Right to Indemnification of Legal Fees
Section 23.1 of the Trustee Act, RSO 1990, c T.23 confirms that estate trustees are entitled to be indemnified for the legitimate costs of carrying out their duties. In other words, estate trustees should not have bear the costs of the estate administration. This includes an estate trustee’s legal fees.
The court has the final word on whether an estate expense is reasonable. An application to pass accounts is a specialized court proceeding where the estate trustee puts forward the estate accounts to be reviewed and, potentially, approved by a judge. If, however, the judge determines that an expense was improper or excessive, the judge may order the estate trustee to reimburse the estate.
Generally speaking, the estate trustee’s costs of the application to pass accounts, including legal fees, are a legitimate estate expenses that should be paid from the estate assets.[1] In Eve v Brook, 2016 ONSC 1496 (CanLII), the Court held (at ¶ 163):
Legal fees incurred on a contested passing of accounts are true administration expenses … I accept … that the trustee is entitled to be reimbursed for the legal expenses for contested passing of accounts from the Estate … However, on the passing of accounts, the court will determine whether the fees were reasonable.
Furthermore, the court has further held that estate trustees “should not be disentitled to their reasonable costs even if their compensation is substantially reduced.”[2]
Given that estate trustees are generally reimbursed for most, if not all, of their legal fees and costs related to a passing of accounts, what happens when an estate trustee agrees to step down, but the application to pass accounts is ongoing? In that case, can the estate trustee put estate funds aside to pay her legal fees even after her removal? This was the situation addressed in Trezzi v Trezzi, 2023 ONSC 4696.
Trezzi v Trezzi – Controversial Request for a Holdback for Legal Fees
Trezzi v Trezzi involved an application to interpret the deceased’s will and a claim by the deceased’s spouse for equalization under the Family Law Act. Given the tensions that existed between the deceased’s family members (who were also beneficiaries and creditors of the estate), the parties agreed to the appointment of a neutral, professional estate trustee.
After four years managing the estate, the estate trustee was ordered to pass his accounts. The passing of accounts was highly contentious and the family members filed numerous objections to the accounts. At the same time, the family members brought a motion to remove the estate trustee.
The estate trustee agreed to step down from his role and transition the management of the estate to the family members. However, the estate trustee sought to hold back $500,000 – representing nearly all liquid assets of the estate – in order to pay his ongoing legal fees in the as-yet unresolved application to pass accounts.
While the family members agreed that the estate trustee would likely be entitled to be reimbursed for his legal fees in the passing of accounts, they took the position that he had to bear that expense at first instance. In particular, they argued that the estate trustee should only be reimbursed after the judge hearing the application to pass accounts determined whether the estate trustee’s legal fees were appropriate and reasonable. For this reason, they opposed the estate trustee’s request for a holdback.
The court disagreed with the family members and granted the estate trustee’s request for a holdback. The court held that, in certain circumstances, particularly where a neutral, professional trustee is appointed by court order, it is right for the estate trustee to retain estate funds for its protection until the passing of accounts has been concluded. Furthermore, it would go against good public policy to require estate trustees to pay an expense from personal funds at first instance then seek reimbursement from the estate. Ensuring that estate trustees have access to estate funds to pay estate expenses places less of a burden on the estate trustee and fosters the smooth administration of the estate.
However, the court reduced the amount of the holdback granted to the estate trustee by half, noting that the estate trustee failed to prove that the full $500,000 was reasonable. The court further held that the original amount requested was unreasonable, given that a holdback of that size would deprive the succeeding estate trustees of the ability to pay the estate’s ongoing expenses.
Take Away
The courts are sensitive to the fact that there is a need for neutral parties to step into the role of estate trustee in highly contentious estate matters. For this reason, the courts will not impose undue burdens on these parties which may hinder their ability to do their job, or which may act as a deterrent from acting as estate trustee in the first place.
[1] See also Kanee Estate (Re), 1991 CanLII 720 (BC SC).
[2] Andrachuk Estate, Re, [2000] OJ No. 2092, 2000 CarswellOnt 2112 (ON SCJ) at ¶ 13.
