Removal of Estate Trustee for Failure to be a “Prudent Investor”
Originally published in our January 2017 Newsletter
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Mowry v Groome, 2016 ONSC 7850 (CanLII), http://canlii.ca/t/gw1z8
What constitutes failing to be a “prudent investor” as an estate trustee?
In the Ontario case of Mowry v. Groome[1] the Court removed an estate trustee for failing to exercise the care, skill, diligence, and judgment that a prudent investor would exercise in making investments. The Court also concluded that the estate trustee erroneously took $70,000.00 which he said was an inter vivos gift from the deceased.
“Prudent Investor” Rule
Pursuant to section 27(1) of the Trustee Act,[2] a trustee must, in investing trust property, exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
Under Section 27(6) of the Act, a trustee must diversify the investment of trust property to an extent that is appropriate to the requirements of the trust, and general economic and investment market conditions.
In this case, after the testator died, the estate trustee (in taking over the finances of the estate and transferring the funds into new accounts) filled out a form that stated his “account objectives” were to be 10% growth and 90% speculative and that his “risk tolerance” was to be 10% medium and 90% high. The Court noted that clearly those percentages were “unacceptable for an estate trustee”.[3]
The investment advisor gave evidence that the new investment accounts and stocks purchased by the estate trustee reflected these percentages. While the risk of each of the stocks was rated medium, the overall portfolio was high-risk as a result of over-concentration in the energy sector, or in other words because of a lack of diversification.
In December 2014 the market for energy stocks crashed and the portfolio lost much of its value resulting in a loss to the trust of $164,983.00 (the total assets of the estate at the time of death were worth $436, 289.00).
Furthermore, the estate trustee chose to invest in certain shares in another company on margin for $48,329.00. The Court noted that buying stocks “on margin” is an “unacceptable risk” for an estate trustee and did nothing to mitigate the risk inherent in the energy stock portfolio. Several weeks after he purchased them, the stocks were worthless and resulted in a loss to the estate of $96,150.00.
Notably, the estate trustee also made the “not particularly wise” choice to retain the deceased’s house which had very little equity in it, instead of selling it, so he could renovate it at the expense of the estate and rent it out for rental income.
The Court concluded that the estate trustee failed to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
“Gift” To Estate Trustee
The estate trustee alleged that sometime after the death of the testator he “found” a cheque that the deceased had left in the estate trustee’s office. The cheque was drawn by the deceased on his chequing account and payable to the estate trustee in the amount of $70,000.00. The reference line on the cheque bore the notation “early inheritance gift”. However, at no time between the date of the cheque and the date of death were there sufficient funds in the account to cover the cheque. On the date of death there was only $24,000.00 in the account. The estate trustee took money out of the investment account and deposited it into the chequing account so he could pay himself.
The Court found that there was no valid gift, as for a gift to be valid it must be perfected. The donor must have done everything necessary to “effect the transfer of the property”. The money said to be the subject of the gift simply didn’t exist. The money “taken out of the investment account to pay himself was not the money which the deceased intended to gift him with the original cheque (if there was in fact such an intention).”[4]
Conclusion
Ultimately the estate trustee was ordered to repay over $350,000 to the estate including repayment for investment losses (the Court ordered that one-half of the losses incurred be repaid), excess compensation, the money taken as a “gift”, partial reimbursement of legal fees paid to estate solicitors and for income tax penalties and interest. The estate trustee was also removed as estate trustee.
Justice Bale made the following observation regarding the estate trustee’s actions:
In my view, the actions of Mr. Mowry that caused the losses were not dishonest, just wrong-headed. After listening to Mr. Mowry talk for several days, my conclusion was that his problem was an inflated view of his business prowess, and a desire to be a hero, without regard for the risks involved, or the duties of an estate trustee.[5]
This case acts as a reminder to choose your estate trustee wisely and to make sure fiduciary duties are explained should you be advising the estate trustee.
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[1] 2016 ONSC 7850 (“Mowry”)
[2] RSO 1990, c T.23
[3] Mowry at para. 9
[4] Mowry at para. 24
[5] Mowry at para. 28
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Written by: Kimberly A. Whaley
Posted on: January 23, 2017
Categories: Commentary, WEL Newsletter
Originally published in our January 2017 Newsletter
View full Newsletter Archive
—-
Mowry v Groome, 2016 ONSC 7850 (CanLII), http://canlii.ca/t/gw1z8
What constitutes failing to be a “prudent investor” as an estate trustee?
In the Ontario case of Mowry v. Groome[1] the Court removed an estate trustee for failing to exercise the care, skill, diligence, and judgment that a prudent investor would exercise in making investments. The Court also concluded that the estate trustee erroneously took $70,000.00 which he said was an inter vivos gift from the deceased.
“Prudent Investor” Rule
Pursuant to section 27(1) of the Trustee Act,[2] a trustee must, in investing trust property, exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
Under Section 27(6) of the Act, a trustee must diversify the investment of trust property to an extent that is appropriate to the requirements of the trust, and general economic and investment market conditions.
In this case, after the testator died, the estate trustee (in taking over the finances of the estate and transferring the funds into new accounts) filled out a form that stated his “account objectives” were to be 10% growth and 90% speculative and that his “risk tolerance” was to be 10% medium and 90% high. The Court noted that clearly those percentages were “unacceptable for an estate trustee”.[3]
The investment advisor gave evidence that the new investment accounts and stocks purchased by the estate trustee reflected these percentages. While the risk of each of the stocks was rated medium, the overall portfolio was high-risk as a result of over-concentration in the energy sector, or in other words because of a lack of diversification.
In December 2014 the market for energy stocks crashed and the portfolio lost much of its value resulting in a loss to the trust of $164,983.00 (the total assets of the estate at the time of death were worth $436, 289.00).
Furthermore, the estate trustee chose to invest in certain shares in another company on margin for $48,329.00. The Court noted that buying stocks “on margin” is an “unacceptable risk” for an estate trustee and did nothing to mitigate the risk inherent in the energy stock portfolio. Several weeks after he purchased them, the stocks were worthless and resulted in a loss to the estate of $96,150.00.
Notably, the estate trustee also made the “not particularly wise” choice to retain the deceased’s house which had very little equity in it, instead of selling it, so he could renovate it at the expense of the estate and rent it out for rental income.
The Court concluded that the estate trustee failed to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.
“Gift” To Estate Trustee
The estate trustee alleged that sometime after the death of the testator he “found” a cheque that the deceased had left in the estate trustee’s office. The cheque was drawn by the deceased on his chequing account and payable to the estate trustee in the amount of $70,000.00. The reference line on the cheque bore the notation “early inheritance gift”. However, at no time between the date of the cheque and the date of death were there sufficient funds in the account to cover the cheque. On the date of death there was only $24,000.00 in the account. The estate trustee took money out of the investment account and deposited it into the chequing account so he could pay himself.
The Court found that there was no valid gift, as for a gift to be valid it must be perfected. The donor must have done everything necessary to “effect the transfer of the property”. The money said to be the subject of the gift simply didn’t exist. The money “taken out of the investment account to pay himself was not the money which the deceased intended to gift him with the original cheque (if there was in fact such an intention).”[4]
Conclusion
Ultimately the estate trustee was ordered to repay over $350,000 to the estate including repayment for investment losses (the Court ordered that one-half of the losses incurred be repaid), excess compensation, the money taken as a “gift”, partial reimbursement of legal fees paid to estate solicitors and for income tax penalties and interest. The estate trustee was also removed as estate trustee.
Justice Bale made the following observation regarding the estate trustee’s actions:
In my view, the actions of Mr. Mowry that caused the losses were not dishonest, just wrong-headed. After listening to Mr. Mowry talk for several days, my conclusion was that his problem was an inflated view of his business prowess, and a desire to be a hero, without regard for the risks involved, or the duties of an estate trustee.[5]
This case acts as a reminder to choose your estate trustee wisely and to make sure fiduciary duties are explained should you be advising the estate trustee.
—
[1] 2016 ONSC 7850 (“Mowry”)
[2] RSO 1990, c T.23
[3] Mowry at para. 9
[4] Mowry at para. 24
[5] Mowry at para. 28
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