A case review of Groome Estate v. Groome
The COVID-19 pandemic has caused a precedent-setting drop in the stock markets across the globe. Could executors be held liable for the estate’s losses in their stock portfolios? The case of Groome Estate v. Groome, 2016 ONSC 7850 (“Groome”) is a cautionary tale to those estate trustees that make speculative investments on behalf of an estate.
Groome Estate v. Groome
In Groome, the estate trustee instructed his investment advisor to maintain an investment account for the deceased’s estate with “account objectives” being 90% speculative and 10% growth, and with the estate’s risk tolerance being 90% high and 10% medium. The portfolio was heavily invested in the energy sector, creating higher risk from a lack of diversification. The estate’s only non-energy sector equity was shares of “Yellow Media” (now Yellow Pages Limited), which the estate trustee purchased through a margin account.
Later, in December of 2014, the market for energy stocks crashed, and the estate’s portfolio lost $164,983. Although the case does not identify the specific stocks the estate held, the below chart showing the value of Imperial Oil Ltd. (an energy sector company) shows the dramatic decline in value that many energy sector stocks would have experienced around December of 2014:
The estate’s Yellow Media shares also lost significant value. By July 2014, a few weeks after the estate trustee had purchased additional shares of Yellow Media, the stock price plummeted, and the estate lost $96,150:
The estate trustee brought an application to pass his accounts for the estate of the deceased. The named beneficiaries and the Office of the Children’s Lawyer objected to the passing of accounts, partially because the estate trustee had failed to diversify the deceased’s stock portfolio.1 The objectors sought the return of half of the investment losses from the estate trustee for his alleged failure to diversify.2
The court agreed with the objectors, and held that the estate trustee failed to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.3
The court further stated that the estate trustee was required to diversify the estate’s investments, to the extent that diversification is appropriate in light of the terms of the trust, and the general market and investment conditions.4 Although the estate trustee had purchased the Yellow Media shares, that purchase did not sufficiently diversify the estate’s portfolio. The court held that purchasing those shares through a margin account was unacceptable for the estate and was contrary to the advice of the estate trustee’s investment advisor.
The court also found that the terms of the will did not override the estate trustee’s duty to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments, or the duty to diversify those investments.5 The provisions noted in the Trustee Act did not authorize or require a trustee to act in a manner that is inconsistent with the terms of the trust.6 In addition, the court found that the will’s language seeking to limit the estate trustee’s liability for investment losses did not override the “prudent investor” rule enumerated above.7
The court, therefore, ordered that the estate trustee repay half of the losses suffered from the energy stock losses.8
Take Away from the Groome Case?
The Groome case is a word of warning for those estate trustees managing significant investments on behalf of an estate. As noted by Ed Esposto in his commentary “Trust Law”, the estate trustee in Groome simply did not understand the duties placed upon him as an estate trustee, and expected to be able to invest the estate accounts with the same recklessness as he would his own.9
Mr. Esposoto’s observation underscores the need for those advising estate trustees to impress upon them that they do not have absolute unfettered discretion. Estate trustees are obliged to act with reasonable care and prudence while adhering to the terms of the will. The law sets out two tests to determine if this obligation of “reasonable care and prudence” has been complied with:
- The investment must be authorized either by the terms of the trust or by legislation; and
- The trustees must have dealt with the investment in accordance with the required standard of care and prudence.10
The standard of care has come to be known as the “prudent investor” rule, developed through the common law and enshrined in ss. 27(1) and (2) of the Trustee Act. As discussed in the Groome case, when investing trust property, a trustee “must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments”, and “may invest trust property in any form of property in which a prudent investor might invest”.
Having a documented plan or strategy for the estate’s investments could go a long way to avoiding liability for future investment losses. Section 28 of the Trustee Act stipulates that a trustee is not liable for the trust’s investment losses if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment, comprising reasonable assessments of risk and return, that a prudent investor could adopt under comparable circumstances.11
When exercising prudence, and subject to the terms of the trust or will, the estate trustee should consider the following criteria in making an investment plan, in accordance with s. 27(5) of the Trustee Act:
- General economic conditions
- The possible effect of inflation or deflation
- The expected tax consequences of investment decisions or strategies
- The role that each investment or course of action plays within the overall trust portfolio
- The expected total return from income and the appreciation of capital
- Needs for liquidity, regularity of income and preservation or appreciation of capital
- An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries
It is also prudent that the estate trustee properly diversify the trust’s investments, insofar as it is appropriate to do so, having in mind the requirements under the trust instrument and the general economic and investment market conditions.
It may be permitted in some cases to delegate investment duties. While it remains a canonical duty of trusteeship that “no trustee may delegate his office to others”,12 provincial governments recognize the complicated and specialized nature of modern portfolio investing, and have carved out statutory exceptions to permit the delegation of investment duties. In Ontario, s. 27.1(1) of the Trustee Act permits a trustee to hire an agent to exercise any of the trustee’s investment functions, but only to the same extent that a prudent investor, acting in accordance with ordinary investment practice, would authorize an agent to exercise any investment function.
Delegation of investment tasks could take the form of (1) investing in funds that are managed by a fund manager, or (2) retaining an investment advisor for advice and management of the trust’s investment portfolio. With respect to the first category, estate trustees are not precluded from investing in mutual funds, pooled funds or segregated funds under insurance contracts, even if those funds are typically managed by an undisclosed investment manager.13 With respect to the second category, a trustee may obtain advice in relation to investing on behalf of the estate, and it is not a breach of fiduciary duty to rely on that advisor’s advice if a prudent investor would rely on the advice under comparable circumstances.14 In the case of Groome, failing to rely on the investment advisor’s advice not to purchase Yellow Media shares was held to be further evidence that the estate trustee did not invest prudently.
Many people have watched their portfolios shrivel and are looking to hold someone accountable. Beneficiaries of an estate are no different and sometimes they will blame the executor. The liability of an executor will depend on the facts specific to that case. Before executors commence making investments and before beneficiaries sue an executor it behooves them to review the Groome case, the Trustee Act and consult with a competent lawyer about prudent next steps.
- Groome at para 4. ↵
- Groome at para 5. ↵
- Groome at para 18. ↵
- Groome at para 7. ↵
- Groome at para 17. ↵
- Trustee Act, R.S.O. 1990, c. T.23, s. 27(9). ↵
- Groome at para 17. ↵
- Groome at para 19. ↵
- Ed Esposoto, “Trust Law”, in Lindsay Ann Histrop’s Estate Planning Precedents, ch. 6.1. ↵
- Timothy Youdan and Elie Roth, “Acting with Reasonable Care and Prudence” in Widdifield’s Executors and Trustees, ch. 6.6. ↵
- Trustee Act, R.S.O. 1990, c. T.23, s. 28(1). ↵
- D.W.M. Waters, Law of Trusts in Canada, ch. 17.1. ↵
- Trustee Act, R.S.O. 1990, c. T.23, s. 27(3). ↵
- Trustee Act, R.S.O. 1990, c. T.23, ss. 27(7)-(8). ↵