An Estate Trustee Pays A Beneficiary Too Much - Now What?
What happens if an estate trustee makes a mistake and fails to pay all of the estate's debts and obligations before making a payment to a beneficiary. Does the estate trustee have to repay the debts or does the beneficiary have to repay all or part of the inheritance s/he received?
The short answer is, like so many legal answers, that it depends on the particular facts of the case. However, it is most likely that the beneficiary will have to repay what s/he received.
In Cronan Estate v Hughes, the Ontario Superior Court examined this very issue. The estate trustee redeemed a RRIF and mistakenly believed that the bank had withheld the appropriate amount of income tax. Based on this mistaken belief, the trustee sent an interim distribution to the beneficiaries. The beneficiaries used a small portion of the funds to pay off their mortgage and then, based on their belief that the money was theirs and that further funds would be arriving, re-mortgaged their property to buy a time-share in Curacao. Some time latter, the trustee learned of his mistake and requested repayment of some of the distribution. The beneficiaries refused.
To determine who should bear the cost of the mistake, the court applied "mistake of fact" doctrine, which states that monies paid by mistake ought to be repaid unless a defendant (recipient) can show a counterveiling equity which would make it unjust to repay the money. A counterveiling equity is usually found when the recipient altered his or her position prejudicially or if s/he placed herself or himself in a compromising situation.
The recipient beneficiaries argued that they had altered their position by remortgaging their house. The time share they purchased had declared bankruptcy and they claimed they were prejudiced by the change in position. The court rejected that argument determining that the remortgaging occurred because the previous mortgage had been paid off. There was, therefore, no counterveiling equity to prevent repayment.
The trustee was also required to repay the compensation that he had pre-taken for his work in administering the estate.
The Lesson: This case is very close to the line of whether the beneficiaries altered their position prejudicially. That said, it provides a cautionary tale that a beneficiary may be responsible to pay back some of the inheritance s/he receives if the trustee makes a genuine mistake.
Estate v Hughes, 2000 CarswellOnt 4587 (ON SC)
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