If not carefully planned for, the amount of compensation paid to the executor(s) for administering an estate or to the trustee(s) for administering any ongoing trusts (collectively referred to as the “trustees”) has the potential to become a contentious issue. In the scope of estate planning, compensation must be part of the conversation when discussing trustee appointments.
Where a will or trust agreement is silent regarding trustee compensation, we turn to the Trustee Act (Ontario) (the “Act”) and caselaw for guidance. Under the Act, trustees are entitled to receive “fair and reasonable” compensation for the “care, pains and troubles, and the time expended” in administering an estate or trust. The Act does not contain any rules as to the calculation and amount of compensation.
The courts have developed a “rule of thumb” tariff based on receipts and disbursements, which works out to approximately 5% of the total value of the estate or trust. This percentage may be departed from depending on several factors, including (i) the size of the estate or trust, (ii) the care and responsibility involved, (iii) the time occupied in performing the duties, (iv) the skill and ability displayed, and (v) the degree of success resulting from the administration.
As well, for ongoing trusts, an annual care and management fee of approximately 2/5 of 1% is typically allowed.
Where a will or trust agreement is silent regarding compensation, issues may arise where the trustees and the beneficiaries do not agree on what constitutes “reasonable” compensation in the circumstances. This increases the potential for disputes and even litigation. The amount that the trustees are claiming may not only be greater than what the beneficiaries expected, but may also greatly differ from what the testator or settlor intended.
The will or trust agreement can set out the method for calculating compensation. There are many factors to consider in determining the method and quantum of compensation.
A person may feel differently if he or she is appointing family members, friends, or professionals to be the trustees. Where close family members are appointed, including a spouse or partner or children, who may also be benefiting under the will or trust, a person may not feel it is necessary in the circumstances to compensate them for acting as a trustee.
The size and complexity of the estate or trust should also be considered. A look at what assets will form part of the estate or trust and what time and effort the trustee would need to expend to manage, dispose of and distribute the assets is needed. Managing and winding up an active business, for example, will take significantly more time, effort and care than managing and distributing several investment accounts.
It is also important to consider whether the beneficiaries have legal capacity to approve compensation. Where the beneficiaries of the estate or trust are minors (under the age of 18 in Ontario), the beneficiaries would not be able to approve any proposed compensation. The trustees would have to pass their accounts in court for their compensation to be approved, which is costly and time-consuming.
There are a number of ways of calculating compensation which can be explicitly provided for in the will or trust, including, for example, a percentage amount, a fixed amount or a professional hourly rate, or a combination. Where a person feels compensation should not be paid, this must be stated explicitly to be effective.
It can be challenging to determine what an appropriate fixed amount may be. Considering the amount a corporate trustee may charge may be helpful in providing a benchmark to calculate an appropriate quantum of compensation for individual trustees. When choosing the amount, it is worth noting that compensation is taxed as income in the recipient’s hands. The amount can also be indexed for inflation.
Acting as a trustee is hard work and comes with legal liability, and it’s important to recognize the efforts of the trustees. What the testator or settlor, the trustee and the beneficiaries think is “reasonable” may not be the same, which may cause unnecessary acrimony. Compensation must be part of the conversation in estate planning – a small omission today may cause a large problem in future.
— Marly Peikes