part of this duty, the executor must maintain an even hand between all beneficiaries. In addition, the executor has a duty to secure and invest the assets appropriately.

An executor must also account to the beneficiaries for his or her actions in administering the estate. In many estates, an informal accounting will suffice. However, there is always a risk that a beneficiary will take issue with an estate expense incurred by the executor, in which case a formal set of accounts will need to be prepared and put before the court to be passed. An executor may be personally liable for estate expenses incurred during his or her administration that are inappropriate or unreasonable. To mitigate this risk, the executor should keep detailed, careful records of all expenses incurred, and should seek legal advice prior to incurring any expenses that may be questioned later.

Next week, I’ll discuss some of the risks and challenges for the professional advisor as executor that arise in connection with beneficiaries of an estate.

[1] This article is adapted from an article published in CALU’s infoEXCHANGE.

[2] In particular, some jurisdictions outside Canada do not allow for executor compensation. For example, in the United Kingdom, lay executors cannot be compensated, and there are limits to the compensation a professional executor can take.