Duty to Avoid Conflict of Interest
There is a general prohibition against an executor or administrator of an estate (known generally as the “personal representative” of an estate) acting in a situation in which there is a conflict between the personal representative’s interests and the interests of some of the beneficiaries of the estate.
It is very important for a personal representative to be cautious about how discretion is exercised in a situation where the exercise of that discretion might benefit the personal representative to the detriment (or even perceived detriment) of a beneficiary or beneficiaries. This is commonly a concern with the distribution of assets that have not been liquidated (e.g. vehicles, collectibles, valuable personal effects) or the sale of substantial assets (e.g. real property, vehicles, collectibles, jewelry).
It can be particularly problematic if a personal representative is a director, officer, or shareholder of a company the estate has an interest in. A personal representative in such a situation must take extra care to avoid a conflict of interest.
Note that self-dealing by a personal representative is forbidden; unless the Will specifically permits it, a personal representative is not permitted to purchase an asset from the estate.
Duty to Maintain an “Even Hand”
Not only must a personal representative be diligent in avoiding conflicts of interest, a personal representative must also take care to ensure that they are being fair in their treatment of the various beneficiaries and classes of beneficiaries. Beneficiaries of the same class with an equal interest in the estate must be treated such that they each receive an equal interest unless the Will states otherwise. For example, if there are two or more beneficiaries and any assets will not be converted to cash but will instead be distributed in the form they were in when the deceased passed (referred to as distribution in specie), the personal representative must ensure that each beneficiary receives equal net value. This can require consideration of the nature of, and the various tax consequences associated with, any assets that will be distributed in specie.
In the absence of directions to the contrary in the Will, beneficiaries of different classes must also be treated fairly by a personal representative. For example, a Will might grant a primary beneficiary the right to live in an asset (if it is real property) and receive the income generated by an asset or fund until they die, after which, the remainder is to be distributed to another person (known as the “remainderman”). In such a situation, unless the Will provides otherwise, a personal representative is generally obliged to balance the interests of the primary beneficiary and the remainderman. This would require a balancing of the income and capital generated to ensure that enough income is generated to be fair to the primary beneficiary and ensure that there is sufficient protection and growth of the capital to be fair to the remainderman. If a Will specifies whether income or capital investment is preferred or otherwise states that the interests of one beneficiary may be preferred over another, the personal representative may be freed, to the extent permitted by the Will, from the default requirement to maintain an even hand.
Similarly, if there are any expenses associated with an estate asset held in trust, a personal representative must determine whether the expense should be paid from the income or the capital. The personal representative should ensure that expenses are paid from the correct one of these funds. Generally, recurring ordinary expenses are paid out of income and costs associated with preserving or protecting the capital are paid out of capital, but a personal representative should seek legal advice regarding which is applicable before paying an expense associated with an asset held in trust. Paying an expense out of the wrong fund could result in upset beneficiaries and potential personal liability for the personal representative.
If a personal representative is required to hold assets in trust before distributing them, for example, funds held for minor beneficiaries until they reach a prescribed age, it is the personal representative’s duty to monitor, protect, and (where applicable) invest estate assets to ensure that they generate a reasonable rate of return without undue risk. This is so that value is preserved for the beneficiaries over time.
All investments must qualify as authorized investments of the estate in accordance with the Trustee Act unless otherwise permitted by the terms of the Will. Any assets or investments that are not so authorized must be converted to an authorized form promptly. Note that a personal representative can be held personally liable for losses resulting from risky or unauthorized investments.
Keeping Beneficiaries Informed
As a trustee and fiduciary, a personal representative has a duty to account to the beneficiaries for everything that the personal representative does with the property being held for those beneficiaries. It is generally prudent for a personal representative to respond to reasonable inquiries by beneficiaries and to keep them updated regarding progress of the administration.
A personal representative may not delegate their authority unless either the document which appoints them (e.g. a Will) permits it or the delegation being considered is permitted by the relevant legislation. The Trustee Act (RSBC 1996, c 464) is the relevant statute in British Columbia. It permits some limited delegation by a personal representative.
Permissible delegation under the Trustee Act includes authorizing a solicitor, and, in some circumstances, a banker, to give or receive a discharge; it also includes delegating to an agent “the degree of authority with respect to the investment of trust property that a prudent investor might delegate in accordance with ordinary business practice.” (see: Sections 7 and 15.5 of the Trustee Act).
A personal representative’s decision-making responsibility is their own to bear. Generally, a personal representative should not delegate any decision-making regarding the distribution of the estate. If there is a question of an exercise of the representative’s discretion and all the beneficiaries do not agree in writing, a personal representative should consider seeking the advice of legal counsel before proceeding. When the beneficiaries do not agree that a given course of action is prudent, the Court is the arbiter of the prudence of the representative’s administrative decision-making.
Personal representatives of estates have a duty to avoid conflicts of interest and to maintain an even hand in their treatment of the beneficiaries of the estate. They must respond to reasonable inquiries made by beneficiaries and take reasonable steps to preserve the value of the assets, including investing them prudently where appropriate. While personal representatives may hire professionals to assist and advise them, they must not delegate decision-making to anyone unless the Will expressly permits it.
Join us next month when we will discuss issues relating to final and interim distributions of estate assets in British Columbia.
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