If not carefully planned for, the amount of compensation paid to the executor(s) for administering an estate or to the trustee(s) for administering any ongoing trusts (collectively referred to as the "trustees") has the potential to become a contentious issue. In the scope of estate planning, compensation must be part of the conversation when discussing trustee appointments.
Where a will or trust agreement is silent regarding trustee
compensation, we turn to the Trustee Act (Ontario) (the
"Act") and caselaw for guidance. Under the
Act, trustees are entitled to receive "fair and
reasonable" compensation for the "care, pains and
troubles, and the time expended" in administering an estate or
trust. The Act does not contain any rules as to the
calculation and amount of compensation.
The courts have developed a "rule of thumb" tariff based
on receipts and disbursements, which works out to approximately 5%
of the total value of the estate or trust. This percentage may be
departed from depending on several factors, including (i) the size
of the estate or trust, (ii) the care and responsibility involved,
(iii) the time occupied in performing the duties, (iv) the skill
and ability displayed, and (v) the degree of success resulting from
the administration.
As well, for ongoing trusts, an annual care and management fee of
approximately 2/5 of 1% is typically allowed.
Where a will or trust agreement is silent regarding compensation,
issues may arise where the trustees and the beneficiaries do not
agree on what constitutes "reasonable" compensation in
the circumstances. This increases the potential for disputes and
even litigation. The amount that the trustees are claiming may not
only be greater than what the beneficiaries expected, but may also
greatly differ from what the testator or settlor intended.
The will or trust agreement can set out the method for calculating
compensation. There are many factors to consider in determining the
method and quantum of compensation.
A person may feel differently if he or she is appointing family
members, friends, or professionals to be the trustees. Where close
family members are appointed, including a spouse or partner or
children, who may also be benefiting under the will or trust, a
person may not feel it is necessary in the circumstances to
compensate them for acting as a trustee.
The size and complexity of the estate or trust should also be
considered. A look at what assets will form part of the estate or
trust and what time and effort the trustee would need to expend to
manage, dispose of and distribute the assets is needed. Managing
and winding up an active business, for example, will take
significantly more time, effort and care than managing and
distributing several investment accounts.
It is also important to consider whether the beneficiaries have
legal capacity to approve compensation. Where the beneficiaries of
the estate or trust are minors (under the age of 18 in Ontario),
the beneficiaries would not be able to approve any proposed
compensation. The trustees would have to pass their accounts in
court for their compensation to be approved, which is costly and
time-consuming.
There are a number of ways of calculating compensation which can
be explicitly provided for in the will or trust, including, for
example, a percentage amount, a fixed amount or a professional
hourly rate, or a combination. Where a person feels compensation
should not be paid, this must be stated explicitly to be
effective.
It can be challenging to determine what an appropriate fixed
amount may be. Considering the amount a corporate trustee may
charge may be helpful in providing a benchmark to calculate an
appropriate quantum of compensation for individual trustees. When
choosing the amount, it is worth noting that compensation is taxed
as income in the recipient's hands. The amount can also be
indexed for inflation.
Acting as a trustee is hard work and comes with legal liability,
and it's important to recognize the efforts of the trustees.
What the testator or settlor, the trustee and the beneficiaries
think is "reasonable" may not be the same, which may
cause unnecessary acrimony. Compensation must be part of the
conversation in estate planning – a small omission today may
cause a large problem in future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.