May An Executor Pay His Legal Or Accounting Fees Directly From The Trust Property?

I asked this question to several very experienced lawyers. Guess What? They each had a very different answer. Let’s start by taking a look at the statute.

Section 23.1(1) of The Trustee Act¹provides that a trustee who is of the opinion that an expense would be properly incurred in carrying out the trust may, pay the expenses directly from the trust property. The legislation also provides that the Court may later disallow the payment if it is of the opinion that the expense was not properly incurred in carrying out the trust. A simple reading of the language of the statute suggests that the trustee has the discretion to take money out of the trust to pay expenses if s/he feels that the expense was properly incurred in carrying out of the trust and the beneficiary of the trusts can later ask the court to disallow that payment if the court feels it was not a proper expense.

The phrase “properly incurred in carrying out the trust” is key. Does that apply to a situation where there is a will challenge? How about when the trustee voluntarily commences an application to pass his/her accounts? Does it make a difference if the trustee is compelled to pass their accounts? Is there a difference if the beneficiaries allege that the executor was negligent or committed certain actions that warrant his/her removal as executor?

The first case I want to review is Coppel v. Coppel Estate.² This is a 2001 decision of the Ontario Superior Court of Justice. The executor commenced his application to pass his accounts. The beneficiary filed a notice of objection claiming that the executor was negligent. A statement of claim was issued by the beneficiaries suing the executor for negligence. The executor paid the interim invoices for legal fees out of estate monies for a total of $48,437.18. The bulk of the fees represented fees incurred in the negligence action. The beneficiaries objected. This is what the court said, “I think the source of the problem here is the misconception by Lancaster, Mix & Welch that they are the solicitors for the estate. Instead, they are the solicitors for the estate trustee; estates cannot hire lawyers. When this fact is recognized, it becomes easy to see the impropriety of paying the litigation accounts from estate funds in the manner that has occurred. It is at least as wrong as an estate trustee pre-taking compensation….. Accordingly, the defendant shall immediately reimburse the estate for all legal accounts paid from estate funds in respect of defending the within action.”³

Interestingly, the court in Coppel did not mention the s. 23.1 of the Trustee Act.⁴ Arguably, the principle of this case, if narrowly construed, seems to be that, in the first instance, legal fees incurred by a trustee in defence of a negligence action does not constitute an expense properly incurred in carrying out of the trust and the Trustee may not pay the legal fees, at the first instance, out of the trust funds while the allegation of negligence is a live issue.

In 2010 the Ontario Superior Court of Justice reviewed this issue again in the DeLorenzo v. Beresh case.⁵ In this case the executor was a lawyer. There were three proceedings before the court. The first two were applications by the executor involving the passing of his accounts and the last one was an application by two beneficiaries which sought to remove an executor. There were three issues before the court, but the one of concern in our analysis was whether in the absence of prior court approval, or the consent of all beneficiaries, is it appropriate for an estate trustee to use estate funds to pay legal fees incurred in connection with litigation between himself and the beneficiaries of the estate. The court opined that a lawyer is retained by an estate trustee in the first instance and not the estate. Accordingly, the estate trustee is personally liable to the lawyer for legal fees. When the lawyer passes his accounts the court will decide whether the lawyer has a right to be indemnified for the payment of those legal fees.⁶ In paragraph 24 Justice Lofchik shared his reasoning, “In a situation such as the present, the outcome of the litigation may very well have a bearing as to what costs each of the parties should be required to bear. It is therefore preferable that each of the parties bear their own costs until the litigation is completed. It would be inequitable to have the estate trustee pay his legal costs from the estate funds and require the applicants, whose funds are tied up in estate, to bear their own legal costs while the litigation is proceeding.”

Just as in Coppel, s. 23.1 of the Trustee was not mentioned. But, Justice Lofchik’s logic is consistent with the proposition that when the propriety of the conduct of the trustee is in question legal fees and accounting fees incurred by the trustee do not, in the first instance, constitute an expense properly incurred in carrying out the trust. So while the Coppel and DeLorenzo cases seem pretty clear on the point of who should be paying a trustee’s legal fees there was criticism of these cases by some academics and practitioners.

Albert H. Oosterhoff, Professor Emeritus, Faculty of Law, Western University and Counsel to WEL Partners wrote several very interesting articles on this topic.⁷ For anyone researching an issue they are a must read. Here are some key points raised by Professor Oosterhoff:

1. Expenses are incurred on behalf of the beneficial owners of the trust and it is not fair that the trustee should have to bear the costs even if only at the first instance;
2. Most trustees do not have the resources to pay the expenses themselves. Nor should they have to.
3. As codified by section 23.1 of the Trustee Act, the courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonably incurred.
4. Coppel was an uncontested motion for further directions by a beneficiary of an estate. Counsel was unable to find any authority on point! Clearly, the case was decided per incuriam,⁸ since there obviously was authority on point.
5. The Supreme Court of Canada decided in Goodman Estate v. Geffen that “… The courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonably incurred. Reasonable expenses include the costs of an action reasonably defended⁹. In Dallaway Sir Robert Megarry stated the Rule thus: In so far as such person [trustee] does not recover his costs from any other person, he is entitled to take his costs out of the fund held by him unless the court otherwise orders; and the court can otherwise order only on the ground that he has acted unreasonably, or in substance for his own benefit, rather than the benefit of the fund.
6. The principle was codified by section 23.1 of the Trustee Act.

It appears that I am not the only one who appreciates Professor Oosterhoff as Justice Victor Mitrow seems to have adopted the reasoning in Furtney Estate v. Furtney.¹⁰ In this 2014 case the conduct of the executor was not at issue. The deceased was involved in contentious divorce proceedings with his wife. After his demise there was an order charging the executor with the responsibility of ensuring that there were sufficient assets to comply with the orders. The executor asked that $100,000 be set aside from the estate for anticipated legal fees. I quote several relevant portions of Justice Mitrow’s decision,

“32     In a recent article, Professor Albert H. Oosterhoff discussed the right of an estate trustee to be indemnified by the estate in respect of expenses reasonably incurred by the estate trustee in the execution of his or her duties, including indemnity for legal fees incurred in relation to legal actions involving the estate.

33     Professor Oosterhoff explained the nature of the right of an estate to be indemnified as follows at pages 127-128 (footnote omitted): As the word itself suggests, the right to be indemnified implies that estate trustees should bear the costs and expenses themselves first and then seek reimbursement from the estate assets. But this presents a problem. Many trustees and estate trustees do not have the wherewithal to pay the costs out of their own pocket. Nor should they have to. Their office is a socially desirable one which at one time, at least in the case of trustees, was carried out without remuneration. Of course, a person who has been named to the office does not have to accept it. He may renounce. Most people would probably want to renounce once apprised of the fact that they must pay for all costs and expenses personally and can recover them only afterwards. On that basis few people would agree to take on the office. That is certainly not desirable, for the administration of estates is a socially necessary and desirable function that the law should promote and foster. And so it has long been the practice and the courts have long since recognized that trustees and estate trustees may pay the costs and expenses out of estate or trust assets. …

34     As Professor Oosterhoff points out (at page 125), the courts have always held that estate trustees (and also trustees) are entitled to be indemnified for their reasonable expenses.

35     The right to indemnity extends to legal fees. In Thompson Estate, Re, [1945] S.C.R. 343 (S.C.C.), Rand J. for the majority states at page 356:

… The general principle is undoubted 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. …

37     Further, in Geffen, supra, the Supreme Court of Canada clarified that trustees are entitled to recover legal costs reasonably incurred, stating as follows at para. 75:

75 The courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonably incurred. Reasonable expenses include the costs of an action reasonably defended: see Re Dingman (1915), 35 O.L.R. 51. In [page 391] Re Dallaway, [1982] 3 All E.R. 118, Sir Robert Megarry V.C. stated the rule thus at p. 122:

In so far as such person [trustee] does not recover his costs from any other person, he is entitled to take his costs out of the fund held by him unless the court otherwise orders; and the court can otherwise order only on the ground that he has acted unreasonably, or in substance for his own benefit, rather than for the benefit of the fund.

43     The respondent relies on DeLorenzo v. Beresh, [2010] O.J. No. 4367 (Ont. S.C.J.) and Coppel v. Coppel Estate, [2001] O.J. No. 5246 (Ont. S.C.J.). However, in Coppel, the court did not consider s. 23.1 of the Trustee Act (or its predecessor) in finding that it was impermissible for the estate trustee to pay litigation accounts from estate funds without the consent of the beneficiaries or a court order. This is specifically noted by Professor Oosterhoff (see page 136). The subsequent decision in DeLorenzo relied, in part, on Coppel.

44     I do accept the analysis by Professor Oosterhoff, coupled with the authorities cited earlier in these reasons, and also considering s. 23.1 of the Trustee Act, that an estate trustee does not require the consent of the beneficiaries or a court order prior to having litigation expenses, reasonably incurred by the estate trustee, paid from estate funds.”

So does the Furtney decision suggest that Coppel and DeLorenzo are no longer good law? Let’s take a look at Justice Price’s decision in Georganes v Bludd Estate¹¹ which was decided around the same time as Furtney. In this case one beneficiary sued her three brothers, who were executors of their father’s estate, and her niece. At issue was the ownership of a house. The niece, Melissa lost her father. She then sued her uncles, the remaining executors, over the fact that the uncles/executors paid their legal fees out of the estate. The allegation was that the uncles/executors were really protecting their own personal interests in the litigation.  This is what Justice Price had to say, “Where an estate trustee incurs legal fees to protect both his own personal interest in an asset and the estate’s interest, he has a duty to separate the legal costs incurred in each. Timothy and Brian Bludd failed to do this. It was improper for them to draw on estate funds to pay the legal costs they incurred in defending their personal interests in the home.”¹²

Conclusion

The title of this blog poses the question, May An Executor Pay His Legal Or Accounting Fees Directly From The Trust Property? The answer is that it depends of the facts of the case. As Professor Oosterhoff correctly points out, s. 23.1 of the Trustee Act and the courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonably incurred (emphasis added). The question is whether the legal fees have been reasonably incurred.

In Furtney it was clear that the litigation had nothing to do with the conduct of the estate trustee. No one sought his removal and no one had questions about his accounts. The estate trustee had to go to court on behalf of the estate. It was a continuation of litigation that predated the deceased’s demise and fell four squares into s. 23.1 because it was a necessary expense properly incurred in carrying out the trust. However, in Coppel there was an allegation that the estate trustee was negligent. It’s possible that the court viewed legal fees incurred for the estate trustee defending himself against allegations of negligence to be a personal expense and not an expense properly incurred, in the first instance, in carrying out the trust. The same can be said in DeLorenzo which involved an accounting. Since no one will know until the end of the litigation whether the legal fees incurred are only to protect the estate trustee’s interests (i.e. because the accounting was flawed and the estate trustee was negligent in the administration of the trust) or whether the fees were properly incurred (because he was not negligent and the trust was properly administered) it may make sense to wait until the matter is adjudicated prior to the legal fees being paid out of the estate. To Professor Oosterhoff, the problem with that position is that the innocent executor who does not have the funds to litigate will have no choice but to capitulate if he/she has to pay their own legal fees.

Perhaps the last word on the subject belongs to Canada’s Supreme Court in Goodman Estate v. Geffen¹³. I quote paragraphs 73-77 because I believe they best summarize the law.

“73      The final issue to be determined relates to the appropriate award of costs. The appellants claim full reimbursement out of the trust property, for their actual and reasonable costs (including legal fees) incurred in defending the respondents’ lawsuit.

74      Much of the respondents’ argument on the issue of costs was made on the assumption that the trust agreement would be set aside on the ground of undue influence. They submitted that in such circumstances the trustees should not be permitted to benefit in any way from their own misconduct. Since I have found no misconduct on the part of the trustees, nothing more need be said on this aspect. However, the respondents also urge the court not to allow the appellants to charge their costs against the trust property, even if they are successful, on the ground that they were acting for their own benefit. I cannot agree.

75      The courts have long held that trustees are entitled to be indemnified for all costs, including legal costs, which they have reasonably incurred. Reasonable expenses include the costs of an action reasonably defended: see Re Dingman (1915), 35 O.L.R. 51. In Re Dallaway, [1982] 1 W.L.R. 756, [1982] 3 All E.R. 118, Sir Robert Megarry V.C. stated the rule thus at p. 121:

In so far as such person [trustee] does not recover his costs from any other person, he is entitled to take his costs out of the fund held by him unless the court otherwise orders; and the court can otherwise order only on the ground that he has acted unreasonably, or in substance for his own benefit, rather than for the benefit of the fund.

76      There can be no question that the trustees in this action acted reasonably. They were initially accused of having perpetrated a fraud against the deceased, an allegation which has not won the approval of any of the courts that have heard the matter. They were, however, obliged to defend the action. The appellants were cleared at trial of any exercise of undue influence on the settlor and, although they lost in the Court of Appeal on the basis of a presumption of undue influence, they were ultimately vindicated in this court on the basis of the trial judge’s finding that no undue influence had in fact been exercised.

77      Nor can there be any serious question that the appellants in defending the action were acting, not for their own benefit, but for the good of the trust. For William Geffen, of course, defending the action promoted both his personal interest as well as that of his fellow beneficiaries. While we have not been referred to a case in which trustees seeking indemnification from a trust were also beneficiaries of the trust, I do not consider the co-existing interest of trustee and beneficiary a valid basis for denying costs. Similarly, the fact that the Geffen brothers were acting in the interests of their children, nephews and nieces does not, in my view, cast any doubt upon the propriety of their actions.”

Some observations on the Goodman Estate. The ultimate decision of the court related to reimbursement, not the trustee paying legal fees while the litigation was ongoing. When the SCC found that there was no undue influence by the executor and the legal fees were not incurred for the personal benefit of the executors they permitted costs to be paid out of the estate. My reading of the case suggested that the decision may very well have been different had the issue of undue influence been a live one. It must be acknowledged that the Trustee in question could always argue that the Trustee Act specifically contemplates that in the first instance. The Trustee could argue that s/he can pay the expense directly from the trust property as long as s/he is of the opinion that it’s an expense property incurred in carrying out the trust. If s/he is ultimately proved wrong the statute contemplates the court disallowing it at a later date.

So what’s the bottom line? If the facts specific to the case are that the legal fees incurred can reasonably be said to be a proper expense in carrying out the trust then it appears as if the court will reimburse the trustee from estate funds.