Our office handles a lot of estates. In the majority of cases, executors manage the process well. They distribute the funds in the estate within a reasonable timeframe with few if any problems. However, the job is not an easy one.
Before I cover the areas of potential executor liability, we should spend some time reviewing the role of an executor. The testator - the person who signed the will - appoints an executor. They may appoint just one or several. The law doesn't dictate how many must be named – the choice is personal. Testators usually appoint executors based on family dynamics, who is most suited or most convenient.
Once the testator dies, the executor(s) gains the power to deal with the estate. If probate is needed, the executor applies to the court for probate letters (for more information about probate and the need for probate, please view our videos here.)
The deceased assets essentially fall into the control of the executor as though he or she owned them. The trustee can access the funds, value and sell property. However - and this is an important, however - the executor holds those assets on behalf of beneficiaries. In law, this creates a relationship of trust. The executor holds the assets in trust for the beneficiaries and must always keep the beneficiaries' best interest when dealing with the assets. We call this a fiduciary duty. Courts take this duty very seriously.
So the first, most crucial executor liability is the responsibility they have towards the beneficiaries. If executors treat the assets as though they own them, they could be liable to the beneficiaries if the treatment of those assets were not in the beneficiaries' best interest. So, for example, if the executor bought a new car with the money from the estate, the executor would be liable to the beneficiaries. It's not the executor's money to spend as they please. So, if an executor fails to distribute the funds as directed, a court will find them liable. While this falls into the category of "common sense," it bears mentioning. You would be surprised at the number of court cases where the executor has not acted in the beneficiaries' best interests.
As a starting point, an executor is not personally responsible for the debts of the deceased. However, if the executor fails to perform specific duties, they can become personally liable. To maintain the freedom from personal liability, an executor must publish a notice to creditors. Each province enacts its own rules, but in Manitoba, an executor must publish a notice in two publications.
Executors are not responsible for the estate's taxes. However, the executor must apply to Canada Revenue Agency (CRA) for a clearance certificate. The clearance certificate confirms that the deceased paid all of his or her taxes. If taxes are still owed, they form part of the estate's debt and must be paid from the estate funds. If those funds have all been distributed, the executor will be personally liable to pay them.
CRA can take up to 6 to 8 months to issue a certificate. Executors often face beneficiaries who are eager to receive their share. This can be frustrating for most. We normally recommend that clients consult with the deceased's accountant to determine a reasonable amount to hold back until CRA issues the certificate. This way, executors can distribute an initial amount within a reasonable amount of time and distribute the balance once the certificate is received.
In the event an executor applies for probate, the government assesses probate fees on the value of the estate. In Manitoba, executors must sign an application for probate where they swear or affirm affidavits stating the assets' value as reported is accurate to the best of their knowledge. A reasonable guess is often sufficient. For example, we ask executors to estimate personal items' values as though we're selling them at a garage sale. The estimate must be reasonable. If an executor knowingly underestimates the estate's value, the executor could be found liable for the difference in probate fees and face prosecution for swearing a false affidavit. In practice, we see very little of this.
In Ontario, however, the practice has recently changed. Executor liability increased significantly. They must complete a return requiring extensive details such as the property roll numbers of real property, bank account numbers and vehicle serial numbers. The assets must also be assessed by a competent evaluation professional. For example, real property must be assessed by a certified property appraiser. The government also reserves the right to audit within four years. Presumably, the government will audit and assess penalties to executors who do not comply seriously with the new provisions.
While I haven't heard any rumours that Manitoba is considering a similar move, our province often follows Ontario's lead.
In Manitoba, under Part IV of the Family Property Act, a spouse or common-law partner may apply for an accounting and equalization payment within six months of the issue of probate letters. What does this mean? The surviving spouse can apply to the court within six months to request their share of the assets.
In Manitoba, under the Act, spouses and common-law partners have equal rights to their joint assets. If one of the spouses tries to "give away" their assets to someone else under the will, the surviving spouse can claim their portion of those assets.
For example, if a couple's assets are under the husband's name, the husband can try to pass on all of his assets to his children. However, his wife would then have a six-month window to apply to the court for an accounting and equalization. A judge would assess the estate's value and order an appropriate amount (representing half of the value of the joint assets) to be paid to the surviving spouse.
A court may find executors who distributed all of the assets before an application liable to the spouse.
As the baby boomer generation enters into retirement age, a large passing of wealth will occur over several decades. As the value of these estates increase, executor liability will also increase. From experience, I can confirm that many of our clients find this process very stressful and demanding. Executors must deal with variables such as family dynamics, age and personal health, not to mention grief, while attempting to perform several legal duties. Planning goes a long way in preparing everyone for a difficult transition.