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.
Thank you for reading.
In today’s podcast, Stuart Clark and Doreen So discuss the Ontario Court of Appeal’s decision in Donaldson v. Braybrook, 2020 ONCA 66, and what to consider when the ownership of a family cottage was changed to include the children.
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The concept of legal and equitable ownership is constantly evolving as our blog has documented over the years. In a world where anything is possible, the viral photograph of the “Monkey Selfie” has led to a new lawsuit by PETA to extend copyright laws to animals.
The “Monkey Selfie” is a series of photographs that were taken by a black macaque during a photo-shoot set up by nature photographer, David Slater. Mr. Slater travelled to North Sulawesi, Indonesia in 2011 for the purpose of photographing black macaques when one of the black macaques took control of his camera and began pressing the shutter button resulting in hundreds of photographs. While most of the photographs were blurry or unremarkable, a handful of these photographs captured a facial portrait of the black macaque, Naruto, smiling and grinning at the camera.
Eventually, the infamous “Monkey Selfie” was posted on Wikipedia for free distribution around the world wide web. To Mr. Slater’s dismay, Wikimedia took the position that there is no copyright attached to these photographs because they were not taken by a human being (see here). In 2014, the US Copyright Office issued a compendium of its policies which included a new stipulation that only works produced by human beings may be registered for copyright.
As the result, PETA, People for the Ethical Treatment of Animals, is now suing, on behalf of Naruto, to claim copyright to the “Monkey Selfie”. According to PETA, as reported here by CNN, “authorship; under the Copyright Act, 17 U.S.C. § 101 et seq., is sufficiently broad so as to permit the protections of the law to extend to any original work, including those created by Naruto”.
For good measure, click here for an “elphie” to round out your #Friday morning.
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Eighty years ago, at the height of the Great Depression, a wealthy Ohio businessman hid $182,000 in minted $50 bills in a wall in his house. There it hung peacefully by a wire in a green metal lockbox, disturbed only by inflation. A contractor discovered the money while tearing down the wall, and he honestly and very admirably informed the home owner.
Unfortunately, things spiralled out of control. First, the home owner and the contractor were unable to agree on a division of the money. She offered the contractor 10%, he asked for 40%. Then the story made it into Cleveland’s local news, and the estate of Patrick Dunne, the guy who hid the money, got involved (Patrick Dunne had 21 descendants). The dispute went to litigation.
For various reasons, the home owner dropped her claim. However, the county court probate magistrate ruled that $157,000 was clearly marked as Patrick Dunne’s property and therefore was the property of his estate. Of the remaining $25,000, the judge recommened the estate receive 83.3% and the contractor receive 13.7% – approximately $3,400.
CBS News produced an interesting podcast of the legal issues, posted here. More food for thought: $182,000 in 1930 is the equivalent of $2,384,341.68 according to the Bureau of labor Statistics inflation calculator. Of course, some of the rare bills are worth up to $500,000 to collectors…
There are a lot of lessons here.
Have a great week,
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