Introductory comments about executor releases
Is it appropriate for an executor to ask beneficiaries to sign a release and indemnity prior to receiving a distribution from an estate? Although non-indemnified executors may face potential personal liability for their work as estate trustees, the beneficiaries of estates are not obligated to sign such releases and indemnities which are presented to them before receiving any distribution of their inheritance.[1] Indeed, in the case of charitable beneficiaries, agreeing to indemnify an executor may even violate the directors’ fiduciary duties to the charity.
The main reason executors ask beneficiaries to sign a release and indemnity before they undertake distributions of the estate’s assets is to receive legal confirmation of their work and their estate accounting to date. Before making distributions, an executor will typically conduct an estate accounting – which may, in some cases, be subject to court assessment through a formal passing of accounts – and will receive a tax clearance certificate from the Canada Revenue Agency (“CRA”). This due diligence is advised because executors who fail to ensure that the estate retains sufficient funds to satisfy any outstanding debts to the estate’s creditors (including to the CRA for taxes) may be personally liable to the said creditors for any outstanding amounts. For instance, in the Muth Estate decision (discussed further below), the Court held that the executor was not entitled to be indemnified by beneficiaries where amounts withheld for taxes proved insufficient and the executor was liable to pay the taxes.[2] This said, Ontario executors are not legally required to formally pass accounts prior to making any distributions, and in some cases, the costs of undertaking this exercise are neither justified nor advised.
1. Executors cannot require beneficiaries to sign releases in order to access their inheritance
Executors who make interim distributions after an initial passing of accounts (to the date of distribution) may still choose to hold back certain amounts until they receive confirmation that all debts have been fully calculated and paid. In these instances, an executor may require beneficiaries to sign a release prior to making an interim distribution. Such was the case in Brighter v Brighter Estate (the “Brighter Estate”).[3] In this case, a beneficiary challenged the executor’s requirement for him to sign a release approving the passing of accounts prior to receiving any funds to which he had a legal entitlement from the estate.
In Brighter Estate, the Ontario Court of Justice found that while it is appropriate for executors to request an estate’s beneficiaries to sign a release before they receive any portion of their inheritance, “it is quite another matter for [an executor] to require execution of the release before making payment.”[4] This, the Court held, is “manifestly improper” since “[an] executor 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.”[5] The Court ordered the executor to pay the beneficiary his share of the residue of the estate with immediate effect.
2. If beneficiaries refuse to sign a release, then the executor can choose to pass the estate accounts formally
It is also worth noting that executors retain the discretion to decide when distributions should be made to beneficiaries, including whether a full passing of accounts is necessary in the absence of a release and indemnity. This said, for relatively simple estates the “executor’s year” is often-cited as a rule of convenience for executors to keep in mind regarding the timing of administering the estate.[6] In McGovern Estate v McGovern (“McGovern Estate”), for example, an executor sought to retain certain estate assets following an interim distribution of a majority of the funds, subject to a release being signed by each of the beneficiaries.[7] One of the beneficiaries refused to sign the release and alleged that the executor had been negligent in their handling of the estate. In response, the executor chose not to make any further distributions until a full passing of accounts could take place, which was the executor’s right.
The dissident beneficiary in McGovern Estate brought a motion for an order that, among other things, the executor make an interim distribution with interest out of the estate assets prior to a passing of accounts. The Ontario Superior Court held that the executor had acted reasonably and within the scope of their discretion by choosing to proceed to a full passing of accounts so long as the beneficiary remained unwilling to sign the release.[8] The Court further held that any delay in the distribution of the beneficiary’s inheritance while the passing of accounts took place was neither unreasonable nor amounted to a breach of the executor’s fiduciary duties.
3. In order for releases to be enforceable, they must be signed BEFORE distributions are made to beneficiaries
A recent judgment from Alberta clarifies the time at which executors should seek releases from beneficiaries if they choose to do so. In the Muth Estate decision, the Court of Queen’s Bench of Alberta held that executors who fail to secure a release prior to a distribution will not be able to force beneficiaries to indemnify them for unpaid debts after the inheritance has been paid out. In Muth Estate, several beneficiaries were awarded summary judgment against an executor who had sought an after-the-fact release and indemnity when her initial passing of accounts turned out to be inaccurate. In this judgment, the Court held that, so long as the executor was not responsible for the deficient passing of accounts, the executor could not obligate the beneficiaries to indemnify her debts owing on the estate. The Court concluded the following: “[i]n a fiduciary relationship such as that between [an executor] and a beneficiary, the logic … is that as between the two parties, one who had the obligation to perform a duty and failed and one who had neither the obligation nor the means to satisfy it, it is the former who should bear the consequences of the action or inaction.”[9] In other words, an executor who does not procure a release and indemnity from beneficiaries prior to making a distribution may be out of luck if it is later determined on a passing of accounts that debts are still owing on the estate.
4. Some beneficiaries may have competing legal obligations which preclude them from signing executor releases
Certain types of beneficiaries may be advised against indemnifying estate executors, even when they may be personally motivated to do so. Trustees or directors of charitable trusts and corporations, for example, have a fiduciary duty to act in the best interest of the charity and to ensure that its objects are carried out.
The directors of a charity have a number of duties, including a duty to act honestly, a duty of loyalty, a duty of diligence and to act in good faith, a duty to exercise power, a duty of obedience, and a duty to avoid conflicts of interests. Exercising such fiduciary duties in the best interest of the charity must always be top of mind for such directors when making decisions. Directors of charitable corporations which operate in Ontario, for instance, must adhere to a statutory obligations – including a statutory duty of care required of all directors – under relevant provincial legislation for non-share capital corporations, as well as duties under the Trustee Act (Ontario).[10] This means that they must take pro-active steps to protect charitable property. Such obligations include maintaining and safeguarding the charity’s long-term financial stability and performance. Any loss of charitable assets due to the directors’ inactivity or failure to act could make the directors liable for breach of their fiduciary duties, or possibly even breach of trust, which could ultimately result in such directors having to pay damages to the organization, or worse, criminal liability.
As such, to the extent that indemnification of the executors of an estate for which the charity is a beneficiary might place a charity at financial risk or preclude it from taking legal action that it would otherwise take, an agreement to release executors from potential future claims could amount to a violation of a trustee’s or director’s fiduciary duties. In these cases, the best arrangement for all parties may be for the executor to conduct a full passing of accounts before making any distribution to the estate’s beneficiaries.
Concluding thoughts
It is appropriate for executors to request that beneficiaries sign a release and indemnity before they make any distributions from the estate assets. The timing of the request in relation to making any distributions is important. However, if any beneficiary refuses to sign such a document, then the executor cannot force any beneficiary to do so. It may be advisable for the directors of charitable beneficiaries to refuse signing such a document to fulfill their fiduciary obligations in certain circumstances. However, in such instances, the executor will be able to formally pass the estate’s accounts as an alternative course of action.
This article seeks to demonstrate the nuances to this important topic. There are legitimate circumstances where executors will be advised to require beneficiaries to sign releases and indemnities and beneficiaries will not have an issue with signing same. However, there will be other situations in which beneficiaries will reasonably be advised to refuse signing such releases and indemnities.
Members of Miller Thomson LLP’s Private Client Services group would be pleased to assist any executors or beneficiaries navigate their legal rights and obligations with a mind to finding practical solutions.
_________________________________
[1] There may be cost consequences which beneficiaries must bare depending on the context of their opposition to signed releases and indemnities and their related behaviour. See Estate of Catherine Davediuk, 2013 MBQB 307.
[2] 2019 ABQB 922 [Muth Estate].
[3] [1998] OJ No 3144 [Brighter Estate].
[4] Brighter Estate at para. 9 [Emphasis added].
[5] Brighter Estate at para. 9.
[6] The “executor’s year” is a common law rule which dictates that executors have a year to administer an estate before the beneficiaries have a right to demand payment from that estate. This is a rule of convenience which is often used because it is flexible, however, the one year timeline assumes that the estate is simple and that there are not mitigating factors which justify the executor’s decision to extend the timeline in which she or he will distribute the assets from the estate.
[7] 2014 ONSC 1875 [McGovern Estate].
[8] McGovern Estate at para. 41.
[9] Muth Estate at para. 62.
[10] Trustee Act, RSO 1990, c T.23.
