1. Introduction
Cases in which the compensation of trustees is contested are not as common as formerly because the law has been well-settled for some time. However, when parties do not adhere to the legal principles, the matter will usually come before the courts. It appears that this happened in Fitzhenry v Stevens,[1] although there were no mala fides involved. Accordingly, it is appropriate to consider this issue again.
2. Facts
The settlor, Robert Fitzhenry (the “Settlor”), established the Fitzhenry (1994) Family Trust (the “Trust”) in 2008, to distribute his wealth among his family. Ultimately it was valued at $35 million. The Settlor was one of the trustees. Initially, a number of professionals – lawyers and accountants – also served as trustees but over time they resigned. In 2008 the Settlor invited Linda Stevens (the “Ms. Stevens”) to become a trustee. She was a very dear friend of the Settlor and his wife, and a highly qualified trustee. She negotiated compensation at $1,000 per day initially and that was later increased to $200 per hour. She had been paid approximately $250,000 in compensation by the time of these proceedings. Her co-trustees agreed to the periodic amounts she claimed over the years until 2019.
The Settlor died in 2019. Ms. Stevens failed to appoint another trustee in his place, as required by the Trust and remained the sole trustee. She resigned in 2022, at which time she claimed further compensation of approximately $266,600 for the years 2019 through 2022. She also claimed approximately $50,000 in addition for care and management of the trust property from 2013 until she retired. Ms. Stevens did not claim entitlement to these additional funds under any agreement.
The beneficiaries then brought this application for orders declaring that Ms Stevens was not entitled to compensation beyond what she had already invoiced and received. They argued that the trustees ignored their right to notice and to approve Ms Stevens interim compensation. They did not demand that Ms. Stevens return improperly taken fees but were of opinion that the compensation to which she had agreed, and which was paid to her was more than fair and reasonable compensation.
3. Analysis and Judgment
Justice Myers began his analysis by referring to section 61(1) of the Trustee Act.[2] It provides that a trustee “is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge …” He also quoted section 61(5) of the Act, which provides that section 61 does not apply if the compensation is fixed by the instrument creating the trust’. Clause 4.5 of the Trust did in fact provide that the trustees were to be paid compensation for their services as agreed. But that clause went on to provide that if any beneficiary should object to the amount of the compensation, the trustees’ compensation shall be fixed by a judge of the court. This meant, therefore, that section 61(1) of the Act applied.
Ms. Stevens’ counsel agreed that the beneficiaries were entitled to be informed to the trustees’ compensation. Indeed, Justice Meyers found that it was implicit that the beneficiaries had to be informed of the Trustee’s compensation, had a right to consent to the compensation claimed, or to ask a judge to determine it. Moreover, the failure of the trustees to tell the beneficiaries about Ms. Stevens’ compensation agreements meant that those agreements were not legally enforceable. Ms. Stevens’ counsel also agreed that the Trust did not authorize Ms. Stevens to take interim compensation without the approval of the beneficiaries or the court. Justice Meyers noted that, apart from the beneficiaries’ concession not to contest the compensation already received, this could have meant that Ms. Stevens might have to pay interest to the Trust on the amounts taken without approval.
Ms. Stevens understood that as a fiduciary she had to make reports to the beneficiaries about the affairs of the trust. She did not do so while the Settlor was still alive because he did not want his children to know how the Trust was being administered. However, as Justice Meyers rightly pointed out, if a Trustee cannot carry out her duties because of the Settlor’s demands, she must resign. Even if Ms. Stevens was not aware of her obligations, she could have learnt of them by reading the Trust deed. While she may have acted in good faith by relying on others, such as the lawyer trustees, that did not excuse her failure to make disclosures to the beneficiaries. She did make disclosures to the beneficiaries after the Settlor died.
Justice Meyers then went on to consider the well-known legal tests that the court uses to assess the fair and reasonable compensation under section 61(1) of the Trustee Act. He referred to the judgment of the Killeen, Surr Ct J in Re Jeffery Estate,[3] in which that learned judge applied the old cases: (a) Re Toronto General Trust and Central Ontario Railway;[4] and (b) although he did not mention the case by name, Re Farmer’s Loan and Savings Co.[5] In the first, Teetzel J adumbrated the five factors approach. The factors are: (1) the magnitude of the trust; (2) the care and responsibility involved; (3) the time occupied in performing the duties; (4) the skill and ability shown; and (5) the success resulting from the administration. In the second, the court referred to the well-settled practice of awarding compensation by way of percentages, namely 2.5% on each of capital receipts, capital disbursements, revenue receipts, and revenue disbursements, and an additional annual care and management fee of 2/5 of 1% of the average value of the gross assets under administration if the estate would not be distributed immediately. However, the cases have made it clear that the care and management fee is not automatic and should be awarded only in special circumstances. The cases made it clear that the court should first apply the percentage approach and should then check the result against the five factors to ensure that the compensation claim is not excessive and to make adjustments as necessary. In Laing v Laing[6] the Ontario Court of Appeal endorsed this approach.
Ms. Stevens calculated that in applying the percentage approach, she would be entitled to approximately $880,000, plus a care and management fee of about $290,000, for a total amount of approximately $1.17 million. However, she was claiming less than half that amount.
The beneficiaries argued that this approach was inappropriate for the trust, since it contained only two assets. The first was an investment portfolio worth between $15 and $18 million, that was managed by two investment management firms. Hence, the trustees had very little responsibility over the portfolio and did not have to spend much time on it. The second was a condominium in Barbados. The trustees delegated its management to a professional manager in Barbados. The condominium had cost $3 million but its value declined substantially. Its annual operating costs exceeded the rental revenue. It had been for sale since Ms. Stevens assumed oversight of the condominium in 2013 but few offers had been received. It was finally sold in 2020 for 1.2 million USD. Ms. Stevens’ other duties were limited.
His Honour first applied the percentage approach and concluded that Ms. Stevens was not entitled to the amount calculated by 2.5 percentage guideline from 2019 to 2022, since much of the work for which she claimed compensation was performed by others. Then he checked the percentage approach against the five factors approach. He agreed that the size of the trust favoured a higher level of compensations. However, considering that Ms. Stevens had little responsibility herself, that the time spent on fulfilling her duties was relatively minor, that she exercised very little independent judgment while the Settlor was alive, failed to keep the beneficiaries informed, failed to appoint a successor trustee, committed a number of breaches of trust, and failed get the Barbados condominium sold promptly when it was losing a large amount of money each year, Justice Myers concluded that it would not be fair or reasonable for Ms. Stevens to be paid anything more for her services. He also ordered her to pay costs to the applicants.
—
[1] 2023 ONSC 5645.
[2] RSO 1990, c T.23.
[3] (1990), 39 ETR 173 (Ont Surr Ct).
[4] (1905), 6 OWR 350, 1905 CarswellOnt 449.
[5] (1905), 6 OWR 350, 1904 CarwellOnt 462 (HC).
[6] (1998), 41 OR 3d 571 (CA).
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Written by: Albert Oosterhoff
Posted on: February 2, 2024
Categories: Commentary, WEL Newsletter
1. Introduction
Cases in which the compensation of trustees is contested are not as common as formerly because the law has been well-settled for some time. However, when parties do not adhere to the legal principles, the matter will usually come before the courts. It appears that this happened in Fitzhenry v Stevens,[1] although there were no mala fides involved. Accordingly, it is appropriate to consider this issue again.
2. Facts
The settlor, Robert Fitzhenry (the “Settlor”), established the Fitzhenry (1994) Family Trust (the “Trust”) in 2008, to distribute his wealth among his family. Ultimately it was valued at $35 million. The Settlor was one of the trustees. Initially, a number of professionals – lawyers and accountants – also served as trustees but over time they resigned. In 2008 the Settlor invited Linda Stevens (the “Ms. Stevens”) to become a trustee. She was a very dear friend of the Settlor and his wife, and a highly qualified trustee. She negotiated compensation at $1,000 per day initially and that was later increased to $200 per hour. She had been paid approximately $250,000 in compensation by the time of these proceedings. Her co-trustees agreed to the periodic amounts she claimed over the years until 2019.
The Settlor died in 2019. Ms. Stevens failed to appoint another trustee in his place, as required by the Trust and remained the sole trustee. She resigned in 2022, at which time she claimed further compensation of approximately $266,600 for the years 2019 through 2022. She also claimed approximately $50,000 in addition for care and management of the trust property from 2013 until she retired. Ms. Stevens did not claim entitlement to these additional funds under any agreement.
The beneficiaries then brought this application for orders declaring that Ms Stevens was not entitled to compensation beyond what she had already invoiced and received. They argued that the trustees ignored their right to notice and to approve Ms Stevens interim compensation. They did not demand that Ms. Stevens return improperly taken fees but were of opinion that the compensation to which she had agreed, and which was paid to her was more than fair and reasonable compensation.
3. Analysis and Judgment
Justice Myers began his analysis by referring to section 61(1) of the Trustee Act.[2] It provides that a trustee “is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge …” He also quoted section 61(5) of the Act, which provides that section 61 does not apply if the compensation is fixed by the instrument creating the trust’. Clause 4.5 of the Trust did in fact provide that the trustees were to be paid compensation for their services as agreed. But that clause went on to provide that if any beneficiary should object to the amount of the compensation, the trustees’ compensation shall be fixed by a judge of the court. This meant, therefore, that section 61(1) of the Act applied.
Ms. Stevens’ counsel agreed that the beneficiaries were entitled to be informed to the trustees’ compensation. Indeed, Justice Meyers found that it was implicit that the beneficiaries had to be informed of the Trustee’s compensation, had a right to consent to the compensation claimed, or to ask a judge to determine it. Moreover, the failure of the trustees to tell the beneficiaries about Ms. Stevens’ compensation agreements meant that those agreements were not legally enforceable. Ms. Stevens’ counsel also agreed that the Trust did not authorize Ms. Stevens to take interim compensation without the approval of the beneficiaries or the court. Justice Meyers noted that, apart from the beneficiaries’ concession not to contest the compensation already received, this could have meant that Ms. Stevens might have to pay interest to the Trust on the amounts taken without approval.
Ms. Stevens understood that as a fiduciary she had to make reports to the beneficiaries about the affairs of the trust. She did not do so while the Settlor was still alive because he did not want his children to know how the Trust was being administered. However, as Justice Meyers rightly pointed out, if a Trustee cannot carry out her duties because of the Settlor’s demands, she must resign. Even if Ms. Stevens was not aware of her obligations, she could have learnt of them by reading the Trust deed. While she may have acted in good faith by relying on others, such as the lawyer trustees, that did not excuse her failure to make disclosures to the beneficiaries. She did make disclosures to the beneficiaries after the Settlor died.
Justice Meyers then went on to consider the well-known legal tests that the court uses to assess the fair and reasonable compensation under section 61(1) of the Trustee Act. He referred to the judgment of the Killeen, Surr Ct J in Re Jeffery Estate,[3] in which that learned judge applied the old cases: (a) Re Toronto General Trust and Central Ontario Railway;[4] and (b) although he did not mention the case by name, Re Farmer’s Loan and Savings Co.[5] In the first, Teetzel J adumbrated the five factors approach. The factors are: (1) the magnitude of the trust; (2) the care and responsibility involved; (3) the time occupied in performing the duties; (4) the skill and ability shown; and (5) the success resulting from the administration. In the second, the court referred to the well-settled practice of awarding compensation by way of percentages, namely 2.5% on each of capital receipts, capital disbursements, revenue receipts, and revenue disbursements, and an additional annual care and management fee of 2/5 of 1% of the average value of the gross assets under administration if the estate would not be distributed immediately. However, the cases have made it clear that the care and management fee is not automatic and should be awarded only in special circumstances. The cases made it clear that the court should first apply the percentage approach and should then check the result against the five factors to ensure that the compensation claim is not excessive and to make adjustments as necessary. In Laing v Laing[6] the Ontario Court of Appeal endorsed this approach.
Ms. Stevens calculated that in applying the percentage approach, she would be entitled to approximately $880,000, plus a care and management fee of about $290,000, for a total amount of approximately $1.17 million. However, she was claiming less than half that amount.
The beneficiaries argued that this approach was inappropriate for the trust, since it contained only two assets. The first was an investment portfolio worth between $15 and $18 million, that was managed by two investment management firms. Hence, the trustees had very little responsibility over the portfolio and did not have to spend much time on it. The second was a condominium in Barbados. The trustees delegated its management to a professional manager in Barbados. The condominium had cost $3 million but its value declined substantially. Its annual operating costs exceeded the rental revenue. It had been for sale since Ms. Stevens assumed oversight of the condominium in 2013 but few offers had been received. It was finally sold in 2020 for 1.2 million USD. Ms. Stevens’ other duties were limited.
His Honour first applied the percentage approach and concluded that Ms. Stevens was not entitled to the amount calculated by 2.5 percentage guideline from 2019 to 2022, since much of the work for which she claimed compensation was performed by others. Then he checked the percentage approach against the five factors approach. He agreed that the size of the trust favoured a higher level of compensations. However, considering that Ms. Stevens had little responsibility herself, that the time spent on fulfilling her duties was relatively minor, that she exercised very little independent judgment while the Settlor was alive, failed to keep the beneficiaries informed, failed to appoint a successor trustee, committed a number of breaches of trust, and failed get the Barbados condominium sold promptly when it was losing a large amount of money each year, Justice Myers concluded that it would not be fair or reasonable for Ms. Stevens to be paid anything more for her services. He also ordered her to pay costs to the applicants.
—
[1] 2023 ONSC 5645.
[2] RSO 1990, c T.23.
[3] (1990), 39 ETR 173 (Ont Surr Ct).
[4] (1905), 6 OWR 350, 1905 CarswellOnt 449.
[5] (1905), 6 OWR 350, 1904 CarwellOnt 462 (HC).
[6] (1998), 41 OR 3d 571 (CA).
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