When an individual passes away, a process known as ‘estate administration’ begins. This is the process where the personal representative (the executor or administrator) winds up the deceased’s affairs and distributes the deceased’s assets in accordance with their last known wishes. When the deceased dies with an interest in a private corporation, this triggers important steps and considerations in the administration. This article is meant to offer a roadmap to personal representatives dealing with private company shares as part of the estate. Helpful tips are also included to flag important considerations for private business owners and potential succession planning during their lifetime.
What is a private corporation?
A corporation is a separate legal entity created when its Articles of Incorporation are filed with and approved by the relevant government body. It has the same legal powers as an individual person and is separate and distinct from its owners – the shareholders. Corporations can either be public (with their stocks being traded on the public market) or private (where the company is owned by a limited number of shareholders and is not publically traded).
The deceased may own shares in a private corporation because they founded the business, either alone or with others, or they invested in the business by purchasing the shares during their lifetime.
Type of Interest
Fundamental to the estate administration is the type of business interest held by the deceased. Was the deceased the sole shareholder and director of the corporation, or one of many shareholders? The answer to these questions will determine how the shares are treated in the administration of the estate.
Sole Shareholder and Director
If the deceased was the sole shareholder and director of a company, the personal representative must consider the following elements in the estate administration:
1. Transmission of the shares to the personal representative
One of the personal representative’s main duties is to safeguard the estate assets until a distribution can be made to the beneficiaries. If the deceased was the sole shareholder and director of a company, the personal representative must step into their shoes and maintain the company until distribution. Therefore, at the outset, a transmission of the company shares must be made to the personal representative. This transmission can typically take place without a Grant of Probate (discussed below in greater detail). Once the shares are in the name of the personal representative, they can elect themselves as the director of the company and maintain the company in the interim. The correct corporate records must be executed to properly record the transmission to and election of the personal representative. It is recommended this documentation is prepared by a lawyer.
2. Is a Grant of Probate required?
As part of the administration of the estate, the personal representative may need to obtain a Grant of Probate. A Grant of Probate is an official document from the governing court that legally acknowledges the authority of the personal representative. It is only required when a third-party organization (most commonly a financial institution or the Land Titles Office) requests it. Without a Grant of Probate, the institution will not release the deceased’s assets to the personal representative. As part of the probate application process, the personal representative must list all the assets and secured debts of the deceased as of their date of death, and B.C. probate fees of approximately 1.4% of the value of the estate are calculated and payable to the provincial government.
A review of the company’s Articles will need to be completed to determine if there is any requirement for a Grant of Probate before the private company shares are transferred to the personal representative. Typically, the Articles leave the requirement for a Grant of Probate to the discretion of the shareholders. When the deceased is the sole shareholder, a Grant of Probate is typically not required. This may differ if there are more than one shareholder and the shareholders request the personal representative to obtain the Grant.
3. Has the deceased gifted the company shares in a Last Will?
The Last Will of the Deceased is the foundational document for any estate administration. An executor must divide the deceased’s assets in accordance with the terms of the Last Will. The deceased has the legal ability to gift their private company shares through their Last Will since they own the shares in their personal name. This is strictly a gift of the shares, not a direct gift of the corporate property. For example, if the deceased’s corporation owns real property in B.C., the property itself cannot be gifted in the Last Will because the deceased does not own the corporate property personally.
The treatment of the private company shares will be dependent on the Last Will of the deceased. There are three scenarios a personal representative may be faced with during the administration:
- The deceased had one Last Will and the shares are dealt with in accordance with this document. This is the most typical scenario seen by personal representatives when administering an estate – the deceased died with a single Last Will gifting all of their assets to specific people or organizations. A specific gift of the company shares may be listed in the Last Will, or the company shares may make up part of the ‘residue’ of the estate and be divided in accordance with residue clause.
- The deceased had more than one Last Will where one will strictly deals with the private company shares. This planning technique is called “multiple wills” in B.C. During the deceased’s life, they may have engaged in estate planning and created multiple wills – one Will to deal with assets that are subject to probate (i.e. bank accounts, real property etc.), and a second for the private company shares that do not require probate (the “Corporate Will”). The use of multiple wills is a technique to avoid paying probate fees on company shares of significant value. For example, if the deceased died with only one Will, and the personal representative needs to obtain a Grant of Probate for an asset owned by the deceased (i.e. a bank account or the deceased’s home), the private company shares and their value will need to be listed on the probate application and would be included in the probate fee calculation. This can be problematic if the value of the private company shares is significant, especially since the private company shares do not typically need to be probated and therefore no probate fee would be payable on their value. This scenario can be avoided if the deceased utilized multiple wills as a planning strategy. The personal representative of the Corporate Will is still legally obligated to abide by the terms of the Corporate Will and administer it in accordance with the law, but the only assets they would have authority over are those listed in the Corporate Will. For further information on private company shares and multiple wills, please click here.
- The deceased died without a Last Will. If a deceased dies without a Will, the estate will be administered in accordance with the provisions of the Wills, Estate, and Succession Act. An analysis of the deceased’s family tree will determine who the beneficiaries of the estate are and who will eventually receive the private company shares.
Much of the process described above is applicable to a private corporation with two or more shareholders with one significant difference: the existence of any corporate agreements which dictate what is to happen on the death of one of the shareholder. The most common agreement that influences the treatment of shares of the death of a shareholder is a Shareholders’ Agreement.
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a legally-binding agreement among the shareholders of a company. The agreement describes how the company should be operated and outlines the respective rights of the shareholders. It is extremely useful as it addresses how the shareholders are to conduct themselves if certain situations arise throughout the operation of the company, providing clarity and understanding to all parties at the outset of the business venture. For more information on why Shareholders’ Agreements are vital to business operations, please click here.
How does a Shareholders’ Agreement impact the estate administration?
Commonly included in a Shareholders’ Agreement is a clause triggered by the death of a shareholder. Each agreement is fact-specific, but typically this clause triggers a mandatory sale of the shares held by the deceased shareholder. This has two benefits. First, it ensures the deceased shareholder’s estate receives sufficient compensation for the deceased shareholder’s investment in the company during their lifetime. Second, it provides clarity and reassurance to the remaining shareholders that they will not be getting into business with an unknown individual (who would otherwise receive the private company shares through the deceased’s Last Will).
The clause in the Shareholders’ Agreement determines the terms of the sale, which may include:
- The options available to the personal representative to sell the shares back to the company or to the other shareholders;
- The method of valuation of the shares to determine the purchase price;
- The obligation for the company or the other shareholders to purchase the shares;
- The timelines for the transaction; and
- The application of any life insurance held by the company for the deceased shareholder to the eventual purchase price of the shares.
A personal representative must inquire with the deceased’s business partners to determine whether any Shareholders’ Agreements or other agreements are in place that may impact the treatment of the shares during the administration. If one exists, the personal representative can work with their legal counsel to ensure the correct procedure is followed.
Navigating the administration of an estate with private company shares can be tedious. If you require assistance or have any questions relating to the treatment of the private company shares, a member of our Estate Administration Team would be happy to assist. If you are a private-business owner interested in putting in place a succession plan, multiple wills, or Shareholders’ Agreement to clearly define what is to occur on your death, please contact any member of our Estate Planning Group and we will connect you with a team of legal professions to achieve your goals.