A recent ontario court decision left an estate trustee on the hook for most of the investment losses in an estate. That ruling is a reminder of the importance of making prudent investment decisions, including proper diversification, when managing an investment portfolio in a trust or estate.
"[The ruling] is not that an estate trustee is expected to be the best investor, or make the best investment decisions," says Debbie Pearl-Weinberg, executive director of tax and estate planning, wealth strategies group, with Canadian Imperial Bank of Commerce in Toronto. "[The court's intent] is just that those decisions have to be to the standard of what a prudent investor would do."
According to the Ontario Trustee Act: "A trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise" when investing trust property. The trustee also "must diversify trust property to the extent that is appropriate," taking into account instructions embedded in the trust and general market conditions.
Mowry v. Groome, a decision released in December 2016, emphasized these responsibilities. Christopher Mowry was appointed estate trustee (a.k.a. executor) to administer the estate of Charles William Groome on behalf of the estate's beneficiaries. The estate was valued at $436,289, with the primary asset being the deceased's life income fund.
Following a transfer of accounts, Mowry signed a client agreement with a brokerage, indicating that his account objectives were 10% growth and 90% speculative, and that his risk tolerance was 10% "medium" and 90% "high." Notes the decision: "Clearly those percentages are unacceptable for an estate trustee."
The portfolio reflected the risk profile Mowry had given, with the investments concentrated in energy stocks. In Dec. 2014, energy stocks dropped, resulting in the estate portfolio sustaining losses of $164,983.
Beneficiaries of the estate called for an accounting of the estate administration in court, known as a "passing of accounts." The beneficiaries filed a number of objections to Mowry's administration and asked for various measures of relief.
Mowry argued in court that he had in fact diversified the estate's investments, both by keeping and renovating the deceased's house with the intention of eventually earning rental income for the trust and by buying shares in a media company.
The court did not accept Mowry's argument. The judge noted that there was very little equity in the house, and that had it been sold at the time of death, the proceeds from the sale would have been plus or minus $5,000. The plan to renovate the house "was not a particularly wise investment decision," the judge wrote. And, more important, the decision to renovate rather than sell "did not excuse the risk of retaining the stock portfolio."
The judge also noted that Mowry had bought shares in a media company, on margin, for $48,329 in June 2014: "Buying stocks on margin is an unacceptable risk for an estate trustee, and this purchase did nothing to mitigate the risk" in the stock portfolio. In July 2014, Mowry bought even more shares in the media company, valued at $50,006, "contrary to the advice of his investment advisor." Several weeks later, the shares were worthless, resulting in a loss of $96,150 for the estate.
The judge found in favour of most of the beneficiaries' objections, concluding that the estate trustee had "failed to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments."
The court ordered Mowry to pay half the loss from the energy stocks and the entire loss from the investment in the media company. Mowry also was ordered to reimburse the estate for: $70,000 he claimed had been a gift to him from the deceased, which the court found Mowry was not entitled to; $89,400 in income tax penalties and interest resulting from his failure to file a tax return for the estate; and a portion of his compensation as trustee and of the legal fees paid to estate solicitors. In total, Mowry was ordered to pay $357,140 to the estate. He also was removed as estate trustee.
Marcia Green, an associate lawyer with Nelligan O'Brien Payne LLP in Ottawa, calls the court's decision "understandable": "It might be harsh from Mr. Mowry's perspective, because he has to pay back significant funds, which he may not have. But when you invest in one sector - and that's it - you know you're taking a risk."
Taking on the role of an estate trustee or executor is a serious responsibility, with many potential pitfalls, and shouldn't be accepted lightly.
"Get professional advice and listen to your advisors," says David Freedman, counsel with estates law firm Hull & Hull LLP in Toronto. "You're running a business - the business of administering an estate. So, unless you're really good at running that kind of business, any reasonable person would seek out advice - from a lawyer, an accountant or an investment advisor - and follow that advice."
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