The Ontario Approach to Executor Compensation
Many people assume that Ontario law provides a fixed percentage or formula for compensating executors and trustees. In fact, no such rule exists.
Ontario’s Trustee Act provides that where a will or trust agreement does not specify compensation, the court may allow compensation that is fair and reasonable having regard to the care, pains, trouble, and time expended in administering the estate or trust.
Over the years, Ontario courts have developed what is often referred to as the “unofficial tariff” of compensation. This guideline generally permits:
- 2.5% of capital receipts;
- 2.5% of capital disbursements; and
- In appropriate cases, an annual care and management fee.
As a practical matter, many people refer to this as compensation of approximately 5% of the value of the estate.
However, this figure is only a guideline. It is not an entitlement.
The Five Factors Governing Compensation
When executor compensation is challenged, the court examines whether the amount claimed is fair and reasonable based upon five well-established factors:
- The size of the estate;
- The care and responsibility involved;
- The time expended;
- The skill and ability displayed; and
- The degree of success achieved in administering the estate.
The court’s objective is not simply to apply a percentage. Rather, it seeks to determine whether the compensation claimed is justified in the circumstances.
The Problem with Large Estates
The traditional 5% guideline becomes increasingly problematic as estate values rise.
For example, applying a 5% benchmark to a $250 million estate could theoretically result in compensation claims measured in the tens of millions of dollars. Yet the work involved in administering a very large estate does not necessarily increase in proportion to its value.
This creates a significant challenge when a will or trust agreement is silent on compensation.
Executors may begin their claim based upon the traditional benchmark, while beneficiaries may view the resulting amount as excessive. The dispute then often becomes the subject of negotiation or litigation, resulting in substantial legal costs, delay, uncertainty, and family conflict.
Unfortunately, there is relatively little Ontario case law dealing specifically with compensation claims in very large estates. As a result, there is often considerable uncertainty about how a court will assess what constitutes reasonable compensation.
Looking to Trust Companies for Guidance
One useful comparison is the fee structure employed by professional trust companies.
Unlike the traditional 5% guideline, trust companies generally charge on a sliding scale. As the value of the estate increases, the percentage charged decreases.
Typically, fees may begin at approximately 5% for the first portion of an estate and gradually decline. Once estate values exceed several million dollars, the percentage becomes significantly lower and may be reduced to a fraction of one percent on the highest asset levels.
This approach recognizes that while larger estates may involve greater responsibility, they do not necessarily require proportionately greater effort.
For that reason, trust company fee schedules can provide a helpful benchmark when determining appropriate compensation for executors and trustees of substantial estates.
Planning Ahead: Avoiding Future Disputes
The best way to avoid disputes over compensation is to address the issue directly in the will or trust agreement.
Unfortunately, many estate plans fail to do so.
There are a number of approaches that can be considered:
No Compensation
Where a spouse, child, or other close family member is acting as executor or trustee, the testator may decide that compensation should not be paid. If so, the document should clearly state this intention.
Professional Time-Based Compensation
Where a lawyer, accountant, or other professional is appointed, compensation may be based on actual time spent using professional billing rates.
Fixed Fees
The will or trust may establish a fixed fee for acting as executor together with an annual fee for ongoing trustee services. These amounts may be adjusted periodically for inflation.
Percentage-Based Compensation
Compensation may be calculated using a specified percentage of estate value, often with reference to trust company fee schedules.
Hybrid Approaches
A combination of fixed fees, percentage-based fees, annual management fees, minimum compensation provisions, or maximum compensation caps can also be used.
Approval Mechanisms
The document may require that compensation above a specified amount be approved by beneficiaries, co-executors, trustees, or another designated fiduciary before payment is made.
Considerations
Far too much estate litigation arises from disputes concerning executor and trustee compensation. In many cases, these disputes could have been avoided through proper drafting and careful estate planning.
When compensation is not addressed, executors may claim amounts that beneficiaries consider excessive, resulting in litigation that diminishes the estate and damages family relationships.
The unfortunate reality is that your intentions may not be carried out if your will or trust agreement does not clearly address compensation. Amounts may be claimed that you would never have approved had you considered the issue during your lifetime.
A well-drafted Will or trust agreement should not only determine who receives your assets, it should also clearly address how the people responsible for administering those assets will be compensated.
Brian Madigan LL.B., Broker
www.OntarioRealEstateSource.com