1. Introduction
I was asked recently whether an estate trustee may distribute residuary personalty in specie. I thought that it might be useful to address the topic in a blog post.
2. Preliminary Matters
When a person dies and an estate trustee is appointed, whether with or without a will, one of her first tasks is to ascertain the deceased’s debts and pay them. To enable her to do that, she needs the complete title to the deceased’s assets, since some, or perhaps all of the assets may be necessary to pay the debts. Thus, the named beneficiaries under the deceased’s will, or the statutory beneficiaries if the deceased died intestate, do not have an equitable interest in the assets until the debts are paid and until the estate trustee assents[1] to the vesting in the beneficiaries.
These principles are not always well-understood, but the law is quite clear. The leading modern case is Commissioner of Stamp Duties (Queensland) v. Livingston.[2] It dealt with residuary real and personal property and held that the residuary beneficiary did not have an equitable interest in the estate assets until administration was complete, that is, the debts were paid.[3] Until administration is complete, the full unfragmented title[4] resides in the personal representative, to enable him to administer the estate properly.
In fact these principles were foreshadowed in earlier cases.[5] These cases all concerned residuary property. Logically, the principles should apply also to specific legacies. Although residuary property is primarily liable to pay debts, if it is exhausted, specific legacies will have to abate, for the estate trustee will have to turn to them and, ultimately, to specific devises to pay the debts in full.[6] Without deciding the point, later cases opined that these principles must apply also to specific gifts.[7] And more recent cases have decided that this is indeed so.[8]
The principles also apply to intestacies. Thus statutory beneficiaries do not have a property interest in the property of an intestate estate until the estate is fully administered and the debts are paid.[9]
Although a beneficiary does not have a property interest in the assets of the estate, he does have the right to require the estate trustee to administer the estate properly. That chose in action is transmissible on his death. Thus, if the beneficiary dies before the estate is fully administered, the chose in action against the estate trustee of that estate is transmitted to his own estate.[10]
Once the estate trustee has fully administered the estate and has assented to the vesting of the residuary estate in the beneficiaries, she holds the assets in trust for the residuary beneficiaries.[11] This means that if a beneficiary dies after administration is complete, he can be taxed on his property interest, his creditors can reach it, and he may have to account for it in matrimonial property proceedings..
3. In Specie Distribution
A testator may make specific bequests of personal property in favour of named beneficiaries. Indeed, he may also devise specific real property to named devisees. For the reasons mentioned in the previous section, the beneficiaries do not become entitled to these gifts until the estate trustee gives her assent, that is, she determines that the property comprised in those gifts is not required to pay debts. It is at that point that the property vests in the beneficiaries, although it is probable that the title then dates back to the date of the testator’s death. That is important, because the beneficiaries can then claim any intermediate income on the property. The estate trustee must then distribute the property in specie in accordance with the directions in the will.
The matter is different with residuary gifts. These are, by definition, gifts of property that has not been disposed of specifically. Thus, the residue in a testate estate consists of all the testator’s property after pecuniary, general, demonstrative, and specific gifts have been satisfied. The residue is typically identified by language such as: “the balance of my estate,” “the rest of my estate,” or “all the residue of my estate.”[12] When a testator does not make any specific gifts, but simply directs that all of her estate is to be divided among named persons, the entire estate is treated as residue.[13] The residue also includes all specific gifts that fail because of lapse, which is what happens when the beneficiary predeceases the testator; he has not provided for a gift over under a substitutionary gift; he has not otherwise indicated a contrary intention; and the statutory anti-lapse provision does not apply.[14] In the absence of a contrary intention, the residue also includes specific gifts that fail for any other reason.[15]
When a person dies intestate, the entire estate is the equivalent of residue. Consequently, the rules that apply to residue under a will apply equally to the entire intestate estate.
Thus in the case of residue under a will and of the entire property on intestacies there are no directions to distribute property in specie. Can the estate nonetheless distribute the property in specie if beneficiaries request it? Beneficiaries often request that personal effect be distributed to them because they have sentimental value.
The estate trustee may distribute in specie if the will confers a power to do. But if there is no such power, the case law makes it clear that the estate trustee may only distribute in specie if all the beneficiaries consent. If they do not, the estate trustee must convert the property into cash and distribute the proceeds. Thus, if a beneficiary disagrees and the estate trustee nonetheless distributes in specie, she is in breach of her duty.[16] If a beneficiary cannot consent because of minority or other lack of capacity, an in specie distribution is also impossible.
The issue was addressed in the Ontario case Re Bucovetsky.[17] The testator directed his executors to carry on his incorporated business. A motion was brought to determine a number of questions. One was whether the executors could distribute the shares in specie among the members of the family. Hope J. declined to give direction on the issue, since no scheme had been suggested for such distribution. However, he stated:[18]
. . . it would appear to be incontrovertible that failing a specific direction in the will, and failing the unanimity of all beneficiaries who might be entitled to share in the distribution, the executors would not be entitled to distribute in specie, but only after conversion.
Hope J. cited Re Harris[19] as authority. This was a decision of Middleton J., whose opinions continue to held in the highest regard. Harris also concerned the question of in specie distribution of corporate shares. Middleton J. held that the beneficiaries were entitled to take the shares in specie, but only if they all agreed. If they did not agree, the executors had to follow the provisions of the will,[20] He also said that the same applies to land that has been settled upon trust for sale with a power to sell, so that the executors cannot then transfer it in specie either, unless all the beneficiaries agree.[21] Middleton J. did, however, add the following caveat:[22]
… as I understand the law, where the objection is one of substance, and not put forward manifestly unreasonably and vexatiously, it is the duty of the trustee to protect the dissentients.
The Prince Edward Island Court of Appeal discussed and applied these principles in Re Gunn Estate.[23] The testator was survived by eight children. There was another child, James, but he had not been heard from for some time. The testator devised a 50-acre parcel of land to James, but provided that if his whereabouts were unknown at the time of the testator’s death and for one year after his death, the devise would lapse and fall into residue. James’s whereabouts remained unknown during the specified period. The 50 acres were part of a larger parcel that was part of the residue. The executors sought the advice of an accountant, who recommended that the larger parcel be transferred to the eight remaining children so that they could take advantage of the “farm rollover” provisions of the Income Tax Act,[24] and be in a position to claim significant capital gains tax exemptions.[25] The executors followed that advice, but Shirley, one of the children, disagreed and brought proceedings to have the matter determined.
The court considered all the cases considered above and held that, absent specific direction in the will, executors may not distribute real property that forms part of the residue in specie, unless all the beneficiaries agree. Accordingly, the court affirmed the order of the judge of first instance that the conveyance be set aside or rescinded.
In Re Gunn, the Court of Appeal did refer to one case, Re McCarthy,[26] in which a court of first instance held that it was within the discretion of an executor to transfer certain items of jewellery in specie rather than sell them and distribute the proceeds among the residuary beneficiaries. The court said that the test to be applied in determining whether the executor exercised her discretion properly was whether an honest and reasonable person would have concluded that this was the best course of action in the circumstances. The Court of Appeal in Gunn did not comment on whether McCarthy remained good law, although it appears that it did not approve it. However the Court of Appeal distinguished McCarthy on the ground that it concerned personal property, whereas Gunn concerned real property. McCarthy did not cite either Re Harris or Re Bucovetsky and the cases it did rely on did not address the specific issue of distribution in specie. So the authority of McCarthy is doubtful.
Re Gunn has been followed in more recent cases.[27]
4. Conclusion
It is apparent that the overwhelming view of the cases is that an estate trustee lacks discretion to distribute the residue of an estate in specie unless all the beneficiaries agree. However, the caveat expressed by Middleton J. needs to be kept in mind may perhaps be relied upon in appropriate cases.[28]
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[1] For a discussion of the law of assent, see Oosterhoff on Wills, 8th ed. by Albert H. Oosterhoff, C. David Freeman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters/Carswell, 2016), §14.4.2; Oosterhoff on Trusts: Text, Commentary and Materials, 8th ed. by Albert H. Oosterhoff, Robert Chambers, and Mitchell McInnes (Toronto: Thomson Reuters/Carswell, 2014), §2.6.
[2] [1965] A.C. 694, [1964] 3 All E.R. 692 (P.C.).
[3] Since the residuary beneficiary died soon after the testator and before his estate had been fully administered, this meant that she did not have a property interest in her husband’s estate and could, therefore, not be taxed on the property that the will directed to be paid or transferred to her.
[4] That is, the title is not fragmented into a legal interest and an equitable interest.
[5] See Sudeley v. Attorney-General, [1897] A.C. 11 (P.C.); Fitzgerald v. Minister of National Revenue, [1949] S.C.R. 453.
[6] For the law of abatement and the order in which testamentary gifts abate, see Oosterhoff on Wills, footnote 1, supra, §14.4.1.
[7] Re Hayes’ Wills Trusts, [1971] 1 W.L.R. 758 at 765, [1971] 2 All E.R. 341, per Ungoed-Thomas J.; Kavanagh v. Best, [1971] N.I. 89.
[8] Official Receiver in Bankruptcy v. Schultz (1990), 170 C.L.R. 306 (Austr. H.C.); Seah Teong Kang v. Seah Yong Chwan, 2015 SGCA 48 (Singapore C.A.), §§20-22.
[9] See Ogilvie-Five Roses Sales Ltd. v. Hawkins (1979), 9 Alta. L.R. (2d) 271, 4 E.T.R. 163 (T.D.); Re Farrell (1983), 44 Nfld. & P.E.I.R. 251 (Nfld. T.D.); Mugford v. Mugford (1992), 103 Nfld. & P.E.I.R. 136 (Nfld. C.A.); Mulligan v. Hughes (2007), 31 E.T.R. (3d) 157 (Sask. Q.B.).
[10] See Re Leigh’s Will Trusts, [1970] Ch. 277, [1969] 3 All E.R. 432.
[11] See, e.g., Attenborough v. Solomon [1912] UKHL 4, [1913] A.C. (H.L.).
[12] Oosterhoff on Wills, footnote 1, supra, §14.3.5.
[13] Hicks v, Snider (1879), 44 U.C.Q.B. 486.
[14] See Succession Law Reform Act, R.S.O. 1990, c. S.26, s. 31.
[15] Succession Law Reform Act, ibid., s. 23; Oosterhoff on Wills, footnote 1, supra, §15.2.
[16] Staub v. Staub Estate (2003), 226 D.L.R. (4th) 327 (Alta. C.A.).
[17] 1941 CarswellOnt 216, [1942] O.W.N. 618, [1943] 1 D.L.R. 208 (H.C.).
[18] Ibid, para. 11.
[19] 1915 CarswellOnt 100, 33 O.L.R. 83, 22 D.L.R. 381 (H.C.).
[20] Ibid., paras. 9 and 10.
[21] Ibid., para. 9.
[22] Ibid., para. 14.
[23] 2010 PECA 13.
[24] R.S.C. 1985, c. 1 (5th Supp.), s. 70(9), (9.2), (10).
[25] Estate trustees do have otherwise have the right to make such elections. See Re Schippmann Estate, 2001 BCCA 195, 38 E.T.R. (2d) 90, additional reasons at 2001 BCCA 387, 38 E.T.R. (2d) 96. However, estate trustees cannot make such elections over the objections of one or more beneficiaries
[26] (1981), 40 Nfld. & P.E.I.R. 303, [1981] P.E.I.J. No. 3, 10 E.T.R. 261 (P.E.I.S.C.).
[27] Gottselig Estate v. Gottselig Estate, 2014 SKQB 20; Podulsky Estate v. Podulsky Estate, 2015 ABQB 509.
[28] See further Widdifield on Executors and Trustees, 6th ed. by Carmen S. Thériault (Toronto: Thomson Reuters/Carswell, 2002, loose leaf)å, §5.1.6. To the same effect, see J.A. Brulé, “Specie Distribution in Estates” (1976-77), 3 E. & T.Q. And see Oosterhoff on Wills, 8th ed. by Albert H. Oosterhoff, C. David Freedman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters/Carswell, 2016) §2.11.
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Written by: Albert Oosterhoff
Posted on: December 20, 2016
Categories: Commentary
1. Introduction
I was asked recently whether an estate trustee may distribute residuary personalty in specie. I thought that it might be useful to address the topic in a blog post.
2. Preliminary Matters
When a person dies and an estate trustee is appointed, whether with or without a will, one of her first tasks is to ascertain the deceased’s debts and pay them. To enable her to do that, she needs the complete title to the deceased’s assets, since some, or perhaps all of the assets may be necessary to pay the debts. Thus, the named beneficiaries under the deceased’s will, or the statutory beneficiaries if the deceased died intestate, do not have an equitable interest in the assets until the debts are paid and until the estate trustee assents[1] to the vesting in the beneficiaries.
These principles are not always well-understood, but the law is quite clear. The leading modern case is Commissioner of Stamp Duties (Queensland) v. Livingston.[2] It dealt with residuary real and personal property and held that the residuary beneficiary did not have an equitable interest in the estate assets until administration was complete, that is, the debts were paid.[3] Until administration is complete, the full unfragmented title[4] resides in the personal representative, to enable him to administer the estate properly.
In fact these principles were foreshadowed in earlier cases.[5] These cases all concerned residuary property. Logically, the principles should apply also to specific legacies. Although residuary property is primarily liable to pay debts, if it is exhausted, specific legacies will have to abate, for the estate trustee will have to turn to them and, ultimately, to specific devises to pay the debts in full.[6] Without deciding the point, later cases opined that these principles must apply also to specific gifts.[7] And more recent cases have decided that this is indeed so.[8]
The principles also apply to intestacies. Thus statutory beneficiaries do not have a property interest in the property of an intestate estate until the estate is fully administered and the debts are paid.[9]
Although a beneficiary does not have a property interest in the assets of the estate, he does have the right to require the estate trustee to administer the estate properly. That chose in action is transmissible on his death. Thus, if the beneficiary dies before the estate is fully administered, the chose in action against the estate trustee of that estate is transmitted to his own estate.[10]
Once the estate trustee has fully administered the estate and has assented to the vesting of the residuary estate in the beneficiaries, she holds the assets in trust for the residuary beneficiaries.[11] This means that if a beneficiary dies after administration is complete, he can be taxed on his property interest, his creditors can reach it, and he may have to account for it in matrimonial property proceedings..
3. In Specie Distribution
A testator may make specific bequests of personal property in favour of named beneficiaries. Indeed, he may also devise specific real property to named devisees. For the reasons mentioned in the previous section, the beneficiaries do not become entitled to these gifts until the estate trustee gives her assent, that is, she determines that the property comprised in those gifts is not required to pay debts. It is at that point that the property vests in the beneficiaries, although it is probable that the title then dates back to the date of the testator’s death. That is important, because the beneficiaries can then claim any intermediate income on the property. The estate trustee must then distribute the property in specie in accordance with the directions in the will.
The matter is different with residuary gifts. These are, by definition, gifts of property that has not been disposed of specifically. Thus, the residue in a testate estate consists of all the testator’s property after pecuniary, general, demonstrative, and specific gifts have been satisfied. The residue is typically identified by language such as: “the balance of my estate,” “the rest of my estate,” or “all the residue of my estate.”[12] When a testator does not make any specific gifts, but simply directs that all of her estate is to be divided among named persons, the entire estate is treated as residue.[13] The residue also includes all specific gifts that fail because of lapse, which is what happens when the beneficiary predeceases the testator; he has not provided for a gift over under a substitutionary gift; he has not otherwise indicated a contrary intention; and the statutory anti-lapse provision does not apply.[14] In the absence of a contrary intention, the residue also includes specific gifts that fail for any other reason.[15]
When a person dies intestate, the entire estate is the equivalent of residue. Consequently, the rules that apply to residue under a will apply equally to the entire intestate estate.
Thus in the case of residue under a will and of the entire property on intestacies there are no directions to distribute property in specie. Can the estate nonetheless distribute the property in specie if beneficiaries request it? Beneficiaries often request that personal effect be distributed to them because they have sentimental value.
The estate trustee may distribute in specie if the will confers a power to do. But if there is no such power, the case law makes it clear that the estate trustee may only distribute in specie if all the beneficiaries consent. If they do not, the estate trustee must convert the property into cash and distribute the proceeds. Thus, if a beneficiary disagrees and the estate trustee nonetheless distributes in specie, she is in breach of her duty.[16] If a beneficiary cannot consent because of minority or other lack of capacity, an in specie distribution is also impossible.
The issue was addressed in the Ontario case Re Bucovetsky.[17] The testator directed his executors to carry on his incorporated business. A motion was brought to determine a number of questions. One was whether the executors could distribute the shares in specie among the members of the family. Hope J. declined to give direction on the issue, since no scheme had been suggested for such distribution. However, he stated:[18]
. . . it would appear to be incontrovertible that failing a specific direction in the will, and failing the unanimity of all beneficiaries who might be entitled to share in the distribution, the executors would not be entitled to distribute in specie, but only after conversion.
Hope J. cited Re Harris[19] as authority. This was a decision of Middleton J., whose opinions continue to held in the highest regard. Harris also concerned the question of in specie distribution of corporate shares. Middleton J. held that the beneficiaries were entitled to take the shares in specie, but only if they all agreed. If they did not agree, the executors had to follow the provisions of the will,[20] He also said that the same applies to land that has been settled upon trust for sale with a power to sell, so that the executors cannot then transfer it in specie either, unless all the beneficiaries agree.[21] Middleton J. did, however, add the following caveat:[22]
… as I understand the law, where the objection is one of substance, and not put forward manifestly unreasonably and vexatiously, it is the duty of the trustee to protect the dissentients.
The Prince Edward Island Court of Appeal discussed and applied these principles in Re Gunn Estate.[23] The testator was survived by eight children. There was another child, James, but he had not been heard from for some time. The testator devised a 50-acre parcel of land to James, but provided that if his whereabouts were unknown at the time of the testator’s death and for one year after his death, the devise would lapse and fall into residue. James’s whereabouts remained unknown during the specified period. The 50 acres were part of a larger parcel that was part of the residue. The executors sought the advice of an accountant, who recommended that the larger parcel be transferred to the eight remaining children so that they could take advantage of the “farm rollover” provisions of the Income Tax Act,[24] and be in a position to claim significant capital gains tax exemptions.[25] The executors followed that advice, but Shirley, one of the children, disagreed and brought proceedings to have the matter determined.
The court considered all the cases considered above and held that, absent specific direction in the will, executors may not distribute real property that forms part of the residue in specie, unless all the beneficiaries agree. Accordingly, the court affirmed the order of the judge of first instance that the conveyance be set aside or rescinded.
In Re Gunn, the Court of Appeal did refer to one case, Re McCarthy,[26] in which a court of first instance held that it was within the discretion of an executor to transfer certain items of jewellery in specie rather than sell them and distribute the proceeds among the residuary beneficiaries. The court said that the test to be applied in determining whether the executor exercised her discretion properly was whether an honest and reasonable person would have concluded that this was the best course of action in the circumstances. The Court of Appeal in Gunn did not comment on whether McCarthy remained good law, although it appears that it did not approve it. However the Court of Appeal distinguished McCarthy on the ground that it concerned personal property, whereas Gunn concerned real property. McCarthy did not cite either Re Harris or Re Bucovetsky and the cases it did rely on did not address the specific issue of distribution in specie. So the authority of McCarthy is doubtful.
Re Gunn has been followed in more recent cases.[27]
4. Conclusion
It is apparent that the overwhelming view of the cases is that an estate trustee lacks discretion to distribute the residue of an estate in specie unless all the beneficiaries agree. However, the caveat expressed by Middleton J. needs to be kept in mind may perhaps be relied upon in appropriate cases.[28]
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[1] For a discussion of the law of assent, see Oosterhoff on Wills, 8th ed. by Albert H. Oosterhoff, C. David Freeman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters/Carswell, 2016), §14.4.2; Oosterhoff on Trusts: Text, Commentary and Materials, 8th ed. by Albert H. Oosterhoff, Robert Chambers, and Mitchell McInnes (Toronto: Thomson Reuters/Carswell, 2014), §2.6.
[2] [1965] A.C. 694, [1964] 3 All E.R. 692 (P.C.).
[3] Since the residuary beneficiary died soon after the testator and before his estate had been fully administered, this meant that she did not have a property interest in her husband’s estate and could, therefore, not be taxed on the property that the will directed to be paid or transferred to her.
[4] That is, the title is not fragmented into a legal interest and an equitable interest.
[5] See Sudeley v. Attorney-General, [1897] A.C. 11 (P.C.); Fitzgerald v. Minister of National Revenue, [1949] S.C.R. 453.
[6] For the law of abatement and the order in which testamentary gifts abate, see Oosterhoff on Wills, footnote 1, supra, §14.4.1.
[7] Re Hayes’ Wills Trusts, [1971] 1 W.L.R. 758 at 765, [1971] 2 All E.R. 341, per Ungoed-Thomas J.; Kavanagh v. Best, [1971] N.I. 89.
[8] Official Receiver in Bankruptcy v. Schultz (1990), 170 C.L.R. 306 (Austr. H.C.); Seah Teong Kang v. Seah Yong Chwan, 2015 SGCA 48 (Singapore C.A.), §§20-22.
[9] See Ogilvie-Five Roses Sales Ltd. v. Hawkins (1979), 9 Alta. L.R. (2d) 271, 4 E.T.R. 163 (T.D.); Re Farrell (1983), 44 Nfld. & P.E.I.R. 251 (Nfld. T.D.); Mugford v. Mugford (1992), 103 Nfld. & P.E.I.R. 136 (Nfld. C.A.); Mulligan v. Hughes (2007), 31 E.T.R. (3d) 157 (Sask. Q.B.).
[10] See Re Leigh’s Will Trusts, [1970] Ch. 277, [1969] 3 All E.R. 432.
[11] See, e.g., Attenborough v. Solomon [1912] UKHL 4, [1913] A.C. (H.L.).
[12] Oosterhoff on Wills, footnote 1, supra, §14.3.5.
[13] Hicks v, Snider (1879), 44 U.C.Q.B. 486.
[14] See Succession Law Reform Act, R.S.O. 1990, c. S.26, s. 31.
[15] Succession Law Reform Act, ibid., s. 23; Oosterhoff on Wills, footnote 1, supra, §15.2.
[16] Staub v. Staub Estate (2003), 226 D.L.R. (4th) 327 (Alta. C.A.).
[17] 1941 CarswellOnt 216, [1942] O.W.N. 618, [1943] 1 D.L.R. 208 (H.C.).
[18] Ibid, para. 11.
[19] 1915 CarswellOnt 100, 33 O.L.R. 83, 22 D.L.R. 381 (H.C.).
[20] Ibid., paras. 9 and 10.
[21] Ibid., para. 9.
[22] Ibid., para. 14.
[23] 2010 PECA 13.
[24] R.S.C. 1985, c. 1 (5th Supp.), s. 70(9), (9.2), (10).
[25] Estate trustees do have otherwise have the right to make such elections. See Re Schippmann Estate, 2001 BCCA 195, 38 E.T.R. (2d) 90, additional reasons at 2001 BCCA 387, 38 E.T.R. (2d) 96. However, estate trustees cannot make such elections over the objections of one or more beneficiaries
[26] (1981), 40 Nfld. & P.E.I.R. 303, [1981] P.E.I.J. No. 3, 10 E.T.R. 261 (P.E.I.S.C.).
[27] Gottselig Estate v. Gottselig Estate, 2014 SKQB 20; Podulsky Estate v. Podulsky Estate, 2015 ABQB 509.
[28] See further Widdifield on Executors and Trustees, 6th ed. by Carmen S. Thériault (Toronto: Thomson Reuters/Carswell, 2002, loose leaf)å, §5.1.6. To the same effect, see J.A. Brulé, “Specie Distribution in Estates” (1976-77), 3 E. & T.Q. And see Oosterhoff on Wills, 8th ed. by Albert H. Oosterhoff, C. David Freedman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters/Carswell, 2016) §2.11.
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