Is it normal for an executor to ask that a beneficiary sign a release and indemnity prior to paying out the inheritance? Executors can ask, but do beneficiaries have to sign?
Let’s review some basics.
It is normal for executors to wait until they receive a tax clearance certificate from the Canada Revenue Agency (“CRA”) before making a final distribution from an estate, because prior to receiving the clearance certificate, the executor is personally liable if the estate has unpaid taxes1. However, once all the estate debts are ascertained and all the assets are collected estate trustees may be in a position to make an interim distribution as long as they hold back sufficient funds for anticipated taxes as well as their compensation.2 While it is prudent for an estate trustee to delay making a final distribution until receipt of a clearance certificate, there is case law that stands for the proposition that if the executor is at fault for delaying obtaining the clearance certificate s/he is not excused from failing to make an interim distribution.3
In other words, the case law encourages estate trustees to make interim distributions as funds become available. When estate trustees do make such distributions, it is common practice for the executor to ask for a release and indemnity prior to making the distribution. What happens if the beneficiary refuses to sign?
That question was addressed in Brighter v Brighter Estate. 4 In this case the deceased had three children and she divided her estate equally between them. Katherine, one of the children was the executrix. Her brother Alan, refused to sign a release of the executrix, and a consent waiving the passing of accounts. One of the main assets in the estate was the deceased’s home. Alan did not agree with the evaluation of the home or what his sister, Katherine, the executrix claimed for “executor’s fees.”
Katherine’s lawyer wrote to Alan and said, “This will advise that the executrix is intent on completing her role in the administration of this estate. If your client fails to notify us, within 7 days of the date of this letter, that he has arranged for his appraiser to attend at the premises for the purposes of conducting an appraisal, then the executrix will distribute. Allan’s share will remain in the estate account and released upon receipt of release of executrix and approval of accounts.”
In court, Katherine the executrix, justified requiring the release and approval as a precondition to a final distribution to Alan. She claimed that he was not entitled to any distribution without signing a release. This is what the court had to say,
“… An executor’s duty is to carry out the instructions contained in the will, which in this case was to distribute the residue equally among the three children of the testatrix. The 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, or the executor’s compensation or fee. It is quite proper for an executor (or trustee, to use the current expression) to accompany payment with a release which the beneficiary is requested to execute. But it is quite another matter for the trustee to require execution of the release before making payment; that is manifestly improper.”5 (emphasis added)
As the court in McGovern Estate v. McGovern observed, “In the Brighter case, the Court’s decision to override the trustees’ discretion and to order an interim distribution could have been justified on the ground that the trustees had acted with mala fides, because she was attempting to extort a release from the beneficiary, while distributing the shares to two other beneficiaries. This conduct would also have breached a trustee’s duty of its fairness to the beneficiaries. In Brighter, the executor had not exercised her discretion to delay distribution to all beneficiaries until she had her accounts approved by the Court.”6
So what is an executor to do if the beneficiary does not want to sign a release? Denofrio v. Denofrio7 O.J. No. 1666 (Ont. Div. Ct.).] is an important read for those advising executors in these circumstances. As one author explained8,
“The court upheld the estate trustee’s right to require executed releases from the beneficiaries before distributing the proceeds of the estate. The court found that, based on the outstanding matrimonial litigation, which was a claim for more than half the estate, as well as the threatened litigation from three of the children “the estate trustees were justified in requesting releases.” The court also found that “based on the threat of litigation” the court was satisfied that the estate trustee was justified in not paying the pending bequests until a passing of accounts. Justice Kershman summarized the risk that the estate trustees faced in administering the estate, stating: While it may appear to be clear cut from Mrs. Denofrio’s perspective, from the Estate Trustees’ perspective, it was not. It had never been a clear cut case and they (the estate trustees) wanted to ensure that their future actions did not jeopardize the Estate, jeopardize their position as Estate Trustees, or jeopardize the assets of the estate. In addition, the court commended the estate trustees for seeking releases and not paying out monies until accounts had been passed so as not to potentially jeopardize the estate and the administration of it. Ultimately the court passed the accounts of the estate trustee and awarded compensation.”
It is important to note that while the court praised the estate trustees for requesting the release, it does not mean that the executor can hold back distributions without taking further steps. The court also underscored, “The court also found that “based on the threat of litigation” the court was satisfied that the estate trustee was justified in not paying the pending bequests until a passing of accounts.”
Here is how one author, Craig Ross, explains the process:
“…there are two methods by which an Estate Trustee may have his or her administration approved and be discharged: first, the Estate Trustee may apply to pass his or her accounts; second, the Estate Trustee may seek to spare the beneficiaries the time and expense of a passing of accounts, and instead ask them to approve his or her administration and provide for his or her informal discharge directly. The latter method contemplates the use of some form of release and indemnity….. While it is obvious that a beneficiary is never obligated to provide a release, and that an Estate Trustee cannot hold a beneficiary’s share to “extort” a release, it should be equally obvious that an Estate Trustee cannot be expected to distribute more of the estate than he or she is certain is not required for potential future testamentary and administration expenses. Thus, the nut of the issue seems to be the definition of “distributable assets”. The court in Brighter Estate does not provide a definition of “distributable assets”, but it seems that a reasonable definition might be the money in the hands of the Estate Trustee at a specific point in time that the Estate Trustee is reasonably certain is in excess of all possible debts and testamentary expenses. In other words, while a distribution cannot be conditional on receipt of a release, the “distributable assets” at a certain point in time might properly depend on whether the beneficiaries are willing to informally approve the Estate Trustee’s administration and deliver a release, or whether a court application is required…..”9
Ultimately, the Saskatchewan Court of Queen’s Bench in Frizzell v. Bonneau10 comments on this topic are very instructive,
103 The executrix takes the position that she was entitled to ask for these releases because as executrix, she will need a final release from the beneficiaries. That is incorrect. A final release from the beneficiaries is not required. The Queen’s Bench Rules require that an executrix to provide a release only if she wishes to be discharged without passing her accounts. She has the option of passing her accounts.
104 Further, the appropriate time to request a release would be when final accounts are provided to the beneficiaries, and not as a condition of an interim distribution of this kind. A final accounting could not be prepared in March 2010. Indeed, it cannot be prepared today. It was not yet time for the executrix to be discharged.
The Courts seem to be of the view that it is well within the rights of an executor to ask beneficiaries for a release prior to making a distribution. As one judge stated, “There is nothing improper in attending to an interim distribution to some of the beneficiaries provided sufficient funds remain on hand for the remaining beneficiaries and expenses. The estate trustees are liable for any deficiencies which may result…. A release is standard and accepted practice on an interim or final distribution, in lieu of a passing of accounts, and failure to provide such is a valid reason to withhold payment.”11
It is also within the beneficiary’s right to not provide on such a release. However, the court analyzes that decision on an objective basis. It is sort of a fault finding exercise. Who was unreasonable? Was the trustee unreasonable for demanding the release (for example if the trustee was demanding a release for his/her own interest? Or, was the beneficiary at fault for refusing to sign when there were no grounds to be suspicious?
So, for the beneficiary the case law suggests that while it is within a beneficiary’s rights to refuse to sign, the beneficiary better have good reason to do so12. For the executor, the take away from our review of the case law is that while it is normal reasonable practice to ask for a release when the beneficiary refuses to provide one it is incumbent on the estate trustee to commence an application to pass his/her accounts or at the very least bring an application to court for directions. Failure to either make an interim distribution or commence an application to pass their accounts may be viewed as evidence of the executor’s efforts to extort the beneficiary to sign the release which is manifestly improper.
- See section 159(3) of the Income Tax Act ↩
- See Arieh Bloom’s article Release Me: An Analysis of the Law Surrounding the Use of Releases in the Estate and Trust Context, Ont-EAdmin SLL-31 Ontario — Estate Administration. DeLorenzo v. Beresh 2010 CarswellOnt 7756, 2010 ONSC 5655, (2010) O.J. No. 4367, 193 A.C.W.S. (3d) 1031, 62 E.T.R. (3d) 65; Donovan W.M. Waters, Law of Trusts in Canada, (3d ed.) (Toronto: Thomson Carswell, 2005), pp. 1148 – 1150; Carmen S. Theriault, Widdifield on Executors and Trustees – 14 – 27, 6th ed. Loose-leaf (Toronto, Thomson Carswell, pp. 4 – 5.); Turner v. Hancock (1882), 20 Ch. D. 303, 51 L.J. Ch. 517 (Eng. C.A.) cited in Josephs Estate, Re (1993), 14 O.R. (3d) 628 (Ont. Gen. Div.) at p. 4. ↩
- See paragraph 28 of DeLorenzo v. Beresh 2010 CarswellOnt 7756, 2010 ONSC 5655, (2010) O.J. No. 4367, 193 A.C.W.S. (3d) 1031, 62 E.T.R. (3d) 65 ↩
- (1998), 81 A.C.W.S. (3d) 743 (Ont. G.D.). ↩
- See paragraph 9 of Justice Sheard’s decision Brighter v Brighter Estate ↩
- See paragraph 37 of McGovern Estate v. McGovern 2014 CarswellOnt 4878, 2014 ONSC 1785, 100 E.T.R. (3d) 169, 239 A.C.W.S. (3d) 541 ↩
- Denofrio v. Denofrio 2012 ONSC 3408, (2012) O.J. No. 2630 (Ont. S.C.J.); additional reasons 2012 ONSC 4019 (Ont. S.C.J.); affirmed 2013 ONSC 2106, [2013 ↩
- Selected Legal Literature SLL-31 — Release Me: An Analysis of the Law Surrounding the Use of Releases in the Estate and Trust Context Arieh Bloom. ↩
- Ontario — Estate Administration Selected Legal Literature Contributing Editor: Megan Connolly, Editor: Anne E.P. Armstrong Selected Legal Literature SLL-20 — Probate Essentials 2012: Winding Up in an Estate Administration By R. Craig Ross, Pallett Valo LLP I. — Releases, Holdbacks and Passing. ↩
- 2012 CarswellSask 596, 2012 SKQB 358, 221 A.C.W.S. (3d) 495, 404 Sask. R. 95 ↩
- See paragraph 11 & 12 of Bedont Estate, Re 2004 CarswellOnt 2107, (2004) O.J. No. 4267, 9 E.T.R. (3d) 59 ↩
- See Arieh Bloom’s analysis in part 4 of his paper referred to above– The Risk of Frivolous Beneficiary Challenges. I quote this section from Mr. Bloom’s paper which underscores the risk to beneficiaries from unreasonably withholding their consent, “In Re Davediuk Estate, an application was brought by an administratrix to pass the estate accounts. The only contested issues were who should be responsible for the payment of the costs associated with the application to pass accounts and who should bear the cost for renewing the administration bond. The applicant took the position that the costs of passing the accounts and renewing the administrative bond should be borne by the beneficiaries who refused to sign the releases. The beneficiaries argued that a formal passing of accounts would have been required anyway for an administrative bond and that a release was not a formal requirement. The court, in rejecting the assertions of the beneficiaries, stated: “It is an understatement of considerable proportion to say that this estate has been plagued by serious problems. For an estate of this size and, theoretically, lack of complexity to take so many years to finalize is unusual and unacceptable. It is to the credit of the applicant that she has been willing to undertake the task of bringing the estate to a final conclusion.” ↩