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.
Many people, including myself, paused on learning of Michael Jackson’s death. While I have not searched out his music for several years, his death marks the end of an era.
Michael Jackson’s music is part of my memory of growing up. I attended his concert in October 1984 at the Canadian National Exhibition in Toronto.
Of course, in my role as an estate litigator, other thoughts also come to mind. Namely, what issues will arise in untangling Michael Jackson’s estate?
Some of these issues are addressed in a New York Times article. One executive describes the singer’s estate as a "mess". There are clearly valuable assets, including a 50 percent share of Sony/ATV Music Publishing which owns the rights to more than 200 Beatles songs; this asset alone may be worth more than $500 million. Apparently these shares were not owned directly by the pop star, but rather by a trust controlled by his mother. The shares therefore may not fall to Michael Jackson’s estate but they would be part of his legacy.
The estate has debts too: Neverland cost many millions of dollars to operate annually and in recent years there was a $24.5 million debt against the property. Some commentators estimate Michael Jackson’s overall debt to be $400 million.
All of these issues – from copyright and real estate assets to Michael Jackson’s personal and business loans – will take many months, if not years, to sort out.
There were recent plans for a 50-concert comeback in London, England. Apparently fans had paid $90 million which will have to reimbursed and the concert preparations included payments for renovations to the venue as well as advance payments to Michael Jackson.
As the administration of Michael Jackson’s estate unfolds, I suspect there may be more related topics to be covered in our blog.
Of course, for us regular folks, estate issues that we encounter in our own lives will be simple in comparison to the challenges faced by the Jackson family. But there are some lessons: careful management of one’s affairs and good planning will lessen the load on named executors and estate trustees.
Enjoy your Monday.
It’s Hallow’s Eve – there will be candy all round tonight. Well, all weekend if we’re lucky.
And, fittingly, just in time for the sweet sound of “trick or treat” Mars, Inc. completed its purchase of the Wm. Wrigley Jr. Company earlier this month; the $23 billion transaction was initiated earlier this year by Mars. Two wealthy family dynasties reached a deal to secure for each giant a greater piece of the world’s confectionary market.
The privately-held Mars with its headquarters in Virginia controls information very tightly; three grandchildren of Franklin Mars apparently live on a vast ranch in Wyoming.
In 2002, after his father’s death in 1999, issues arose about Bill Wrigley Jr.’s right to vote the company shares held in a trust set up by his grandparents three decades earlier. The trusts sheltered nearly $3.2 billion, which was particularly important for him given his pending divorce. Presumably, shares held in trust are not part of the family assets to be divided at the time of divorce. The claimant insisted that the votes attached to the shares in trust were to be shared by other beneficiaries. The recent transaction seems to have smoothed over some family differences.
In Ontario, recently, Frye v. Frye Estate, 2008 ONCA 606 (CanLII) emerged with less fanfare but it is significant nonetheless. The Court of Appeal addressed the tension between a shareholders’ agreement and the rights of a beneficiary who received shares under a Will from a signatory of the agreement. The Justices seem to have neatly balanced competing estate and corporate principles.
Have a good night. Boo.
If you have recently gone on to your favourite charity’s website or received correspondence from a charity you donate to, you will likely notice an advertisement asking if you own BCE shares.
The privatization of BCE shares means that some shareholders are now looking for a way to minimize their tax liabilities from the sale of shares. Some financial advisors have advocated the direct transfer of the publically traded securities to registered charities as one way to minimize any capital gains.
Since 2006, charities seem to have benefitted from the elimination of capital gains for donated shares. In turn, charities have become more sophisticated and take a business-like approach to attracting potential donors of shares. By providing the contact information of a gift planner, easy to fill out share transfer forms with step-by-step instructions, and information about the advantages of share donation, charities are hoping shareholders donate their shares directly to them by presenting them with a win-win situation.
Additionally, charities are providing more information to potential donors about estate planning and the potential tax benefits of donations-in-kind, such as the transfer of shares. Charities and private foundations are sending the message to potential donors that donors can benefit on multiple levels through different types of donations and charities are there to assist them with their choices.
Enjoy your weekend,