Fiduciary Duties
The duty to account held by executors and trustees is a part of the broader fiduciary duty holders of such roles owe to beneficiaries. In Canadian law, fiduciary obligations arise in relationships in which one party (the fiduciary) is responsible for looking after the interests of another party (the beneficiary). The word fiduciary is derived from the latin word fiducia, which means trust or reliance, and it is ultimately that element of trust and reliance placed in the fiduciary by the beneficiary from which the fiduciary duties arise. In Frame v. Smith, Wilson J. characterized a fiduciary relationship as one in which:
- The fiduciary has scope to exercise their discretion or power
- The fiduciary may unilaterally exercise their power of discretion in such a way as to affect the legal or practical interests of the beneficiary
- The beneficiary in question is vulnerable to or at the mercy of the fiduciary
However, in Hodgkinson v. Simms, LaForest J suggested that the element of vulnerability described by Wilson J, though a good indicator of a fiduciary relationship, is not essential for a relationship to be characterized as fiduciary. Instead, the minimum required for the imposition of a fiduciary obligation is that there exists a relationship of trust and confidence wherein the beneficiary relies upon the fiduciary.
Broadly speaking, all fiduciaries must act honestly, in good faith, and use their powers properly and only for the purposes for which they were granted. Fiduciaries may not make any unauthorized profits, may not delegate their responsibilities, and may not have conflicting interests with their duty. When it comes to estate and trust law, the duty to account is part and parcel of these foundational fiduciary duties.
Duty to Account
Within the scope of estate and trust law, the duty to account ultimately demands that trustees, executors and attorneys of property must keep proper accounts of their dealings with the trust property or estate and be prepared to show the accounts to beneficiaries when requested. The duty is enshrined in both law and statute. Some trust instruments stipulate the exact manner in which trustees must pass the accounts. In the absence of such instructions trustees may also refer to the corresponding statute for guidance on how to pass their accounts. For example, section 23 of the Ontario Trustee Act stipulates precisely the procedure which trustees must follow in passing accounts: their applications must contain an inventory of trust property, an account showing what the original estate consisted of, an account of all money received and disbursed, an account of all property remaining, a statement of compensation requested, and any other accounts the court might require.
The duty holds throughout estate and trust law, applying in any fiduciary relationship between individuals involving property and assets. As such it also applies to attorneys of property and those authorized to act as power of attorney to another. For instance, section 19(1)(d) of British Columbia’s Power of Attorney Act mandates that attorneys “keep prescribed records and produce the prescribed records for inspection and copying at the request of the adult.”
Breach of Duty
Though the above limits on the duty to account exist under normal circumstances, in the context of litigation it is vital that fiduciaries comply fully with the duty to account, to the best of their ability, to both the court and beneficiaries. Failure to do so can result in the court drawing of an adverse inference, leading to the imposition of liability upon the fiduciary. Any expenses incurred by the trust or estate due to the failure to pass accounts must generally be borne personally by the fiduciary, in addition to unaccounted for expenses.
In Zimmerman v. McMichael Estate 2010 ONSC 2947, 2010 CarswellOnt 3481, a trustee was held liable for nearly $1 million worth of unaccounted costs, all the compensation he claimed as trustee, and legal costs. Zimmerman held power of attorney for property and for the care of Signe McMichael, whose estate was valued at approximately $5 million. McMichael appointed Zimmerman as trustee of a trust to which she authorized the transfer of nearly all her property. Ostensibly, the trust was intended to preserve the legacy of the McMichael family and promote Canadian visual arts for twenty-one years after McMichael’s death. Between the trust and the power of attorney of property and care, Zimmerman effectively controlled Mrs. McMichael’s finances from 2004 until her death in 2007.
Mrs. McMichael’s niece, upon being appointed trustee of the McMichael estate in 2008, brought an application to declare the power of attorney and the trust void and require that Zimmerman pass his accounts as the attorney for property and trustee. Zimmerman was unable to account for hundreds of thousands of dollars worth of expenses he had claimed through the trust. Some of the questionable expenses billed to the trust included over $40,000 in cash withdrawals; $15,000 in hotel, airfare, and limousine charges; and $150,000 in “compensation” Zimmerman paid to himself from the trust between October 2005 and April 2006, during which time he went sailing in the Caribbean. Given Zimmerman’s inability to account for all of the expenses, Judge Stathy drew an adverse inference and ordered Zimmerman to pay back all the money he claimed as compensation from the estate and all of the legal costs occasioned by the dispute over the passing of accounts. This amounted, in total, to nearly a million dollars.
In Sarzynick v. Skwarchuk 2021 CarswellBC 761, 2021 BCSC 443, the executor of an estate was also held liable by adverse inference for unaccounted-for expenses. Siblings Leonard and Caroline Sarzynick were the only beneficiaries named in their mother’s will. In the final years of their parents’ lives, Leonard was authorized to act as their power of attorney. During this time, Leonard depleted his parents’ funds by purchasing several properties. Consequently, Caroline alleged that Leonard had misappropriated estate assets for his own benefit. However, despite being compelled to do so by four different court disclosure orders, Leonard failed to supply documents essential to assessing his handling of the estate’s assets, including the will, the POAs, and bank records. Leonard was ultimately ordered to compensate the estate for $154,549.29 dollars’ worth of unaccounted-for expenses.
The Saskatchewan case Spelay (Litigation Guardian of) v. Spelay 2007 SKQB 408, 2007 demonstrates that the importance of the duty to account holds even in the face of specific testamentary instructions. Jodi Spelay was made executrix, trustee and sole beneficiary of her brother Blaine’s estate. Blaine’s only assets of value were the proceeds from a life insurance policy and pension plan, which were paid out to Jodi to be held in trust for his two daughters. Several years earlier, Blaine separated from his wife, Dawn, the mother of the girls. Concerned about Dawn’s gambling problems, he specifically instructed Jodi to resist “every effort of [hers] to access information regarding the trust funds or to access the trust funds,” and to strictly reserve it for the girls to use to pursue post-secondary education or, if they chose not do so, to transfer it directly to them within a reasonable time after they turned 18. The court found that Blaine’s conditions for Jodi were invalid insofar as they were contrary to the fiduciary duty to account. The duty to account necessitates that fiduciaries regularly provide trustees with accurate information about the state of the trust and its administration. No clause or condition can override this duty. The court therefore ordered Jodi to provide annual accounts to Dawn as guardian of the beneficiaries.
Timeline of producing accounts for beneficiaries
On the whole, fiduciaries should always be ready to produce accounts for inspection and examination by the beneficiaries. As the above cases show, failure to do so can incur grave consequences. However, this does not mean that fiduciaries must be ready at a moment’s notice to furnish copies of their accounts. Fiduciaries are allowed a reasonable amount of time to gather the necessary accounts once a beneficiary requests them. In Sandford v Porter 1889 16 O.A.R. 565 (CA) ONCA, a creditor demanded copies of the accounts of the assignee of a debtor, and brought an action for an account against the assignee. However, the creditor expressed no desire or attempt to inspect the accounts and did not wait a reasonable amount of time for the preparation of the accounts. Within ten days of the demand, they were informed that the accounts were being prepared. Days later they were told that the accounts would be passed that week – yet the suit was launched anyway. Justice Maclennan of the Ontario Court of Appeal ruled that there was no misconduct on the fiduciary’s behalf in this case.
Fiduciaries do not have to drop everything and pass accounts the second they are demanded to do so by a beneficiary. Rather, fiduciaries have a duty to keep their accounts ready for inspection and examination, and to provide in full relevant information when it is required; however, as a general rule fiduciaries are not obliged to prepare copies of their accounts for any and all parties interested. For example, a trustee is not obligated to furnish, on demand, a copy of the estate accounts to a party interested only in a small share of the residue of the estate. Furthermore, though trustees must regularly give beneficiaries accurate information and explanations regarding the state of the trust, they are not necessarily required to give detailed reasons for any decisions they made at their own discretion regarding the trust. The extent of the burden imposed by the duty to account is therefore proportional to the interest held by the beneficiary in question and is limited to what is feasible and reasonable.
Conclusion:
The duty to account is a core fiduciary duty owed to beneficiaries in estate and trust law. Though the duty does not necessarily demand that accounts be ready at a moment’s notice, ultimately executors and trustees are expected to be able to furnish beneficiaries and courts with accounts of their dealings with the estate. A failure to do so constitutes a breach of duty which courts are prepared to hold fiduciaries financially liable. However, keeping proper accounts, especially in the case of dealings over long timelines with complicated estates, is not always straightforward.
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