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Disputes Between Executors & Beneficiaries

Disputes Between Executors & Beneficiaries


by Andrew Verspaandonk, Barrister

Released October 2007

ABOUT THIS PROGRAM

The role of Executor is significant for all involved with a deceased estate.

It is potentially complex, onerous and open to dispute.

This program examines key aspects of the role and conduct of Executors, including:

  • the fundamental duties and obligations of an Executor
  • the relationship between an Executor and beneficiaries
  • rights of beneficiaries
  • conflicts of interest
  • removal of Executors
  • conduct that Executors should avoid

EXECUTORS - DISPUTES WITH BENEFICIARIES

The Executor’s role

The essence of the role of the executor is to put the wishes of the testator into effect by collecting assets, paying liabilities and primarily of course, distributing the testator’s property to those the testator wished to benefit.

Unlike trustees who must act unanimously, executors may act severally and their actions so taken will bind the estate:

The office is one and indivisible, no matter whether it is executable by one or several. When it is said that co-executors are to be regarded as an individual person, it is not meant that all must unite in the performance of each act, but that their official personality is not divisible or distinguishable and that they have individually and collectively all the rights and duties of the office they undertake.1

The executor stands in a fiduciary relationship to the beneficiaries of the estate. The executor must therefore discharge his duties with due care and with undivided loyalty to the good of the beneficiaries.

There are a number of specific powers and duties inhering in the office of executor. For a full list and discussion, refer to Ford and Lee, Principles of the Law of Trusts, but they include:

  • disposing of the body;
  • proving the Will, if that is required for the administration or because somebody wishes to bring a claim under Part IV of the Administration and Probate Act 1958;
  • collecting in and securing the assets of the estate;
  • ascertaining and discharging the deceased’s liabilities;
  • compromising or settling claims or other liabilities, pursuant to the powers expressly given by section 19 of the Trustee Act 1958;
  • keeping proper accounts and distributing the estate assets.

An executor should apply for a grant of Probate of the Will promptly. Where a grant is not applied for within 6 weeks of the death of the testator the matter may be brought before the Court to receive an explanation as to why this has not occurred and if good cause is not shown, to put the executor to an election to either prove or renounce probate or provide for representation to be given to the plaintiff.2  Beach J has observed3 that the fact that the legislature had set this period at 6 weeks gave “some indication” of the speed at which such an application was expected to be made. Mandie J has criticized a delay of 6 months from the date of death, bearing in mind that the application was routine and the executor was a solicitor. He opined that a period of 3 months in those circumstances would have been justified.4

The application may be made by a “person interested in the estate”. This has been widely interpreted5 and can include a beneficiary6, a creditor7, a fellow executor8, a prospective Part IV claimant9 or even a trustee in bankruptcy of a beneficiary.10

On the other hand, the executor has a year from the date of death within which he cannot be compelled to distribute the estate.11

This “executor’s year” is reflected in the period which elapses before a legatee is entitled to interest on their legacy pursuant to a judgment ordering an account of legacies under order 78.05 of the Rules of Court. Note also that this Rule is interpreted as entitling a successful Part IV claimant who obtains a specific amount by way of provision (as opposed to a share in residue) to interest from a year after the death.12  Interest, although sometimes of a modest amount, can even make the difference between beating an offer of compromise and falling short of one.13

Another time limit which executors should observe is the limitation period for claims for further provision set by section 99 of the Administration and Probate Act. Accordingly, the estate should not be distributed within 6 months of the grant of probate. If distribution occurs within that time, the executor will be personally liable for any award of further provision made, subject to a right of recoupment from the beneficiaries who received the distribution.

Executors commonly request beneficiaries to execute releases or even indemnities upon the completion of the administration, usually before entitlements are paid out to those beneficiaries. However, the general rule is that where a trustee is obliged to account for trust property, he cannot make that accounting conditional upon obtain the beneficiary providing a release or indemnity. In Moody-v-Simpson 14 Madden CJ noted that it was:

…very reasonable that a beneficiary receiving the money shall not foreclose himself against any claims he may have against the trustee for breaches of trust or otherwise.15

However, a qualification exists:

Where a trustee is induced, for the advantage of the beneficiary- prematurely or under some conditions which make it an indulgence to the beneficiary- to hand over the subject matter of the trust to the beneficiary, although the beneficiary is not then absolutely entitled to it, the trustee may demand from the beneficiary an indemnity: for this reason, that the beneficiary is anticipating the legal time for getting the money or property.16

In general, where a beneficiary prospectively approves of a breach of trust or concurs in such breach at the time, or subsequently ratifies a breach of trust, then subject to the beneficiary being fully informed as to the legal consequences of the trustee’s conduct, he cannot complain of the breach.17 In accordance with that general proposition, where the beneficiary requests the trustee to depart from the terms of the trust, then a release and indemnity can be obtained by the trustee, but only in relation to the consequences of that departure, not in relation to any matter whatsoever. In short, the release and indemnity must be specific to the departure requested or authorized and must be given on the basis of full disclosure.18 In accordance with this, a release which has been obtained will probably not be enforceable in respect of a liability of which the beneficiary did not have full disclosure.

An executor (or trustee) has a right of recoupment from the estate assets in respect of charges and liabilities properly incurred in discharging the office. This will ordinarily include costs in litigation and is an incident of the “contract” between the testator or settler and the executor or trustee. Further, the right of recoupment can be perfected by way of security over estate assets. Note that where an executor is defending a removal application, the costs of defending should not be taken from estate funds until judgment or other order of the Court.19

An executor also has the opportunity of approaching the Court (both under Order 54 of the Rules and the Court’s inherent jurisdiction) to answer questions, give directions or approve transactions.

Rights of beneficiaries

The rights of beneficiaries correspond in general terms with the duties of executors. The primary right of the beneficiary is to a due administration of the Estate, (whether pursuant to Will or the intestacy scheme) and the fruits of that administration:

Mrs Schultz [a beneficiary of a devise in Mrs Pereira’s will] acquired upon the death of Mrs Pereira a right to have the deceased estate administered in accordance with the duties of the executors. Though not the legal or equitable owner of  the assets which were the subject of the devise and bequest in her favour, she had by virtue of the chose in action created by the devise and bequest, an expectation that the assets would pass to her upon completion of the administration, subject to their being realised to meet any outstanding liabilities and to defray the cost of administration, and an interest in respect of those assets. That interest was derived from and dependent upon the chose in action. The interest is of such a kind that, when a beneficiary transmits a chose in action (or part thereof) or that chose in action passes by operation of law, such as under the Bankruptcy Act, that transmission naturally encompasses not only the chose in action but also the expected fruits of that chose in action: Horton-v-Jones; Re: Leigh’s Will Trusts [1970] Ch 277 at 282.20

This right clearly constitutes “property” within the meaning of the Bankruptcy Act 1966 and will vest in the Trustee in Bankruptcy upon sequestration- see sections 5 (1), 116 and 58 (1).

As discussed, this is the precise nature of the right which qualifies the beneficiary as a person interested in the estate of the deceased for the purposes of bringing an application under Section 15 of the Administration and Probate Act 1958 if probate is not applied for within 6 weeks.

One implication of this is that a devisee has no caveatable interest in any land devised, at least until the administration is complete and it has been determined that the land or property has not been required to discharge other liabilities of the deceased or the estate.

Other rights of beneficiaries are the right to bring an application for compelling an executor to prove or renounce probate of a Will, for the removal of an executor or trustee of an estate, for the right to a distribution and the right to an accounting.

Executors and conflicts of interest

In general, an executor as a fiduciary has an obligation to avoid a position of conflict between his own interests and the interests of the estate in general and the beneficiaries in particular.

However, it is wrong to think that if there is any conflict between an executor’s personal interests and executorial duties it must inevitably mean that the executor will be removed.

The cases make it clear that the intention of the testator that a person should act as executor should not lightly be set aside:

It is not every conflict of duty and interest which should result in removal of an executor. The intention of the testator that the executor be a particular person should not lightly be set aside- whether before or after the grant.21

I am satisfied that, before the court would act in any situation of conflict of duty and interest so as to hold that the executor has been proved unfit to act as executor, either that situation must have already given rise to mischief of a level of seriousness that is reasonably high, or there must be a reasonably high level of risk of such mischief arising in the future. I recognize that in using the words “reasonably high”, I am applying a standard which might be criticized as too high and too flexible. But that is as I think it should be.

I consider that the standard should not be set too low in relation to executors, whatever may be the position in relation to other situations of conflict, primarily for the reasons given by Ashley J…that the court should respect the intention of the testator, a matter which is not a consideration in other situations of conflict.22

The question is essentially whether the relevant conflict of interest renders the executor “unfit” pursuant to section 34 (1) (c) in the particular circumstances of the case.23

Executor as beneficiary

As a practical matter, the fact that an executor is also a beneficiary will not constitute a conflict of interest such as to disqualify the executor from holding office. Some real mischief must be demonstrated before such a conflict (recognized as such by Ashley J in Monty-v-Delmo at page 83) will disqualify the executor. Clearly, the testator would have been aware of any conflict arising by inclusion of the executor as beneficiary and will be taken to have approved the appointment regardless.

Executor in possession of land

From time to time an executor remains in possession of estate land, uses same and will not agree to either transfer or sell it so that distribution to the beneficiaries can occur. In these circumstances, the executor is clearly acting in breach of his obligations to call in and administer the assets for the benefit of the beneficiaries. Therefore, unless there is some particular good reason to the contrary, such conduct can be terminated by an application to remove the executor in accordance with the procedures and principles below.

Executor as claimant in an application for further provision

In general, the role of the executor is to defend the interests of the beneficiaries under the provisions of the Will.

These rules put the executor in a position of great responsibility, as he is the only defendant of the will. In In the Will of Lanfear (deceased) Williams J, speaking with the concurrence of Nicholas CJ in Eq. said, “in an ordinary case, specially where the estate is a small one, it is the duty of the executors either to compromise the claim or to contest it and seek to uphold the provisions of the will. For that purpose, they should place all the relevant evidence before the Court relating not only to the case generally, but to any particular circumstances, which the Court should take into consideration relating to any particular gift in the will. In special cases where for instance the executors are themselves beneficiaries under the will or where very substantial benefits are conferred upon beneficiaries, it can be proper for beneficiaries to intervene and be separately represented, but as a general rule, such separate representation  should not be necessary if the executors do their duty….24

Although it is sometimes overlooked, the Rules also provide a mechanism whereby an executor may also make such a claim.

Obviously, the executor cannot be on both sides of the record, therefore, where the executor (or administrator) seeks to make an application under Part IV, the correct defendants are as follows:

  • where there is more than one personal representative, the remaining personal representatives; 25
  • where there is only one personal representative, a person with a substantial interest in opposing the application, for instance, a residuary or other affected beneficiary.26

It follows that the mere fact that an executor intends to claim will not without more, constitute a conflict of interest such that he cannot prove the Will or act in the administration.

Where an executor defendant is “interested” in the claim itself or the estate claimed upon

From time to time, an executor may be in such a position as to raise a query about their willingness to vigorously defend a claim or their impartiality in doing so.

One example of the former situation was where a testator died leaving 3 daughters and a grandson, born of one of the daughters. The grandson made a claim and his mother first, let it be known that she was sympathetic to it and second, dragged the chain in having the administration proceed, apparently in an attempt to put pressure on her co-executrices to resolve the claim. She was discharged from her office by agreement, leaving the two remaining executrices to defend the claim. Had she not voluntarily discharged herself, she could have been removed.

Another situation is where the executor is also a beneficiary in the impugned estate. This casts doubt upon the executor’s impartiality in determining from where any settlement moneys are to be paid. In circumstances such as these, it is the practice of the Master in Court 2 (upon giving initial directions) to require notification of the claim to the other beneficiaries, indicating that they may apply to be joined as defendants to the claim if they wish. The Master usually exercises some judgment as to whether the respective interests are significant enough to justify either a suspicion about the executor’s impartiality and if so, the joinder of further parties. Sometimes, the plaintiff indicates that the interests of certain beneficiaries are not challenged, obviating the need for notification. One recent case in which I appeared involved an executor who was a residuary beneficiary. The specific devises and bequests were actually quite substantial and included a home. However, the executor let it be known that he would bear any settlement (of the three claims brought) from residue. Notification had been given but joinder was ultimately not required.

Although beneficiaries who are joined in this way cannot guarantee receiving their costs at trial if the trial judge believes that the joinder was unnecessary, the practical reality is that at mediation it is relatively uncommon to see objection taken to these costs, or even the costs of beneficiaries who have not been joined but are represented at mediation. However, it would be prudent when advising a beneficiary about these matters to carefully consider the circumstances of the individual case before committing the beneficiary to becoming a party or even attending mediation.

Removal of executors

Section 34 of the Administration and Probate Act provides that an executor’s office may be terminated by the Court where the executor:

(a) remains out of Victoria for more than two years;

(b) desires to be discharged from his office of executor or administrator; or

(c) after such grant or appointment refuses or is unfit to act in such office or is incapable of acting therein.

The Court’s jurisdiction under Section 34 (1) (c) is usually enlivened by misconduct, but also encompasses conflict of interest as a species of unfitness.27

The basic rationale is the protection of beneficiaries. The jurisdiction has been described as follows:

The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred on the trustee. In deciding whether to remove a  trustee the Court forms a judgment based on considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. But in a case where enough appears to  authorize the Court to act, the delicate question whether it should act and proceed to remove the trustee is one upon which the decision of a primary judge is entitled to special weight.28

The court also has an inherent power to remove a trustee (including trustees who are appointed by virtue of their position as executors):

Within the principle so stated, the Court has power to remove a trustee who has not acted in breach of trust and has not been guilty of misconduct and the Court might decide, for the purpose of seeing that the trusts are properly executed, to remove a trustee whose conduct had not been improper in any way. This could only happen rarely. A state of conflict with a beneficiary or other interested person might, at least in concept, so interfere with the administration of a trust as to cause the Court to remove the trustee. An application for removal naturally tends to take the form of charges and misconduct against the trustee, but is not necessarily to be disposed of according to findings upholding or dismissing the charges…29                                         

Further, it is obvious that such questions are not in the normal course amenable to summary determination and should go to trial in the normal way. An application to have a removal dealt with summarily in the Practice Court will usually be unsuccessful.30 It follows that the full trial procedure will usually be necessary with attendant cost and delay.

Such an application was determined summarily in the Practice Court in the matter of Fysh-v-Coote31, however:

  • in that case, the primary judge found that it involved the “simplest of estates” and the administration had not been completed after 3 years,
  • the evidence led to clear findings by the judge that the defendant had “raised obstacles in the path of the disposition of the property”, which was the only asset in the estate and had made “totally unreasonable demands”;
  • the defendant did not submit any substantial affidavit material in response to the plaintiffs’ material and did not seek to cross examine the witnesses for the plaintiffs, hence it was one of the rare cases where such applications could be determined in the Practice Court.

In summary:

  • the question of removal of an executor is a delicate question and the testator’s intention that the executor act should not lightly be set aside;
  • the basis upon which removal occurs is that significant mischief or harm would be done to the beneficiaries’ interests if the executor was not removed;
  • this can arise through undue delay in the administration, conflict of interest and in certain cases, an “unworkable” relationship between co-executors;
  • the question is largely discretionary and one on which the decision of the trial judge has special weight;
  • it follows that in the ordinary course, the question is one to be determined after full examination of all the facts and testing of the evidence at trial in the normal way and it would need to be a very clear case (probably on agreed facts) that could be determined in the Practice Court.

It is also possible for an executor to be voluntarily discharged pursuant to section 34 (1) (b) of the Administration and Probate Act. For an example of a case where one executor wished to be discharged, but also sought the removal of his co-executor and the appointment of an independent executor to ensure that the rights of a beneficiary would be protected, see Mann-v-Grantham.32

Conduct to avoid

Although it is impossible to exclude the possibility of dissention and conflict, the cases illustrate conduct for which executors have been criticized, whether for disputes between themselves or as regards the beneficiaries of the estate.

  • persistently refusing  to obtain probate;
  • openly refusing to comply with a trust for sale and stating an intention to hold the estate assets indefinitely to enable another beneficiary to have the use of estate property on a rental basis;
  • failing to comply with consent order to either prove Will or renounce probate;
  • excessive delay in the administration, including 6 month delay in applying for probate;
  • an attempt (later abandoned) to require the fixing of executor’s commission as a condition of executing terms of settlement in a Part IV proceeding, which was taken into account in a successful removal application;
  • delay in paying agreed costs in a Part IV proceeding, found to be motivated by a desire to compel agreement as to the executor’s costs and claim for commission;
  • “very serious” persistent failure to respond to the correspondence and requests for information of beneficiaries and their solicitors;
  • failure to lodge tax returns, delay in paying legacies, failure to pay interest on legacies, failure to invest moneys in interest bearing account,
  • failure to authorize works on real estate to make it lettable with a consequent wasting (12 months vacancy);
  • failure to provide information and permit inspection of accounts;
  • payment, from estate funds, of executor’s legal costs in defending a removal application, prior to the conclusion of the application;
  • attempting to exercise a discretionary power of sale for an ulterior purpose;
  • refusing to agree to a co-executor’s proper claim for the costs of defending litigation;
  • attempting to have rental from an estate property paid directly to an co-executor beneficiary rather than into the estate account when the estate was still embroiled in litigation and the administration incomplete.

Clearly conduct such as this will antagonize beneficiaries, co-executors and ultimately, the Judges who will adjudicate any necessary application.

Unreasonable behaviour and acts in breach of trust usually attract the sanction of either indemnity or solicitor client costs in any subsequent litigation.33

Although prima facie, the conduct of the executor, as fiduciary will be scrutinized in the event of a complaint or removal application, Courts are also realistic enough to know that at times, the complaints made are unreasonable and improper. In such circumstances, applications for commission and costs can provide some vindication of the executor’s otherwise thankless task.

FOOTNOTES

  1. Union Bank of Australia-v-Harrison Jones & Devlin Ltd, (1910) 11 CLR 494 at 516; applied more recently in relation to an interment of ashes, see Leeburn-v-Derndorfer [2004] VSC 172.
  2. Section 15 Administration and Probate Act 1958. For the procedure to obtain Letters of Administration for a successful applicant, see Re: Petta (2005) 12 VR 219.
  3. Sharpe & Anor.-v-Forbath [2000] VSC 282 at [10].
  4. Skaftouros-v-Dimos [2002] VSC 198.
  5. Re: Giggins, Deceased [1969] VR 208 at 210-11.
  6. Halliday-v-Hill and another [2003] VSC 509.
  7. Re: Randall [1927] VLR 535.
  8. Re: Giggins Deceased.
  9. Shaw-v-Blanchett [2006] VSC 295.
  10. White-v-Cross, Supreme Court of Victoria, file 6326 of 2003.
  11. Section 49 of the Administration and Probate Act 1958.
  12. Blair-v-Blair [2004] 10 VR 69.
  13. Blair-v-Blair [2002] VSC 125.
  14. (1895) 21 VLR 244.
  15. At 248.
  16. At 248.
  17. Ford and Lee, [18100-18120].
  18. Ford and Lee, [18110].
  19. Skaftouros-v-Dimos [2002] VSC 198 at [206] – [212].
  20. Official Receiver-v-Schulz 170 CLR 306 at 314.
  21. Monty Financial Services Ltd and anor-v- Delmo [1996] 1 VR 65 at 83.
  22. Gowans-v-Watkins SCV unreported decision of Teague J, 21 February 1996 at 30-31.
  23. Monty-v-Delmo at page 82.
  24. Vasiljev-v-Public Trustee [1974] 2 NSWLR 497 at 503.
  25. Chapter II, Rule 16.04 (1).
  26. Chapter II Rule 16.04 (2).
  27. Monty-v-Delmo.
  28. Miller-v-Cameron (1936) 54 CLR 572 at 580-1.
  29. See-v-Hardman [2002] NSWSC 287 at [17]. See also Profilio-v-Profilio [1999] NSWSC 657 at [25] where  Bryson J refers to the court’s jurisdiction being exercisable where the administration has been rendered “inoperative”.
  30. Morgan-v-MacRae [2001] NSWSC 1017 at [6], [17] and [18], applied by Dodds-Streeton J in an interlocutory application in Mann-v-Grantham [2004] VSC 156.
  31. [2000] VSCA 150.
  32. Mann-v-Grantham.
  33. See for instance Skaftouros-v-Dimos [2003] VSC 219 in respect of a removal application and Halliday-v-Hill & anor. [2004] VSC 55 in respect of an application under section 15 of the Administration and Probate Act

STUDY POINTS

  1. “Executors must act jointly.” True or false?
  2. How quickly should an executor apply for a grant of probate?
  3. How long before an executor can be compelled to distribute the estate, and what happens if distribution occurs within 6 months of death?
  4. “An executor can obtain a binding release and indemnity from a beneficiary.” True or false? Explain your answer.
  5. What interest does a beneficiary devised a specific asset have, in respect of that asset, before distribution?
  6. Explain the test(s) or standard(s) the Court will look for before removing an executor from office