Law Times

Law Times • OcTOber 24, 2016 Page 9 www.lawtimesnews.com Trustees to absorb their legal costs after battle Don't take indemnification for granted, warns lawyer BY MICHAEL MCKIERNAN For Law Times A court of appeal de- cision that ordered two estate trustees to personally bear their own legal costs should serve as a warning to trustees that they cannot take indemnification by the estate for granted, according to a Toronto litigator. The unanimous three-judge panel in Brown v. Rigsby up- held a lower court judge's deci- sion that ordered both sides to absorb their costs after a years- long dispute among siblings over their mother's estate, con- cluding the trustees should not have their costs covered by the estate because they acted unrea- sonably and in their own self- interest during the litigation. "This is a shot across the bow from the court of appeal," says David Morgan Smith, a partner with trusts and estates boutique Hull & Hull LLP. "They're sending a message to the estates bar and to trust- ees that the conduct of trust- ees is going to be scrutinized, and that it will be considered when it comes to costs. I think it will cause everyone who does litigation to pause and consider whether the conduct of the par- ties is appropriate." "There is still a misconcep- tion that the estate will cover everybody's costs," adds Charles Ticker, a Markham, Ont. estate litigator. Typically, he says a well- behaved trustee will get his or her costs covered, "but there is a caveat. "They are fiduciaries, which makes them subject to a higher standard of care," Ticker says. "If you fall below that standard, and I think in this case they fell well below, then the court is going to penalize you. Trustees' conduct is always subject to court review, so anyone who undertakes that role has to educate themselves about the duties and responsi- bilities they have." Three of Blanche Shackleton's children launched the Rigsby case in 2008 against their broth- er and sister, who were granted power of attorney for their mother's affairs during the later years of her life, and then acted as trustees of her estate. According to Ontario Superior Court Jus- tice Lynne Leitch's March 2015 decision, they were concerned that the value of their mother's estate appeared to have dwindled from around $1 million when she made her will in 1992 to vir- tually nothing by the time she died in 2007, and initially applied to have the trustees removed and to pass their accounts. The litigation eventually set- tled before trial in 2014, but the parties went to court to settle the matter of costs, with the trustees claiming $75,000 costs and the challenging siblings seeking around $80,000. After consid- ering the "loser pays" approach to estate litigation costs, Leitch found success was divided, and ordered each side to bear its own costs. The trustees appealed that decision, arguing that the judge was wrong to deny them their costs from the estate, since they were duty bound to respond to their siblings' action. Writing for the court, Ap- peal Court Justice Sarah Pepall set out the general rules govern- ing trustees' indemnity for legal costs: • an estate trustee is entitled to indemnification from the estate for all reasonably incurred legal costs; • if an estate trustee acts un- reasonably or in his or her own self-interest, he or she is not entitled to indem- nification from the estate; and • if an estate trustee recovers a portion of his or her costs from another person or party, he or she is entitled to indemnification from the estate for the remaining reasonably incurred costs. Lou-Anne Farrell, who acted for the three challenging siblings, says her clients were pleased with the court's "common sense" ap- proach to the case. "The right of indemnification shouldn't be absolute, because that basically gives trustees a free pass on litigation, allowing them to act unreasonably without any way to sanction them," says Far- rell, who is counsel to London, Ont. law firm FP Law. "The prin- ciple is still there that, in most cases, trustees will be entitled to reimbursement for costs." After finding Leitch had failed to analyze whether the trustees' conduct "rose to the level of unreasonableness or self-interest that would justify denying them indemnification," the appeal court performed the assessment instead: "I would deny the appellants indemnification from the estate on the grounds of both unrea- sonableness and self-interest. In large measure, the parties' dis- pute centred on a need for the appellants to make disclosure. Their failure to be forthcom- ing resulted in elevated costs for all parties. Although prior cost awards addressed some of the appellants' conduct, as illustrat- ed by the motion judge's find- ings, the appellants' behaviour is fairly characterized as unrea- sonable," Pepall wrote. "Moreover, the conduct un- der scrutiny, and the appellants' failure to exhibit timely can- dour, related for the most part to conduct that pointed to an aggrandizement of their per- sonal holdings at the expense of FOCUS David Morgan Smith says a recent deci- sion awarding costs against trustees shows their conduct will be scrutinized. Foreign Beneficiaries A number of tax-related considerations arise during an estate administration which has foreign beneficiaries, including: • Withholding tax on income paid to a non-resident beneficiary. • Obtaining a clearance certificate under s. 116 of the Income Tax Act (ITA) in respect of certain capital distribu- tions. • Loss of a tax-free rollover on a distribution of certain capital property by a trust to a non-resident beneficiary. • If an estate distribution involves an interest in a Canadian tax-resident corporation, beneficiaries may be exposed to double taxation on the corporation's earnings due to a mismatch of foreign tax credits and be subject to certain filing requirements. U.S. resident beneficiaries may also be exposed to the U.S. controlled foreign corpo- ration and passive foreign investment company rules. If a corporation is a Canadian-controlled private corporation, it may lose its status upon a change of control. • Multiple taxation on death: tax may be levied on the estate (or the deceased) or, less commonly, on the beneficiary, on various bases such as citizenship, domi- cile, residency or the location of inherited assets. Certain countries impose an inheritance tax where the beneficiary pays tax based on the value of the inheritance received. Most Ontario wills have debts and death taxes clauses which provide that all taxes arising on death are paid by the estate with the result that all beneficiaries receive the same amount after all taxes, notwithstanding local taxa- tion. Inheritance tax rates are high in certain jurisdictions (such as France), and can cause unintended results. Non-Resident Legal Representatives The following sets out a few issues that arise when an estate has foreign legal representatives: • Legal representatives who are not Ontario or Commonwealth residents are required to obtain an ad- ministration bond in order to receive a grant of probate, generally set at twice the value of the estate assets in Ontario. In certain cases, the court may dispense with the bond, or reduce its amount. • If a grant of probate has already been obtained in another jurisdiction, it will often be necessary to have the grant resealed by an Ontario court or to apply for an an- cillary grant in order for the legal representative to have authority to administer the Ontario assets. • If the non-resident executor is a U.S. person, and if the deceased held investment assets with Canadian financial institutions, there may also be limitations on the U.S. person providing instruction on the estate's accounts due to the impact of U.S. securities regulation governing securities dealers. A Canadian investment advisor may be unable to take instructions from a non-resident legal representative. • It is important to consider tax reporting, disclosure and compliance requirements. Generally, legal represen- tatives are responsible for paying taxes from the estate and related compliance if they are proper enforceable debts of the estate. The increasing number of bilateral treaties between jurisdictions, as well as multijurisdic- tional agreements, have created enforceable information exchange obligations to better fight tax evasion and improve tax compliance, as well as in some cases assist in the collection of taxes (e.g., the Canada – United States Tax Convention). • Consideration should also be given to the tax residence of the estate and any trusts under it so that tax and estate administration matters can be proper- ly addressed. The residence of a trust for Canadian income tax purposes is where the central management and control of the trust actually takes place, the deter- mination of which involves a factual inquiry. In addi- tion, the ITA prevents the avoidance of Canadian taxes by certain non-resident trusts with particular Canadian connections by deeming them to be Canadian resident for certain purposes. Tax residency will determine what property and income are subject to Canadian tax, as well as any related reporting and withholding obliga- tions. With increasing globalization comes added com- plexity and the need to successfully navigate these challenges, including obtaining appropriate profession- al advice in all relevant jurisdictions. Margaret R. O'Sullivan, Principal, O'Sullivan Estate Lawyers Special Issues Arising When an Estate has Foreign Beneficiaries or Legal Representatives Sponsored by See Case, page 12

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