September 22, 2021
Historically, estate trustees were not entitled to be paid for their work unless the will expressly provided for compensation.
Now, in Ontario, the opposite applies – unless the will denies or limits trustees’ compensation, the trustees are entitled to reasonable compensation. This is paid out of the residue of the estate, after specific gifts, but before the residual beneficiary or beneficiaries receive the remainder. If there is not enough value in the residue, specific gifts may have to be reduced to pay compensation, although this is rare, because of the “reasonableness” test.
This right to compensation applies even if the trustee is also a beneficiary, and may tilt the balance if the intent in the will is to divide the estate equally. Sometimes this causes hurt feelings between heirs after death. However trustees required to do the work, while others share equally in the rewards may resent that result. It is an issue you need to consider as you plan your will.
The question then is “what is reasonable”?
Trustees’ compensation is subject to court approval, though this may be avoided if all beneficiaries are adults and all consent to the amount.
Under Ontario’s Trustees Act, compensation is to be based upon the care, pains and trouble and the time expended by the trustee. The five factors that in theory are considered are:
- the size of the estate;
- the care and responsibility required;
- the time required;
- the skill and ability displayed; and
- the success of the trustee’s efforts.
However, in most estates, there is a conventional formula used, setting compensation at 2 1/2 percent of the total capital and revenue received by the trustee, plus 2 1/2 percent of the payments out of the estate. An annual management fee of 2/5ths of 1% of the value of the capital may be added where ongoing management is required.
This may be adjusted up or down, but in reality, that is rarely done, except in cases involving trust companies as trustees. Those corporate trustees typically insist on an hourly based approach to compensation before agreeing to act.
Otherwise, courts unfortunately do not apply a consistent approach to adjustments, even in cases where the judge recites the five factors.
Even in cases of trustee misconduct, judges are reluctant to deny compensation entirely.
In one well-known recent example involving a case with real evidence of trustee dishonesty, the judge reduced the requested compensation by 50%, rather than denying it entirely because the judge felt that the trustee was forced to do extra work by uncooperative beneficiaries, and the trustee did not personally benefit.
This contrasts with another case decided shortly afterwards, where the trustee was “guilty” of “pretaking” (paying themselves compensation without consent or court approval) and was criticized for making only “superficial” efforts in the administration of the estate and other instances of breaching the obligations of a trustee. The trustee was ordered to reimburse the estate the full amount of the pretaking.
It is somewhat surprising that the courts would treat dishonesty less harshly than the apparent indifference exhibited in the second example.
In a 2021 example of the court’s attitude toward a trustee who did a poor but honest job, Toller James Montague Cranston (Estate of), the judge goes through the factors in detail, but ends up allowing compensation based on the tariff. The trustee was found to have performed her duties regarding a complicated estate less than perfectly, but reasonably and in good faith. The beneficiaries opposing the compensation were ordered to personally pay the trustee’s costs of the contested approval, on an increased or substantial indemnity basis, because they had made unfounded allegations of fraud. The trustee’s costs not paid under that order were paid out of the estate.
Trustee compensation is something that you need to consider as part of your estate planning.
If you are a trustee, you should be aware of your right to compensation, and the rules surrounding it.
If you are a beneficiary, you must accept that trustees will be compensated in most cases, but that you have the right to question the compensation, at the risk of exposure to costs if you do so unnecessarily.