When an estate trustee’s decisions about the administration of an estate in Ontario are challenged, that sometimes includes decisions about estate money spent on legal fees. Lawyers acting for an estate trustee need to be aware of potential challenges by a beneficiary or anyone with a financial interest in the estate.
Because an estate is not an entity that can sue or be sued directly, the estate trustee must be named as the proper party. The estate trustee’s burden and responsibility involves not only time and effort, but expense.
In recognition of this burden and the benefit to the estate, the law has long established the right of an estate trustee to be indemnified for expenses incurred for estate administration. As a starting point, this means that such expenses, which include legal fees, are generally recoverable from the estate’s assets in priority to beneficiaries.
The usual legal expenses would include payment for advice about the estate’s administration, the duties of the estate trustee, and interpretation of a will. Subject to certain conditions, it also extends to legal fees incurred to defend the estate against claims, commence proceedings on its behalf, or participate in other Court proceedings affecting the estate.
In a recent Advocate’s Quarterly article, Albert Oosfterhoff reviewed the authority for estate trustee indemnification in Supreme Court of Canada cases, and in Ontario’s Trustee Act which make clear that estate trustees may pay properly incurred costs out of the estate. In particular, he cited Thompson v. Lamport (SCC, 1945), and Goodman Estate v. Geffen (SCC, 1991).
Justice Rand in Thompson v. Lamport wrote that “a trustee is entitled to indemnity for all costs and expenses properly incurred by him in the due administration of the trust: it is on that footing that the trust is accepted. These include solicitor and client costs in all proceedings in which some question or matter in the course of the administration is raised as to which the trustee has acted prudently and properly.”
Justice Wilson in Goodman Estate v. Geffen stated that “the courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonable incurred. Reasonable expenses include the costs of an action reasonably defended.”
The principle of indemnity is incorporated into the Trustee Act, R.S.O. in section 23:
23.1 (1) A trustee who is of the opinion that an expense would be properly incurred in carrying out the trust may,
(a) pay the expense directly from the trust property; or
(b) pay the expense personally and recover a corresponding amount from the trust property.
Later disallowance by court
(2) The Superior Court of Justice may afterwards disallow the payment or recovery if it is of the opinion that the expense was not properly incurred in carrying out the trust.
Limits to Indemnification
So, the estate trustee’s right to indemnification is not without limit. Expenses incurred for the estate must be reasonable and proper, and the onus of proving that rests with the estate trustee. This would clearly exclude legal expenses arising from his/her own proven misconduct. It also excludes situations where the actions were made exclusively for the estate trustee’s own benefit rather than for the estate’s.
To prevent abuse or misappropriation of funds by an estate trustee, the Court can intervene to either prevent indemnification or require an estate trustee to repay funds already taken from the estate. An estate trustee can be removed altogether under certain circumstances.
Challenge to expenses can be made when an estate trustee applies to pass his/her accounts. He or she may in fact be required to do so by the estate’s beneficiaries or those with a financial interest in the estate pursuant to Rule 74.15 (motion for orders for assistance) of the Rules of Civil Procedure. An application or motion for directions pursuant to Rule 75.06 could also be brought to scrutinize and challenge the incurred expenses.
However, cases suggest that absent clear evidence of wrongdoing, Courts will not intervene to scrutinize legal expenses incurred in responding to litigation against an estate’s interest until the passing of accounts stage. Generally, this will be done at the conclusion of the estate’s administration, after the litigation has been resolved when the full picture of costs are available. See for example, Hosein v. Hosein (2010, Ont. Sup. C. J.), para. 5.
Can estate trustees pay themselves litigation costs out of the estate without prior Court approval or consent from the beneficiaries? Recent Ontario cases have sowed confusion in this area. The Court in Coppel v. Coppel Estate [2001] O.J. No. 5246, and DeLorenzo v. Beresh 2010 ONSC 5655 CanLII (which cited Coppel), for example, each held that litigation fees were not payable out of the estate funds without prior approval or consent. However, as Oosterhoff notes, both cases are in direct conflict with section 23.1 of the Trustee Act and decisions of the Supreme Court, none of which were cited.
In light of all this, it may be prudent to seek the Court’s advice and direction about the propriety of proposed legal expenses to avoid an unexpected claw-back later.
MZS Lawyers are experienced Ottawa estate dispute lawyers that can assist with will challenges, executor misconduct, powers of attorney abuse, and guardianship applications.