Who Pays the Legal Fees of the Executor in a Contested Passing of Accounts?

It is clear from the statute that expenses properly incurred in carrying out the trust should be paid directly from the trust property.¹

So what about the legal fees incurred by an executor in the passing of his/her accounts?

By way of background, we should explain what we mean by “passing of accounts”.  Essentially, the estate trustee is a fiduciary who has a duty to keep all the financial records of the estate. They have to keep the deceased’s money in a separate account and cannot intermingle it with the estate trustee’s own funds. All the receipts and documentation showing what money the estate received, where it is from as well as all the expenses of the estate and where they were spent, have to be provided to the court. However, much of the litigation surrounding the accounting done by the estate trustee does not involve allegations of dishonesty or mismanagement of estate assets. Often it’s a fight over the compensation claimed by the estate trustee.

So if the beneficiaries challenge the estate trustee’s accounts, who pays the legal fees of the lawyer advocating for the executor in a passing of accounts? Are such legal fees “…expenses properly incurred in carrying out the trust..”?  If the answer is yes, then are those legal fees to be paid directly from the trust property?  If the answer is no, then are those legal fees to be paid by the executor out of his/her personal funds?

So far the case law is divided about whether the estate has to pay these expenses or whether it’s the personal expense of the executor.

In Zucker v. Zucker Estate,² the court acknowledged that there is a divergence of views on this issue.  At paragraph 36 the judge said, in the context of legal fees of a contested passing of accounts,

“….I am mindful that some cases have held that Executors are entitled to full indemnity for costs and expenses properly incurred in the due administration of the Estate. See: Kanee Estate, Re, 1991 CarswellBC 647, 41 E.T.R. 263 (B.C. S.C.). Other cases such as Coppel v. Coppel Estate, 2001 CarswellOnt 4660 (Ont. S.C.J.) have held the opposite…”

Let’s review several cases which take these two different approaches.

In Kanee there was a seven day contested passing of accounts. The Master decided that the executor’s legal fees ought to be paid out of the estate. On appeal it was argued that the executor’s legal fees were incurred for the executors’ self interest and therefore not incurred in carrying out the trust. The judge disagreed and in paragraph 24 quoted previous case law for the following proposition:

Subject to considerations of reasonableness and honesty, the question of costs should be dealt with in the same way for remuneration as for the other aspects in the passing of accounts. Executors are entitled to be paid for their work. In Re Grimthorpe’s (Baron) Will Trusts, [1958] Ch. 615, [1958] 1 All E.R. 765, Danckwerts J. said at p. 769 [All E.R.]:

It is a commonplace that trustees, who take the onerous and sometimes dangerous duty of being trustees, are not expected to do any of the work at their own expense; they are entitled to be indemnified against the costs and expenses which they incur in the course of their office; that necessarily means that such costs and expenses are properly incurred and not improperly incurred. The general rule is quite plain; they are entitled to be paid back all that they had had to pay out.

Notwithstanding the Kanee decision, other courts have come to the opposite conclusion. Coppel v. Coppel Estate³ was a contested passing of accounts. The executors paid their legal fees from the estate funds. The court had this to say about that practice,

8      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.

But what about section 23.1 of the Trustee Act? Isn’t what’s important the question of whether the legal fees incurred by the executor in a contested passing of accounts whether such fees were incurred in carrying out the terms of the trust? On this point, the court in Toller James Montague Cranston (Estate of)⁴ at paragraph 98, had this to say,

In Furtney v. Furtney, 2014 ONSC 3744, at paras.  43 and 44 the court held that an estate trustee could pay litigation accounts reasonably incurred from estate funds, without the consent of the beneficiaries or a court order.  The objectors rely on the decisions of Delorenzo v.  Beresh, 2010 ONSC 5655 (CanLII) and Choppel v. Choppel Estate, [2001] O.J. No 5246 (S.C.J.) which held otherwise.  The court in Furtney (heard after the above two decisions) noted that neither the Coppel nor the Beresh decisions considered the language contained in section 23.1 of the Trustee Act.  At para 44 of Furtney the court held that the two decisions relied on by the objectors no longer had any application and that a court order or beneficiary consent was not required for an estate trustee to pay litigation expenses, reasonably incurred, from the estate accounts.  The court stated as follows:

I do accept the analysis by Professor Osterholf, coupled with the authorities cited earlier in these reasons, and also considering section 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.

Conclusion

There are cases where the courts support the proposition that a passing of accounts is part of the administration process and unless the fees are unreasonable it’s a proper expense of the estate.⁵  This line of reasoning follows the general principle that a trustee should be fully indemnified out of estate funds for expenses properly incurred.  For those wanting to challenge the executor’s entitlement the best route may be to demonstrate that on the facts specific to the case the quantum of legal fees was unreasonable and the step to take a formal passing of accounts in the circumstances was unnecessary or the result of the executor’s unreasonable accounts.