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Estate trustees refuse to make an interim distribution; Court refuses to interfere with their discretion

If estate trustees are burdened by strict fiduciary duties and exposed to claims by beneficiaries, they can take some comfort in the message in McGovern Estate v. McGovern that they have a reasonably wide discretion to administer the estate defensively.

In McGovern, the estate trustees refused to make an interim distribution until their accounts were passed. The beneficiary who demanded the distribution had interfered with the proper administration of the estate and had alleged misconduct and negligence against the estate trustees. The court found that the estate trustees acted in good faith and refused to interfere with their decision even though, in the court’s opinion, at least a small interim distribution was warranted.

Mrs. McGovern died leaving an adult son and daughter as equal beneficiaries of her estate. The will named the daughter and another woman as estate trustees. The son was a ne’er-do-well, and various terms of the Will were designed to keep him from undermining the administration of the estate – with limited success, as it turned out.

The assets of the estate included the deceased’s house. The will directed the estate trustees to sell the house, but the son, who had moved into the house temporarily before Mrs. McGovern died, refused to move out for more than two years after her death. Although he expressed an interest in buying the house, but did not take any steps to properly respond to the estate trustees’ offers to sell it to him. The estate trustees finally secured vacant possession of the house and sold it to a third party buyer.

Just six days after the house was sold, the son demanded an interim distribution to fund his purchase of a new home. The estate trustees offered to make the interim distribution if he approved their accounts, which they quickly prepared. The son did not approve the accounts.

The estate trustees promptly applied to court to pass their accounts. The son filed objections. He also moved for an order that the estate trustees make an interim distribution.

The court reviewed the principles applicable to the exercise of a trustee’s discretion and the court’s role in overseeing the administration of estates. Unless restricted by the terms of a will, trustees have the uncontrolled discretion to make decisions in the administration of an estate. The court will only intervene where: 1) there is a mala fide (i.e. bad faith) exercise of the discretion; 2) the estate trustees fail to exercise the discretion at all; 3) the estate trustees are deadlocked and cannot make a decision; or 4) the estate trustees behaved unreasonably or breached their fiduciary duty of good faith and fairness to the beneficiaries.

In this case, the court found that the estate trustees had in fact exercised their discretion by making an informed decision not to make an interim distribution until their accounts were passed. The judge concluded that this was a reasonable decision for the estate trustees to make given the son’s allegations of negligence and misconduct and his tendency to interfere in the administration of the estate and cause the estate trustees additional legal costs.

The court interestingly noted that the son did not show any evidence that he would suffer prejudice or financial hardship. The court did not explain how evidence of a beneficiary’s prejudice or financial hardship should factor into the exercise of discretion, but the inference is that estate trustees should give more weight to a decision to make a distribution to a beneficiary in need.

The judge noted that he would have exercised his discretion differently than the estate trustees did and ordered at least a small interim distribution. However, in a comment that reinforces the deference due to estate trustees, the judge said that he saw no reason to substitute his discretion for the estate trustees’ own.

The court was careful to distinguish Brighter v. Brighter Estate, [1998] O.J. No. 3144, in which Justice Sheard, said, in memorably colourful language, that an estate trustee, “has no right to hold any portion of the distributable assets hostage in order to extort from a beneficiary an approval or release of the executor’s performance of duties as trustee…” In Brighter, the estate trustee had made distributions to all of the beneficiaries except for the one beneficiary who would not grant a release and had not taken steps to pass accounts promptly. Unlike in McGovern, this conduct was properly described as unfair and extortive. Although the Brighter case did not refer explicitly to the rule that the court will only interfere with an estate trustee’s exercise of discretion when made in bad faith, the court in McGovern found that this rule must underlie the decision in Brighter.

Justice R.J. Smith has given estate trustees some very helpful direction about how and when it is appropriate to exercise the discretion not to make an interim distribution:

An Estate Trustee is in a fiduciary position and must act in good faith and fairly to all beneficiaries. An Estate Trustee’s request for a release and a waiver of passing of accounts from all beneficiaries before making a final distribution of an estate is a reasonable step, provided the beneficiaries are advised that, if any beneficiary does not agree, the Estate Trustees will ask a court to review and approve their accounts and that the beneficiaries will have an opportunity to have their objections decided by a judge. This step may incur additional costs to the Estate and to the individuals involved but I find this is a reasonable course of action for the Trustees to follow when there is any objection by a beneficiary or a threatened legal action for negligence. The Rules of Practice permit either an executor or a beneficiary to have the Trustees’ proceed with a passing of accounts where the Trustees actions and claim for compensation will be reviewed by a judge. A passing of accounts is generally a summary proceeding which does not unreasonably delay the administration of the Estate, and allows for any objections to be considered and decided by the Court. I find that the Estate Trustees should not be prejudiced by proceeding to pass their accounts, as provided in the Rules, when there is an objection by a beneficiary and allegations of negligence.

This case should also act as a caution to beneficiaries. A beneficiary may either demand a distribution or make allegations of estate trustee misconduct, but she should be cautious about doing both at the same time. The beneficiary in McGovern was ordered to pay $4,500 in costs personally for trying to do this.

Estate trustees are burdened with many obligations. They must gather in the assets of the estate, sell them, pay the estate’s debts, and distribute the estate to the beneficiaries. As fiduciaries, they are accountable to the beneficiaries for carrying out these obligations reasonably, loyally, honestly, and without improper delegation to others. However, this case demonstrates that estate trustees who act diligently and in good faith will enjoy considerable latitude in administering the estate defensively.


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