In a follow up to my blog post of September 18, 2020 (“Part One”), this blog will consider what it means if you have received notice that you are a residuary beneficiary of an estate.

You are probably wondering what a residuary beneficiary is.  To understand this, you must understand what the term residue means.  As I addressed in Part One of my blog, the term residue is defined to mean the balance remaining in the estate after the payment of debts, expenses, statutory claims (i.e. spousal claims or dependant relief claims), taxes and legacies (i.e. specific gifts of personal property or cash gifts) have been satisfied (the “Residue”).  To say you are a residual beneficiary means you are entitled to either all of the Residue or a portion of the Residue.

How will you be informed about your interest?

As noted in Part One, if the executor requires a Certificate of Appointment of Estate Trustee with a Will (more commonly known as “Probate”) to administer the estate, under the Rules of Civil Procedure, all parties with an interest in the estate, must be served with notice of the executor’s application for Probate.  In most cases, a beneficiary will receive a letter from the executor or their legal representative advising them of the executor’s application and providing Form 74.7 – Notice of Application of Estate Trustee with a Will (the “Notice”)[1].  Unlike a person who is entitled to just a legacy and only receives an extract from the Will, as a residuary beneficiary, you are entitled to a complete copy of the deceased’s Last Will and Testament (the “Will”).

It is important to note that the lawyer who provides you with the Notice is retained by the executor, which means they do not act for and cannot provide legal advice to you or any of the beneficiaries.  A beneficiary should carefully review the Will to determine what their interest is in the estate.  A beneficiary may wish to seek advice from a lawyer to ensure that there is nothing time sensitive that needs to be addressed.

If you haven’t heard from the executor after having received the Notice, the executor may be addressing income tax matters and other administrative issues.  It may also be that there is a delay in issuing Probate.  Some executors are good at providing periodic updates to the beneficiaries, while others are not.  If you want to know the status of the estate, do not hesitate to reach out to the executor.

Show me the money!!!!

As Tom Cruise’s character enthusiastically and repeatedly yelled through the phone to Cuba Gooding Jr’s character in the movie Jerry Maguire, some beneficiaries are probably wondering after Probate has been received when the executor will “show me the money”.

Wait, not so fast!  Each estate is different and there may be a number of matters which might delay the distribution to the beneficiaries.

In the normal course, the steps to complete the administration and the wind-up of the estate include the following and are described in greater detail below:

• selecting a wind-up date for the estate;
• setting aside a reserve;
• accounting to and obtaining the release of the beneficiaries or a judgment on a passing of accounts, if a release from all residuary beneficiaries cannot be obtained;
• making a distribution to the beneficiaries upon receipt of the release or judgment;
• filing the final T3 Trust Income Tax and Information Return (the “T3 Return”);
• requesting a final clearance certificate from the Canada Revenue Agency (“CRA”) upon receipt of the notice of assessment with respect to the final T3 Return; and
• upon receipt of the clearance certificate, completing an informal accounting to the beneficiaries of the reserve and distributing the reserve to the beneficiaries.

Wind-Up of the Estate

To complete the administration of the estate, the executor must be seen as having distributed all of the assets of the estate in order to effectively wind up the estate from an income tax perspective (the “Wind-Up”).  More specifically, all assets must have been distributed into the hands of the beneficiaries, including any amounts the executor is holding as a reserve to secure his or her right of indemnity.  To Wind-Up the estate, the executor must select a wind-up date (the “Wind-Up Date”).

It is common for an executor to decide to set aside a reserve or holdback from the distribution of the assets of the estate (the “Reserve”).  The Reserve is set aside pending receipt of the clearance certificate and fulfilling any other regulatory obligations required by the executor to complete the management, administration and the wind-up of the estate.  It is possible that the Reserve could be anywhere from 10% – 20% (or more, depending on the circumstances relating to the estate).

Release

Before making a distribution from the estate, the executor will want to be released in respect of his or her administration of the estate.  There are two ways in which an executor can be released:

• Written Release

Considered the more informal route, the executor would provide the residuary beneficiaries with his or her accounting of the estate and ask each to sign a “release”, if all residuary beneficiaries have capacity to sign a release.  The executor may include indemnity language in the release because if the executor has distributed too much to the residuary beneficiaries and an unexpected liability arises, he or she has a legal right to ask for some of the money back.  The executor would set out any claim for compensation that he or she is making in connection with their services provided to the estate.

• Passing of Accounts

The more formal route is known as a “court passing of accounts”.  An executor may wish to pass his or her accounts in various circumstances, including where the residuary beneficiaries do not all have legal capacity to sign a release (for example, if there are minors or an incapable beneficiary) or where the residuary beneficiaries do not all agree to sign the release.   The executor receives their “release” when the court issues a judgment passing the estate accounts.

What do you mean the executor gets paid from the estate?

Unless the Will provides otherwise, the executor is entitled to be compensated for the time and trouble spent in the administration of an estate.  If the compensation is not outlined in the Will, the fees usually charged for an estate of average complexity are based upon the following formula:

• 2 ½% of capital receipts (for example the realization of original estate assets), plus
• 2 ½% of capital disbursements (for example, payment of debts, distributions to beneficiaries), plus
• 2 ½% of annual revenue receipts, plus
• 2 ½% of annual revenue disbursements, plus
• an annual “care and management fee” of 2/5 of 1% of the average fair market value of the assets during the period of administration of the estate.

The above compensation calculation serves only as a guideline and can vary significantly. In particular, compensation is often judged against the following five factors to ensure the amount represents fair and reasonable compensation:

1.        the size of the estate;
2.        the care and responsibility involved;
3.        the time occupied by the executor in performing his or her duties;
4.        the skill and ability shown; and
5.        the success resulting from the administration by the executor.

Any work that a third party, such as an accounting or law firm, does on behalf of the executor which is considered “executors’ work” should be deducted from the amount of allowable compensation, as determined by the formula.

Note that compensation is taxable to the executor, so he or she may choose to waive his or her right to be paid compensation where they are also a residuary beneficiary.

Compensation to be paid to the executor is either approved by the residuary beneficiaries in the written release or by the judgment issued by the court on a passing of accounts.

Final Tax Matters

The executor will be responsible for filing a final T3 Return with CRA reporting the Wind-Up Date of the estate.

Once the executor receives the notice of assessment with respect to the T3 Return, it is typically recommended that the executor obtain a final clearance certificate from CRA (the “Clearance Certificate”).  If the executor distributes property of the estate without first receiving the Clearance Certificate, he or she will be personally liable for any taxes owing to the CRA in the event of a reassessment.

The Clearance Certificate is considered the blessing of CRA, which certifies that all taxes, interest, penalties and other amounts payable by the deceased and his or her estate have been paid or security for the payment has been accepted by the Receiver General.  Unfortunately, the final Clearance Certificate cannot be requested until all the applicable tax returns have been filed and assessed and any taxes payable have been paid in full (including any penalties and interest that might have been charged).

On average, it can take CRA 3-6 months to issue a Clearance Certificate once they have received the request from the executor.  There are situations in which this can be delayed if all the information required has not been provided with the request.

In some cases, where the estate is small, it might not be appropriate to obtain a Clearance Certificate.  Ultimately, this will be the decision made by the executor on recommendations made by his or her professional advisors (lawyers, accountants, etc.).

Finally….

Once the Clearance Certificate has been received, the executor will finally be in a position to complete the wind-up of the estate and distribute the Reserve among the residuary beneficiaries according to their proportionate interest in the estate.  If the beneficiaries have signed a full and final release and indemnity, then the executor will provide an informal accounting of the Reserve and distribute the Reserve.

The administration of an estate takes time and beneficiaries should expect to pack their patience.

Thanks for reading.  Stay tuned for part three where I will discuss what happens if you receive Notice that your minor child has an interest in an estate.

[1]      If the deceased died without a Will, you will be served with Form 74.17 – Notice of Application of Estate Trustee without a Will.