Over my years of practice, I have not been able to get used to the startled look that an executor, attorney or trustee gives me when I advise them of their duty to account. Questions such as: “Really?” “Why?” and “To whom?” then follow.
Simply put, any time that a person is handling or dealing with the assets of another person, that second person is a “beneficiary”. Therefore, the person handling or dealing with those assets has a fiduciary duty to act honestly and in good faith towards the beneficiary, and to account to that beneficiary with what has been done with those assets.
The most obvious example is in the area of estates. An executor takes on the responsibility of gathering in the deceased’s assets, paying the deceased’s debts, and distributing the residue of the estate to the deceased’s beneficiaries. But the executor also has the responsibility to account to the beneficiaries for what the executor did with those assets, any additional income that the estate earned after the deceased’s death, and whether all of the debts have been paid. In addition, what compensation, if any, the executor is seeking to have performed those duties. Moreover, the executor is not entitled to receive any compensation unless this accounting is both provided to and approved by the beneficiaries.
The same responsibility to act honestly and in good faith and to account is also present anytime a person is an attorney pursuant to a power of attorney, a guardian for a minor or a disabled person, or a trustee in any capacity. In each case, the person acting in this role is responsible for receiving and disbursing the income/assets and to account to the beneficiary for the actions taken.
In situations involving estates, the responsibly to account is usually taken for granted. In situations involving powers of attorney or trusts, the responsibility to account is often not considered.
To ensure that there is an accounting, we have statutes to mandate this requirement. The Estates Act of Ontario deals with the requirement of executors to account. The Substitute Decisions Act of Ontario deals with the requirements of attorneys and guardians to account, and the Trustee Act of Ontario deals with the requirements of trustees to account.
In each of these statutory requirements, the accounting must be approved by a Judge of the Superior Court of Justice for Ontario. In the case of attorneys or guardians, the Ontario Public Guardian and Trustee (“PGT”) must also approve the accounting. In the case of estates or trusts involving minor children (under the age of 18 years), the Ontario Children’s Lawyer (“CL”) must also approve the accounting. This statutory and jurisdictional approval is in addition to approval by the beneficiaries (if they are adults and capable) who are ultimately entitled to the assets or income that is being administered by the executor, attorney, guardian or trustee.
An accounting mandated by the Estates Act, the Substitute Decisions Act or the Trustee Act is called a “Passing of Accounts”. It is a court proceeding that ultimately culminates in a Judge hearing any opposition to the accounting and making a final decision on same.
A Passing of Accounts proceeding is expensive. Not only does it require the preparation and filing of court documents, but it also involves the preparation of a very specific type of accounting. This specific type of accounting is not simply a financial statement with a balance sheet and statement of income for the period in question. An accounting mandated in a Passing of Accounts requires an accounting of each receipt and expense made and an allocation of the receipt or expense entry between the estate’s income and capital component.
Due to the fiduciary role of the executor, attorney, guardian or trustee, the duty to account is mandatory. In the case of a simple estate with few beneficiaries, an executor can often satisfy this duty to account with a summary statement of assets and income received and expenses paid. So long as all residuary estate beneficiaries sign a release stating that they approve the contents of this summary statement and release the executor from any claims, the executor does not need to provide any further or deeper level of accounting. Note that beneficiaries receiving specific bequests do not need to approve an estate accounting, provided that the beneficiary receives his or her entire bequest.
The case of an attorney or trustee is often similar to that of an executor. If every beneficiary signs a release approving the summary statement of accounts from the attorney/trustee, they do not need to provide anything further.
Where the beneficiary is a minor or is suffering from a disability such that a guardian needs to be appointed, the Children’s Lawyer or the Public Guardian and Trustee become the entity to review and to approve the executor’s/attorney’s/guardian’s/trustee’s accounting. Quite often, the CL or the PGT will ask for more in-depth and/or supplementary accounting materials than in situations with beneficiaries who are over the age of 18 years and mentally capable. In most cases, however, the CL and the PGT will accept an accounting without a formal Passing of Accounts.
It only takes one beneficiary or the CL or PGT to object. If the objection cannot be resolved, the executor/attorney/guardian/trustee has no choice but to prepare a formal set of accounts (normally from a professional accounting firm) and file the necessary Court application for a judicial determination of the accounting. If the executor/attorney/guardian/trustee does not proceed with the judicial determination of the accounting, he/she will remain personally liable for the objections raised. Moreover, if there is an objection raised that cannot be resolved, the statutes allow the beneficiary (including the CL or the PGT) who has objected to also begin a Court application to force the executor/attorney/guardian/trustee to file a Passing of Accounts application.
Once the Court application is commenced, the beneficiary(ies) who is/are questioning the accounting must file a formal list of objections with the Court. In Ottawa and Toronto, the issues arising from the accounting and the objections are subject to court-mandated mediation before being decided by a Judge. In many cases, the mediation stage will resolve the issues; but if not, a Judge will be hold a hearing to resolve the issues.
A Passing of Accounts hearing is a formal trial with evidence being led by the executor/attorney/guardian/trustee or their lawyer, and cross-examination of the opposing parties being conducted. The Judge will determine all of the issues that have not been resolved, including, very often, the compensation to which the executor/attorney/guardian/trustee is entitled and who should bear the cost of preparing the accounts.
Be warned, acting as an executor/attorney/guardian/trustee is not for everyone. The person must be organized and keep excellent records of all assets/income and expenses for the entire period that he/she is acting in this capacity. These records must also be available when it becomes time to account to the beneficiaries.
For more information, please contact a member of our Wills and Estates Practice Group.
This article originally appeared in Fifty-Five Plus Magazine in March/April 2017.