Corporations and Estates – What happens when a Will gifts an asset that is actually corporately owned?
The use of privately held corporations to manage an individual’s assets or business interests seems to be an increasingly common strategy and tool. Although the use of privately held corporations offer a number of potential advantages to the individual both during their lifetime and as part of their estate planning, it does raise a number of novel issues for the administration of the estate which may not exist if these assets had been directly owned by the individual. Such potential issues manifested themselves before the Ontario Court of Appeal in the relatively recent decision of Trezzi v. Trezzi, 2019 ONCA 978, where the court was asked to determine the potential validity of a bequest in a Will of property that was not directly owned by the testator personally but rather owned by them through a wholly owned private corporation.
As privately held corporations are often wholly owned by a single individual owner the individual in question would be forgiven for thinking that any assets that are actually owned by the corporation are their own. Such a misconception could carry with it some significant legal issues however, as it ignores the important fact that at law the corporation and the individual owner are two distinctly separate legal entities, and that although the individual owner of the corporation can exercise almost absolute control over the corporation as the sole shareholder, and could through such control likely direct the corporation to take any action regarding any asset the corporation may own (subject to any obligations of the corporation), they do not personally “own” any asset that is in fact owned by the corporation. Such a distinction is potentially important to keep in mind when a person who owns assets through a private corporation is creating their estate plan, as they should be mindful of whether any specific asset which they wish to bequest is owned by them personally or through the corporation.
In Trezzi the testator left a bequest in their Will to one his children of all equipment and chattels that were owned by a construction company that was wholly owned by the testator. This bequest was challenged by certain of the residuary beneficiaries, who argued that as the equipment and chattels in question were not actually directly owned by the testator, but rather the corporation, the testator’s bequest of such items had failed and that the items in question should instead continue to form part of the corporation and be distributed in accordance with the residue clause to their potential benefit.
The Court of Appeal in Trezzi ultimately upheld the bequest in question; however, in doing so, noted that the language was potentially problematic and encouraged counsel to be more careful when drafting in similar circumstances (even including potential precedent language to follow from the Annotated Will program). In upholding the bequest the Court of Appeal was in effect required to do an interpretation application for the Will, noting that they placed themselves in the position of the testator and considered what his intention would have been when including the provision in question. The court ultimately concluded that it would have been the testator’s intention with such a provision that the executor was to wind up the corporation in question, with the assets being distributed to the beneficiary in question as part of such a process. In coming to such a conclusion the court states:
“While it is true that Peter, as the sole shareholder of Trezzi Construction, did not directly own the corporation’s assets, that does not complete the analysis. In substance, Peter’s shares in Trezzi Construction became part of the estate, and Peter effectively directed his executors to wind-up the company and to distribute its assets in accordance with his will, even though he did not own those assets directly. As already noted, the key question thus boils down to whether this was indeed Peter’s subjective intention in his will…” [emphasis added]
Although cases like Trezzi show that under certain circumstances a bequest of assets which are not directly owned by the testator but rather through a corporation can be upheld such a result cannot be guaranteed, as the Court of Appeal in Trezzi was required to resort to the rules of construction and place themselves in the position of the testator to uphold the bequest in question. As a result, a testator would be wise to take extra care when dealing with an estate plan that includes the potential bequest of assets that are corporately owned to ensure that the ownership of such assets is properly described and the executor is provided with any necessary authority and direction to deal with the corporately held assets on behalf of the estate.
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The composition of assets held by a trust can be complex. In situations wherein a significant amount of wealth is held in a trust, the trust can often be composed of various corporate entities (whether numbered companies or otherwise), which in turn can often hold interests in other corporations. The administration of such corporate entities can have wide ranging implications, with the trusts perhaps only owning a portion of any shares in the overall structure. But what right, if any, does a beneficiary of the trust have to view the backing corporate documentation for such corporations? Does a beneficiary of a trust have an automatic right to view all backing corporate documentation, or do the trustees have the authority to refuse the request in certain circumstances?
Although there is little jurisprudence in Canada on the subject, the English case of Butt v. Kelson,  Ch. 197, has been cited as a leading authority. In Butt v. Kelson, Justice Romer provides the following commentary in confirming that beneficiaries of a trust have certain rights to compel the release of backing corporate documentation:
“What I think is the true way of looking at the matter is that which was presented to this court by Sir Lynn Ungoed-Thomas, that is that the beneficiaries are entitled to be treated as though they were the registered shareholders in respect of trust shares, with the advantages and disadvantages (for example, restrictions imposed by the articles) which are involved in that position, and that they can compel the trustee directors if necessary to use their votes as the beneficiaries, or as the court, if the beneficiaries themselves are not in agreement, think proper, even to the extent of altering the articles of association if the trust shares carry votes sufficient for that purpose… I would propose, accordingly, that the declaration which has been made be discharged, but that there should be inserted into the order liberty to [the beneficiary] to apply in these proceedings in relation to any document which he may hereafter desire to see and of which [the trustees] decline to give him inspection.“ [emphasis added]
Justice Romer’s commentary suggests that at minimum a beneficiary of a trust is entitled to the same disclosure rights regarding any corporation owned by the trust as if the beneficiary were the shareholder of the shares which the trust owns. Whether such disclosure rights go beyond that of a shareholder, and whether the beneficiary can compel the release of any documentation available only to the directors, will need to be determined on a case by case basis, with Justice Romer suggesting that it may even be possible in circumstances where the trust is the majority shareholder for the beneficiaries to compel the trustees (as shareholders) to alter the articles of incorporation to provide for the release of certain documentation which otherwise may not have been available to them. Whether the beneficiaries would be entitled to receive such documentation would need to be determined by the court on a case by case basis.
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