Estate planning isn't a fun topic, but it's essential. That's especially true for business owners, from sole proprietorships to corporations. Be sure your final plans meet your hopes and expectations for your business—for the sake of yourself, your family and your partners.
Administering the estate of a family member or friend may seem like a complicated undertaking. Understanding what is involved when distributing property, paying off debts, and closing accounts is a serious responsibility, and likely one everyone will have to take on at some point in their lives. Administering estates where business interests are involved introduces an additional layer of complexity.
As estate administration is not my specialty, I've interviewed my colleague Peter Tomic for this article. Peter will provide some guidance on administering the estates of deceased business owners and some estate planning considerations for business owners who wish to provide an orderly transfer of their business interests upon their death.
To start, who is responsible for administering the estate? If the deceased individual died with a will, in most cases, the will names a personal representative who'll be responsible for administering the estate. That person does not have to accept the role, however. If you have been named an executor, you should first ask yourself whether you are prepared to take on the responsibility. If not, you should renounce your appointment before taking any steps to administer the estate.
If there's no will or a will without a personal representative, no one will have the legal authority to administer the estate without a court order. Someone will have to apply to the court for a Grant of Administration, which will empower them to deal with the estate. Each of the territories and provinces has default rules about who has the priority to apply for a Grant of Administration.
What is the role of a personal representative? At its most basic, the job of the personal representative is to make funeral arrangements, identify the deceased's assets, pay the deceased's debts (including tax liabilities), report to the beneficiaries, and distribute the estate's assets as directed by the will or by the statutory distribution scheme—and to do all of that as quickly as possible.
How is a personal representative's job different if the deceased was a business owner? Interests in a business will generally be considered as estate assets. So, while there is no difference in the ultimate duty to administer and distribute a business asset, how that happens will depend on how the business was structured, whether there is a will, and what the deceased directed should happen with the business. Here are some examples of the issues that can arise with different ownership structures:
- Sole proprietorship: If the business was owned
and operated by the deceased personally, the deceased (and now
their estate) owns the assets and takes on the business:s
liabilities. If there were unfulfilled contracts or leases whose
terms haven:t expired, the estate may be liable to pay for any
consequences of their early termination.
- Partnership: A partnership is where two or
more people carry on business together with the expectation of
profit. Like a sole proprietorship, a partnership is not a separate
legal entity. The default rule in the Northwest Territories is that
unless a partnership agreement exists, the partnership is dissolved
on the death of a partner and its business property and profits are
divided equally. Those default rules can be modified by way of a
partnership agreement. A personal representative must confirm if an
agreement exists and may be bound by its terms.
- Corporation: A corporation is a separate legal entity from the deceased, even where the deceased was the only shareholder, director and officer. The corporation remains in existence even after death and must continue to meet its obligations such as payroll, taxes and completing ongoing contracts. The directors and officers are responsible for the day-to-day operations of a corporation. A personal representative will not automatically become a director tasked with running the business. Instead, the personal representative steps into the shoes of the deceased shareholder and will exercise the voting rights associated with those shares to appoint directors, for example. Deciding who to appoint to continue the management of a corporation before the estate is ready for distribution is an important decision for the personal representative in the early stages of an estate administration.
It sounds like the administration can get complex quickly in these cases. What can business owners do to make an estate administration easier? I would say that the best thing a business owner can do is to have a valid will in place. The personal representative takes their authority from a will. If there is a will, a personal representative can immediately take steps to administer, or at the very least preserve, the business assets. Without a will, no one will act until the court issues the Grant of Administration. That could take time, especially if there is a dispute over who should act.
In my view, the second most valuable thing is to clearly set out your intentions for the business in the will. That requires you to appreciate the dynamics between your intended beneficiaries. Generally, it isn't a good idea to leave the business to individuals you know who do not get along, or to expect that a child will continue to operate the business if they haven't been a part of its operations before your death.
You also need to be clear on how you own your assets. Often, I see people trying to give away corporation-owned assets in their will. It is also important to have some sense of the anticipated tax liability on your death, so I suggest that business owners ask their tax advisors that question from time to time.
Having clarity in your estate plan will make the job easier for your personal representatives, likely reduce the professional fees after death and may help to avoid disputes and misunderstandings when you are no longer around to explain yourself.
This article was originally published in Up Here Business - Issue 3 2022.
Predrag (Peter) Tomic is a wills and estates lawyer with a focus on complex estate and trust litigation, estate planning and probate matters.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.