Canada: Ontario Court Acknowledges Estate Trustees' Right To Indemnification, Denies Use Of Estate Funds For Litigation

Estate distribution and the associated legal battles often bring forward intricate legal questions, especially when changes are made to wills or disputes arise among the beneficiaries.

In the recent decision of Santos et al v. Coghlan et al, 2023 ONSC 4862 from the Ontario Superior Court of Justice, the intricacies of estate distribution and the denial of using estate funds for trustees' litigation costs were brought to light.

Background

Hans and Colleen Luettge, who married in 1987 and had children from prior marriages, made wills in January 2005. Their wills specified that the surviving spouse would inherit the deceased spouse's estate. Upon the passing of the surviving spouse, the estate would be divided equally among their combined seven children.¹

In August 2011, Colleen passed away, transferring a significant portion of her assets to Hans prior to her death.² After Hans' passing in May 2021, a legal dispute arose. It was revealed that Hans had made significant alterations to his will in November 2020, deviating from the initially planned equitable distribution among all seven children.³ Instead, he designated his four children as primary beneficiaries, providing $30,000 each to two of Colleen's children and completely excluding one of her children, Terry, from any inheritance.⁴

Litigation

The legal proceedings commenced when the applicants, Hans' children, filed for a certificate of appointment of estate trustee with a will. The respondents, Colleen's children, opposed by filing a notice of objection, contending that Hans lacked the mental capacity to formulate the 2020 will.⁵ The applicants commenced an application on January 27, 2022, seeking, inter alia, an order to strike the respondents' Notice of Objection and a declaration affirming the validity of Hans' November 2020 will. Alternatively, they sought an Order for Directions. A hearing for the application was scheduled for June 14, 2022.⁶

In response to the applicants' request to strike their objection, the respondents presented evidence supporting their claims. They also extended a Rule 49 offer on April 25, 2022, allowing the applicants to withdraw their request to strike the objection and validate Hans' last will with no cost implications.⁷ The offer also provided that the parties would consent to a mutually acceptable Order for Directions.

ORDER FOR DIRECTIONS FROM JUSTICE PHILLIPS

The parties appeared before Justice Phillips on June 14, 2022, and a consent Order for Directions was issued on June 16, 2022. The order, among other things, provided that "the remaining relief sought by the Applicants in their Notice of Application is hereby dismissed" and that "the determination of costs relating to this appearance is hereby postponed to a date to be decided upon by any of the parties."⁸

The Order for Direction also explicitly stated that the Estate Trustee "may not distribute or disburse any estate assets, unless such distribution is approved under this Order or agreed upon in writing by the parties involved in this proceeding."

RESPONDENT'S MOTION FOR FURTHER DIRECTIONS

The respondents later brought forth another motion for directions, pursuing two specific orders: Firstly, they requested costs associated with the applicants' earlier abandoned attempt to strike their notice of objection. Secondly, they sought an order preventing the applicants from utilizing estate assets to cover their legal expenses.⁹

Court's Ruling and Analysis

The respondents' motion for the specific orders hinged on the interpretation of the Order for Directions provided by Justice Phillips.

ENTITLEMENT OF COSTS

Kaufman JA found that based on the resulting Order of Justice Phillips, it can be inferred that the Offer was in fact accepted.¹⁰

The applicants agreed to no longer pursue orders striking the respondents' Notice of Objection or affirming the validity of Hans' November 2020 will. The applicants were also found to have consented to an Order for Directions agreeable to the parties. These terms aligned with the respondents' offer.¹¹

According to the offer's terms, if accepted after that date, the applicants would have to pay the respondents' partial indemnity costs.¹² Kaufman JA found that the applicants ultimately accepted the respondent's offer after the specified deadline, and therefore should cover the respondents' partial indemnity costs, which were fixed at $14,000.¹³

COVERAGE OF LITIGATION COSTS FROM ESTATE FUNDS

The Order explicitly stated that the Estate Trustee could not distribute or disburse any estate assets without approval under the order or written agreement from the involved parties.¹⁴ While it granted the trustee the authority to manage the estate, including consolidating assets and paying the deceased's debts, it did not directly address the funding of litigation costs.

Although the Court agreed with the applicants that trustees were generally entitled to reimburse themselves for expenses reasonably incurred in connection with the administration of the Estate without obtaining the beneficiaries' prior consent or a court order, it nonetheless concluded that the Order for Directions precluded them from paying out litigation fees from the Estate.¹⁵

The court argued that the listed actions in paragraph 14 (d) of the Order primarily pertained to the administration of the estate, as opposed to litigation concerning claims against the estate. Additionally, the court emphasized the need for equity and the importance of "maintaining a level playing field during estate litigation."¹⁶

Kaufman J also noted that Colleen Luettge had transferred a significant amount of her assets to Hans during her lifetime, likely with the intention of those assets being shared among her and Hans' children after his passing.¹⁷ This created a situation where the applicants had ample resources to finance their legal battle against the respondents.

The Court ultimately ruled that the applicants were prohibited from paying any further legal fees in relation to this proceeding out of the Estate.¹⁸ Additionally, the applicants shall reimburse the Estate for any legal fees incurred in this proceeding that have been paid out of the Estate within 45 days of the decision.¹⁹

Conclusion

Santos et al v. Coghlan et al, 2023 ONSC 4862 offers a fascinating glimpse into the complexities and nuances of estate planning and inheritance disputes. It serves as a reminder that the court's role in estate litigation extends beyond the mere interpretation of wills and distribution of assets. It also involves ensuring a level playing field and protecting the integrity of estate assets.

While estate trustees usually have the right to be indemnified for expenses related to estate administration, the court's discretion and the specific details of an Order for Directions can impact their ability to use estate funds for litigation costs.

In this case, the court's decision reflects a commitment to fairness and the maintenance of equitable conditions for all parties involved, making it a significant precedent in estate litigation matters.

Footnotes

1. Santos et al v. Coghlan et al, 2023 ONSC 4862 at para 1.

2. Ibid at para 2.

3. Ibid at para 3.

4. Ibid.

5. Ibid at para 4.

6. Ibid at para 7.

7. Ibid at para 9.

8. Ibid at para 11.

9. Ibid at para 5.

10. Ibid at para 16.

11. Ibid.

12. Ibid at para 17.

13. Ibid.

14. Ibid at para 29.

15. Ibid at para 21.

16. Ibid at para 34.

17. Ibid at para 33.

18. Ibid at para 41.

19. Ibid.

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