Listen to The Investment Accounts.
This week on
Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
Listen to The Capital Account
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about taking capital out of an account and what to consider along the way.
Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
The Capital Account - Hull on Estate and Succession Planning Podcast #117
Posted on June 17, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #117 of our podcast on Tuesday, June 17th, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Ian Hull: Hi, Suzana.
Suzana Popovic-Montag: Hi there, Ian. How are you today?
Ian Hull: Well, I’m a lot better than you. This is the joys of podcasting, and one day we may go to video podcasting but we aren’t there, we are in audio. And so, those who are listening don’t get the pleasure of seeing a big cast on your right arm, as Suzana tried to leap from giant buildings and be Superwoman, and broke her arm. So if I get out of line, you’ll hear a chunk against my head, and we’ll have some interesting podcast. So, good to be back and always good to see you. Hope you had a busy but fruitful week last week.
Suzana Popovic-Montag: A little bit slower than I’d like, but certainly trying to limp along. Thanks, Ian, for that. I did just want to start by mentioning we did get a little bit of feedback on our last podcast and I just wanted to clarify that when we were talking about capital disbursements, we were talking about the kinds of entries that are typically in those listings. And I did mention that we would be looking for whether or not there are any entries for the purchase of investments. And someone correctly pointed out that they ought not to be listed in there and that’s absolutely right. What I had meant to say and didn’t get across quite properly, was the fact that those are things that we look for when we’re trying to identify possible problems with the accounts. And even though they may show up in a listing on capital disbursements, they have to be backed out later on any accounts as well. So thank you for having mentioned that and for that clarification.
Ian Hull: That’s a great point and you know, the thing about accounts in this world, this strange world of estate accounting, is that to simplify down to basic terms, there are really categories that these accounts are in. And one of the separated categories as you say, is the investment account. So it is much easier to follow it through. And we’ve talked about the two aspects of any financial accounting and that is, one is, you’ll have capital, you’ll have the core asset and then you have essentially income that gets generated, or revenue as we call it in the estate world more often than not. And we spoke about last week the capital disbursements as you say, and why don’t we spend a few more minutes going through some of this concept of taking capital out. Taking a core asset, for example, a GIC, on death goes into the accounts at $112,000 because that’s what the deceased had on the date of death, and that comes into the estate in the form of capital. And let’s continue to work through how that $112,000 comes out, and how it is shown in the estate accounting world.
Suzana Popovic-Montag: And then what’ll happen is, once that money is taken out, whether in that denomination or in another, the executor will, depending on the terms of the Will and how liquid the estate needs to be relative to the timing, will decide whether or not to invest that account or that amount into some other form of investments.
Ian Hull: Right, because in some cases, say there’s $112,000 and say there’s a $12,000 gift to a favourite charity of the deceased, and you want to pay that quickly for example, you would take that and you could pay some of that GIC out, put it all into the estate account and then pay some of it out quickly to the charity to satisfy that particular gift. But leave the rest in for the other, depending on the terms of the Will. So, when we go through these accounts with our fine-tooth comb, and we’re looking for problems that may exist or not exist, is that one of the things we also look for are the professionals. And how are the professional’s fees being dealt with in the accounts themselves.
Suzana Popovic-Montag: And as part of that, we’re looking for, for instance, for the legal accounts or the accountant’s bills and that, and how they’re reflected as capital disbursements presumably at first instance. And then the question is, are those proper expenses of the estate, are they properly reflected and particularly in a situation where the executor is also the lawyer for the estate, the question as to whether or not there’s a possible sort of double-dipping in terms of compensation at the end of the day.
Ian Hull: And one of the things that I often will say to my clients is “just ask for copies of the professional’s accounts”. So there’s a bill in there and the capital disbursements that’s been paid to XYZ Corporation, an accounting firm, then to get a handle on what work they did or didn’t do, you know, say you don’t want to pay the $5,200 or the $2,300 or the whatever amount it is, look behind it because sometimes that will tell you whether or not (a) it’s appropriate and (b) whether or not the administration of the whole estate may come into question. Because if it was a simple step such as filing a T3 return, and you’re being charged $10,000 for it, you may want to ask some other questions and start to wonder whether or not the professional work is being done at a reasonable fee basis.
Suzana Popovic-Montag: And the other thing that normally people will look for is that the work that’s being done by a lawyer who is an executor of the estate, that there is legal work and that that’s distinguished from executor’s work. Because the understanding, of course, according to the case law, is that you shouldn’t be compensated for accounting work or for other executor’s work at your legal rates. And so when it comes to determining the proper amount of compensation at the end of the day, looking at the detailed docket entries, looking at the detailed accounts, allows people to make that determination in terms of the appropriate breakdown between executor’s compensation and legal fees.
Ian Hull: And just following through on that legal fees, the delineation is sometimes hard. It’s a bit blurred. I usually use the example of an executor, as a lawyer or as an accountant, for example, and they charge their hourly rate to go down to the bank and set up the estate bank account. That is improper. The Courts will typically say that setting up a bank account, for example, is a job of an executor and you should be paid out of your compensation as opposed to at the hourly rate. Now having said that, we have to remember that under the Trustee Act and there’s a clear provision that says that you can contract out of the general rules. You could actually put in your Will that you want your executor to charge at the hourly rate. There’s a specific provision in the Trustee Act, s. 61(5) that says that if you want, you can change those terms, so to speak.
Suzana Popovic-Montag: Another illustration of a situation where you’d look in more detail is when you’ve got legal accounts for the sale of real property. And you’ll want to review, in those circumstances, the statement of adjustments and the solicitor’s trust account, just to make sure that there is again, no duplication of charges.
Ian Hull: So, Suzana, one of the things that I sometimes get bogged down on are entries regarding payments of loans and promissory notes. In particular, where they are made to persons who are not at arm’s length to the deceased. When I say not at arm’s length, I mean to payments and loans that have been created before death with say, a brother of the deceased or with a spouse, or a common-law spouse, that may raise your eyebrows. What’s the best way to deal with that scenario?
Suzana Popovic-Montag: I’ll typically tell executors or trustees that I’m advising, Ian, that they should make sure that they’ve got sufficient back-up, just like the payment of any debt. You want to make sure that it is a legitimate expense of the estate and that at the end of the day, you have the voucher to substantiate the payment. And particularly in this situation where you’re suggesting someone not at arm’s length, because there is already a supposition that perhaps it’s not a legitimate expense. And so you want to make sure that there is a promissory note or there is some form of evidential proof of the fact that there was amount owing and that it was properly paid by the executor or the trustee.
Ian Hull: What about unusual entries? What do we do with those? And maybe you can talk a little bit about what unusual entries are and how we deal with them.
Suzana Popovic-Montag: I think sort of as a one-off when you’re looking at accounts and you see that there’s perhaps a continuing payment of rent or mortgage on a piece of real estate, and then the question is, how long should those payments be made. If it is, for instance, the real estate, should the home have been sold quicker or the cottage have been sold faster so as to have stopped the mortgage payments or the rental requirements or something to that effect.
Ian Hull: And the second unusual payment that I think about is when you have improvements to the capital property that is being directly given to a beneficiary, for example, the family cottage. Say it’s going to one of the beneficiaries, but you start using estate expenses to pay for those. And I think those two illustrations are perfect examples of where an executor really needs to step in and communicate with the beneficiaries. Because it may be that the beneficiaries say, “yes, we do actually want the cottage roof fixed right away because although it’s going to Johnny, Johnny’s not 100% sure that he wants it, and we’re talking amongst the family as to whether or not Betty wants to buy it instead; and so we need to preserve the cottage, we don’t want water leaking through the roof, so, sure, take it out of the estate”.
But the other approach might be, geez, Betty says, “what are you spending my money, or $50 of my money on fixing the roof?” So, that kind of problem, what happens is, if an executor moves forward in what I would describe as a non-communicative, and sometimes even an arrogant way on these issues, then you create the potential problem of a beneficiary stepping in and being questioning, but also being frustrated with your conduct as an executor. So this is an easy illustration of where it sure pays off to talk early and talk often with your beneficiaries.
Suzana Popovic-Montag: That’s a great illustration, Ian, because we know just from our own experience that, especially a cottage property, there’s a lot of situations where there’s emotional undercurrents lying attached to that property. And when one child or one beneficiary is favoured and others aren’t, it can be a real flashpoint. And then, as you say, to suggest that someone else’s money is being used to take care of an asset that’s going to someone else, it could be a real problem.
Ian Hull: Well that’s great. I think what we’ll do is we’ll wrap up on that point. We started this podcast talking about the investment account and clarifying from the input we got from our listener. And again, we didn’t actually at the outset make it clear that we have call-ins, but we’re going to give you that detail right now, quickly. And also, next podcast I think we’ll turn to the whole question of the investment account, because the capitals account is one, capital disbursements, money coming out is one topic that we’ve sort of covered in pretty good detail. But in the next topic, I think we’ll want to work through is this separate category of the investment account and how it’s set out in estate accounting. But I just remind everyone, feel free to call in at 206-457-1985.
Suzana Popovic-Montag: And in case you didn’t catch that, you can find that number in our show notes along with our e-mail address which is hullandhull@gmail.com, or of course, you can feel free to visit our blog at estatelaw.hullandhull.com. Thanks very much, Ian.
Ian Hull: Thanks, Suzana.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.
Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.
/mem
In my blog yesterday, I introduced the prudent investor rule as the standard of care for trustees when investing assets that are held in a trust. Today, I will address how a trustee’s investment performance may be assessed.
Prior to July 1999, trustees were required to make investments pursuant to the “statutory legal list” provided for in the Trustee Act. This had the effect of holding trustees accountable for each particular investment, rather then the investment portfolio as a whole. The principle was further illuminated by the anti-netting rule, which stated that a trustee, who committed a breach of trust, was not entitled to set off a gain in one transaction against a loss in another. However, through recent amendments to the Trustee Act, the statutory legal list was repealed and replaced with the Prudent Investor Rule.
The Prudent Investor Rule reflects the modern portfolio approach to investments, the emphasis being on the prudence of the portfolio as a whole as opposed to each particular component. This theory is captured in Section 27(5) of the Trustee Act. Section 27(5) requires “a trustee to consider … the role that each investment plays within the overall trust portfolio”. Furthermore, under section 27(6) “a trustee is required to diversify the investments of the trust property. It appears that under the modern portfolio approach, a trustee would not be breaching the standard of care, should he or she invest a substantial amount of trust assets into a single security. As described above, section 27(6) requires that the trustee consider diversifying the portfolio, which is necessary if the Prudent Investor Rule is to be followed. To conclude my topic, tomorrow I will consider the liability of a trustee with respect to the investment of trust assets.
Thanks for reading,
Rick
Not all Wills provide for an outright distribution to the beneficiaries. In some cases, the assets of an estate are held in trust over a period of time for the benefit of one or more beneficiaries, sometimes in succession. When a trustee administers a trust, he or she is entrusted to act for the benefit of others. As such, our common law and statutes impose standards that trustees must comply with when dealing with trust property.
With the recent plummet in the stock market, I believe many trustees are considering how the stock market losses have affected the trust investments and what action they should take in the circumstances.
Section 27 of the Trustee Act addresses the standard of care for trustees when investing assets held in a trust. Section 27(1) states, “in investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments”. Section 27(2) states that “a trustee may invest trust property in any form of property in which a prudent investor might invest”.
Section 27(1) and (2) outlines the prudent investor rule. When investing trust assets, a trustee must comply with the prudent investor rule to protect himself or herself from liability. Section 28 of the Trustee Act, emphasizes this point as it states that a Trustee will not be liable for losses arising from investments if the standard of the prudent investor is met. Nevertheless, the issue remains how does a trustee meet the “prudent investor” standard? In keeping with this theme, tomorrow I will address how a trustee’s investment performance may be assessed.
Thanks for reading, and have a great day!
Rick
Listen to Estate Assets
This week on Hull on Estates, Natalia Angelini and Sean Graham discuss issues that surround estate assets. The value of some assets are not always determined by their financial value and the value of other assets may change dramatically over time.
Estate Assets - Hull on Estates Podcast #90
Natalia Angelini: Welcome to
Welcome to
Sean Graham: Hi Natalia, how are you?
Natalia Angelini: I’m great, Sean. How are you?
Sean Graham: Oh, pretty good thanks.
Natalia Angelini: That’s good. I thought we would talk today about assets in the estate planning context. And so one of the questions that come to my mind is, what kind of considerations does a testator have to take into account when dealing with their assets?
Sean Graham: Well, and it’s kind of a fundamental question which sounds, at first blush, fairly simple. What do you own? But I think there’s a bunch of background issues that go into it. And once we start to talk about some of these issues, at least I was thinking about them when I was doing my blogs this week, it came to my attention that really it can mushroom into a whole bunch of different considerations. And as we both know, one of the indicia of testamentary capacity is that the testator must know the extent of his or her assets. So that’s sort of the first step. You need to know it to do a valid Will, but also knowing the nature and extent of your assets is not always as simple as it may seem, at least in the estate planning context.
Natalia Angelini: So what different assets are there that testators should know about?
Sean Graham: Well, and to some extent, that’s going to depend on what the testator holds dear. Economic value is not necessarily the only measure of value that goes into a Will. There may be a painting or a family memoir of some kind that really has no economic value but in some cases, may be the most important asset. So assets, I think, needs to be considered not only in an economic framework, but also in a sentimental framework.
Natalia Angelini: That’s a good point. I think in last week’s podcast, David and Allan were talking about probate. And, of course, one of the things you need to do is value your assets when you’re seeking probate.
Sean Graham: Yeah, and some of those sentimental assets that I just talked about, aren’t going to show up on that application. But again, in some cases, with some testators, that can actually be more important than the economically valuable assets. So that’s something I like to look for in any given situation.
Now moving on to the economic assets which, in the litigation framework, tends to dominate, although certainly there can be disputes over sentimental things. Again, this is a possible…this topic really can mushroom. It’s easy to say sort of off the top of your head what you think is in your bank account and so forth. But let’s just maybe break it down. Because each asset, depending on its characteristics and its form of ownership, can really lead to tax issues, litigation issues in terms of who owns something. It may have an economic and a sentimental value to the testator and also to potential beneficiaries. So there may be a reason to give an asset to one of the beneficiaries instead of the others. And really, that’s just the start of it. So…
Natalia Angelini: Now the obvious largest asset that most people have is their house. But there’s a whole bunch of others that might not come to mind unless you give some further thought to it. Why don’t you let us know what some of those are, Sean?
Sean Graham: Well, sure, and the house leads me into sort of real estate, of course. Not just residences, but people can have multiple residences. It’s often the case that someone may have bought a residence decades ago. The price of real estate may have been a relative fraction of what it is today and the testator may have a general idea that real estate values have gone up in the last 50 years. But they may not know that that house they bought, you know, for, I don’t know, $5,000 in the Forest Hill area and the 5 acres of land on which it sits, are now worth a good deal more than $5,000. So that’s a situation, obviously that’s an extreme example. But, you know, there can be very large disparities in values in terms of what a testator who never really wanted to sell the house, never really bothered to check on the market and all of a sudden is talking about giving this house in a Will plan. It would be helpful certainly to know what the value of that property is. And, of course, that leads into the issue of well, what happens after the Will is drafted and the value keeps changing? And that’s why a lot of planners, I think, sort of advise someone to go back to their plan and look at it every few years, because the value of assets change.
Natalia Angelini: That’s right. I think it’s something always to keep in mind and when you’ve got assets that are local to where you’re residing, it might be more straightforward. But a lot of people have real estate outside of the country as well.
Sean Graham: And cottages. I mean, depending on the area, the value of cottages, I understand anyway, can really have changed a great deal. You know, up in Muskoka, my layperson’s understanding from what I read is that some of the land values have really gone up. And they might go back down, who knows? And again, then you’ve got the foreign assets. Condominium prices for vacation properties in the areas hit by the hurricanes down south a few years ago, you know, who knows what happened to those? But a testator, you know, it’s a good idea, I think anyway, for a testator to certainly find out. And it doesn’t hurt to check every once in a while, just to keep yourself updated, whether you’re planning a Will or not, I suppose, just general financial planning.
Natalia Angelini: That’s right. And once you’re actually administering an estate, that’s going to be relevant at that point again.
Sean Graham: Yeah, and again, the values can change between the time of the Will and the administration of the estate. I mean, you’re stuck with the Will I suppose. But you may find that the intentions of the testator sort of may get skewed a bit by changes in values.
The other thing I find interesting is those sort of up-in-the-attic personal property, or hanging on the wall, if it’s a painting say, where the family has a basic idea, a family or testator is pretty sure that the painting is valuable. Say it was done by an artist who rose to prominence after the painting was purchased. And so the family has a pretty good idea that the painting is worth something but really it’s never been appraised, they’ve never tried to sell it. Those assets can be, it seems to me, very helpful to value, really get a sense of what it’s actually worth. There could be tax consequences of any assets, and particularly, you know, a valuable painting which was bought for nothing. And similar to corporate shares, which are bought for nothing and then they skyrocket, but not identical. You know, there’s different considerations I suspect. And knowing the value, it seems to me, is the first very important step.
Natalia Angelini: It’s particularly important when you’ve got litigation that’s brewing, because you’re going to want to keep, if you’re the estate trustee, you’re going to want to keep all the beneficiaries and purported beneficiaries aware of what the status of the administration is. And one of the first things they’re going to want to know is, what all the assets are and what their value is, so they know what they’re fighting over essentially.
Sean Graham: For sure. And if…let’s just take a hypothetical situation, I’ll pull some names out of mid air. There’s 3 children: John, Jenny and Stewart. There’s a testator who wants to divide up the assets and the testator thinks that John really likes the house and wants the house and Jenny, I think I said, wants the painting, and Stewart gets the rest. And this is similar to the hypothetical situation I mentioned in my blog. Again, if you don’t know the values of these different assets, you could be giving John the $2,000,000 house, Jenny the $50,000 painting and Stewart the residue, which is worth $100,000. But who knows? Maybe someone is suing the testator so, you know, one of these assets gets eaten up completely. Without knowing the value and knowing, not just the value, the market value, but also whether there’s claims against an asset, whether it has depreciated or been damaged somehow. All those things are helpful, in my view, in coming up with a plan.
Natalia Angelini: And the sooner you know this, the better, because if you’re trying to resolve litigation, you’re not going to be able to do it in a meaningful way without knowing what your net dollar value is.
Sean Graham: For sure. So then you have, of course, the investment assets. And we’re not talking about every kind of asset in this podcast that someone could have. But investments, portfolios, mutual funds, that sort of thing. Again, a lot of people I think tend to know the value of these assets because they get statements. But you don’t get regular statements about your car and you don’t get regular statements about a painting or a house, and so on. So in many cases at least, I think the investment side of things may be a little easier to figure out. But you still have background information that’s helpful. You mainly want to get some tax advice in terms of whether these investments have grown or whether they’re invested in the best, you know, tax manner. And that can all go into the planning stage as well.
Natalia Angelini: And I think it depends on how sophisticated the testator is and how complex their estate assets are. But it’s certainly something that, in that kind of scenario, is a good idea, or it’s something I would do in any event.
Sean Graham: And the last thing I’d just sort of want to maybe close on is that you want to come up with a total, I suppose, or some sense of a total value of all these assets once you take into account claims and tax consequences and so forth. And the total value may affect the amount of beneficiaries. If an estate is worth $50,000, you may not want…a testator may not want to get too generous to too many people because once all the administration is done, of course, you know, the initial amount may not lend itself to having too much left to give to too many people. If you’re looking at a $10,000,000 estate and the testator just, for example, might want to take care of the kids “first” and then decide about what other beneficiaries there may be, then who knows. There may be specific bequests to charities, you know, that would not necessarily be desirable in a smaller estate.
Natalia Angelini: Good point, Sean.
Sean Graham: Well I think…I hope that’s sort of helpful. Again, we’re just sort of sketching out issues here and the one thing when I think about this topic is a relatively simple question: what do you own? - can lead to an extremely complicated set of follow-up questions and inquiries and so on. And you may need to go to other people other than the testator, a tax expert, there could be foreign assets, you need to get an opinion from a foreign expert, just to come to that initial question of value. So I hope that’s helpful to people.
Thanks very much, Natalia.
Natalia Angelini: Thanks, Sean.
Sean Graham: So that’s the end of our podcast, and hopefully it’s been some help to people and thanks very much to everyone for listening.
Natalia Angelini: Thanks for listening. Bye.
This has been
To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.
Our theme music is Upper Structure by DJ AKid and is courtesy of the Podsafe Music Network.
/mem
The recent decision of the Ontario Superior Court of Justice in the matter of Hutchison v. Hutchison [2006] O.J. No. 3231 (W.A. Jenkins J.) provides an illustration of the court considering the concepts of undue influence and testamentary capacity.
The plaintiffs in this case were three of the four children of the deceased. The defendants were the youngest child, and the child’s wife.
The evidence as considered by the court seriously called into question the capacity of the deceased. By 1996, the deceased was showing early signs of dementia. In 1998, he was found in his car, parked on a railway track. He was disoriented, and was taken to hospital. He was diagnosed as suffering from dementia. While in the hospital, he wandered away, and had to be returned by the police.
Following his diagnosis, he was released from the hospital and lived with the defendants at his home until his death in February, 2002 at the age of 86.
Shortly after his assessment in 1998, the deceased transferred his home to his youngest son. He also transferred his investment account. He then made a new Will wherein he bequeathed the whole of his estate to his youngest son. (In a prior Will, executed in 1992, he divided his estate equally amongst his four children.)
The plaintiffs gave evidence that the deceased was suffering from dementia as early as 1995, and that he wasn’t aware of what was happening around him.
With respect to the transfer of the assets, the court did not rely on any consideration of the issue of incapacity, but rather, set aside a transaction on the basis of undue influence. The court found that the deceased was, as of 1998, in failing health and dependent on the defendants for his care and comfort. The court stated that against this background, the defendant must show that the deceased entered into a transaction as a result of his own free will and informed thought. The court found that there was a presumption of undue influence based on the deceased’s failing health, and also based on the fact that the defendants took steps to convince the deceased that his other children were attempting to take his money.
With respect to the validity of the will, the court found that the deceased was confused and disoriented, and was suffering from dementia when he executed the new Will in 1998. The Court found that there was reason to doubt the deceased’s capacity to make a new Will and, consequently, the onus shifted to the defendants to prove the deceased’s testamentary capacity on a balance of probabilities. The court found that the defendants had failed to prove that the deceased had testamentary capacity when he gave instructions with respect to his new Will, and when he actually executed his new Will.
(Actually, the onus of proving testamentary capacity is always on the propounder. More accurately, and as the court indicated in the decision, the existence of suspicious circumstances may rebut the presumption of capacity, thus requiring the propounder to prove knowledge and approval and testamentary capacity.)
As a result, the transfer of the property and the investment accounts was set aside, as was the 1998 Will.
Have a great day.
Paul Trudelle
Enter keywords:
