Administering an estate that includes a business is often a complex and nuanced process. Business assets require careful attention, as they involve not only financial considerations but also legal and operational challenges. One of the primary concerns when handling such an estate is ensuring the business continues to operate during the interim period of estate administration. This is critical for preserving its value and protecting employees, customers, and overall operations. In this blog, we’ll outline key considerations for estate trustees when administrating an estate that holds interest in business corporations.
Understanding the Terms of the Will
The first step in administering an estate with business interests is for the trustee to carefully review the deceased’s will. It’s essential to determine whether the business should continue operating during the administration of the estate. If the will allows, the trustee may need to take immediate action to ensure the business can function temporarily. This may involve arranging for the continued employment of the business’s staff, ensuring salaries are paid, or, if necessary, managing employee terminations in accordance with applicable laws.
In cases involving employment termination, it’s advisable to consult with an employment lawyer to ensure compliance with relevant employment regulations. Additionally, trustees should consider whether the business requires financial support to stay operational, and whether continuing operations in the short term will benefit the estate’s financial interests.
Practical Steps to Protect the Estate
Before taking active control of the business, estate trustees should take the following practical steps to safeguard both the estate and its interests:
- Reviewing corporate documents to ascertain the ownership structure of the business;
- If the deceased was a professional who was governed by a professional regulatory body, consulting with that body to determine how the deceased’s business ought to be handled and whether the estate trustee is permitted to do so or is required to engage an member of the profession;
- Checking to see if the business had any outstanding contracts and, if so, whether they are enforceable and their terms; and
- Determining whether any tax returns for the business need to be filed.
Winding Up or Continuing the Business
If the deceased’s will does not provide clear instructions regarding the fate of the business, the trustee will need to evaluate several factors to determine the best course of action, such as the profitability of the business and access to the necessary resources and expertise to effectively manage and operate it. Consulting with key stakeholders, such as employees, shareholders, auditors, and other relevant parties, can provide valuable insight into this decision-making process.
It is important to note that the trustee does not have automatic authority to continue operating the business indefinitely simply by virtue of their appointment. In fact, continuing the business “as a going concern” may expose the trustee to personal liability if losses, debts, or other financial obligations arise. While it may be permissible to run the business temporarily, trustees must be cautious about assuming long-term responsibility without making proper arrangements for its continuation.
Section 35 of the Trustee Act provides some relief in these cases, allowing the court to excuse a trustee from personal liability if they have acted honestly and reasonably. However, this protection is not automatic, and trustees should proceed with caution and seek legal advice when appropriate.
In many cases, it may be more prudent to wind up the business if it no longer aligns with the goals of the estate or the beneficiaries. While there may be value in temporarily operating the business to facilitate its sale or transition, this isn’t always the best option. Trustees should carefully evaluate whether continuing operations benefits the estate or whether dissolution would be the better course of action.
Handling Shares and Ownership Issues
For estates involving businesses that issue shares, trustees must carefully handle the transfer of shares. As mentioned above, the terms of the will are indicative of what shall be done with the shares of the corporation. This may include transferring ownership, managing share certificates, or potentially dissolving the company, depending on the goals of the estate.
Estate trustees should collaborate with corporate counsel to ensure proper management of share transfers and consult with accountants and tax lawyers to address any tax issues tied to the estate’s business assets. There may be opportunities for post-mortem tax planning, especially within the first year following death. Effective tax planning can reduce the estate’s tax liabilities and enhance the value of the estate’s assets.
Conclusion
Administering an estate that includes business interests presents unique challenges, but with the right approach, the process can be managed effectively. From understanding the terms of the will to evaluating the financial and legal implications of operating or winding down the business, estate trustees must proceed cautiously and seek expert advice where necessary.
Ultimately, every decision made during the estate administration process should prioritize maximizing the estate’s value and safeguarding the interests of beneficiaries. By taking proactive steps and consulting with professionals, estate trustees can navigate the complexities of managing a business within an estate while minimizing personal risk and ensuring the estate’s long-term success.
Thanks for reading.