Earlier this week, I had the pleasure of hosting the Family Dispute Resolution Institute of Ontario’s webinar on “Special Considerations When Valuing a Family-Owned Business” featuring Tom Strezos, Adam Guyatt, and Claudio Martellacci of Grewal Guyatt LLP. A link to their article on this topic is available here.
In the estates context, we often encounter situations where a family business needs to be valued after death. While we will often defer to experts for assistance in this regard, it can be helpful to keep in mind some considerations unique to family businesses that might affect valuation. These may include the following:
- Payroll considerations: including whether any family members are on the business payroll and paid compensation greater or less than standard market rates;
- Related party transactions: for example, whether a family member owns a supply company and that relationship may increase or decrease business expenses and impact its value upon any change in that relationship;
- Non-operating assets or liabilities: whether there are investments in assets that do not impact cash flow directly or liabilities payable to family members;
- Internal controls and governance: such as whether additional staffing costs would need to be considered as part of the valuation to reflect the situation if certain family members were no longer involved in the operations of the business;
- Transferability of goodwill and discounts for reliance on certain individuals: some family businesses may have limited assets beyond goodwill and it can be worthwhile to consider how a departing family members (such as a divorced spouse or incapable or deceased family member) may impact value going forward.
These considerations may be relevant to probate applications, estate administration, and certainly where there are claims against an estate or specifically against a family business.
Also discussed during yesterday’s webinar was the idea of business valuation expert hot-tubbing, whether formally at trial or otherwise working together in a similar manner to try and determine a reasonable value of a company for the purposes of settlement discussions. This is an Interesting concept that may work well for some estate matters where valuation issues are at play.
A recording of this week’s FDRIO webinar is available to FDRIO members free of charge and will be replayed at a fee for non-members later this month. More information is available at fdrio.ca.
Thank you for reading.
I recently came across an interesting New York Estate Planning Blog, which attempts to address the valuation of intangible property in relation to the payment of estate administration tax.
Although it is rather straightforward that estate trustees are required to value assets of a deceased person, and pay taxes on those assets, the issue posed by the blog is, whether intangible assets are included in the payment of estate administration taxes, and if so, how a valuation is reached.
In Ontario, intangible property is deemed to be owned by the deceased at the time of death, and is therefore included in the calculation of estate administration tax. This has been made clear by the Ministry of Finance.
Valuing intangible property appears to be less clear though. Apparently, in the USA, disputes have arisen between estate trustees and the Internal Revenue Service (IRS), over the valuation of intangible assets, and to the amount of estate administration tax paid.
This dispute seems to be highlighted by the valuation of publicity rights. For example, the estate trustees of Michael Jackson’s estate have valued his estate at $2,105.00, whereas the IRS has attributed a value of $1.125 billion – therefore alleging that an additional $702 million is owned in estate administration tax (based on taxes and penalties). According to the LA Times, most of the dispute is over the price attributable to the King of Pop’s image, and his interest in a Trust which includes the ownership of Beatles songs, including Yesterday, Get Back, and Sgt. Pepper’s Lonely Hearts Club Band.
While most Ontario residents will not be burdened with valuing publicity rights, it is nonetheless important to consider the inclusion of assets, including intangible assets, in calculating estate administration tax, and that a proper valuation is obtained. Otherwise, in reviewing the payment of estate administration tax paid, the CRA may not ‘Let it Be’.
The recent B.C. Court of Appeal decision of McMillan v. Johnson (Estate) 2011 BCCA 48, deals with the valuation of an unjust enrichment claim of a long-time common law wife against the estate of her deceased common law husband.
The couple lived together for almost 40 years and both contributed to a family fishing business, of which the deceased was the sole shareholder. The deceased did not properly provide for his wife and although she would have had a claim under the Wills Variation Act, she was out of time and so claimed a constructive trust against the only valuable asset in the estate, a $2.4 Million shareholder’s loan owed to the deceased by the fishing business.
The trial below proceeded summarily and rather than declaring a constructive trust, the trial judge awarded the wife a monetary remedy of 50% of the value of the loan ($1.2 Million).
On appeal the estate argued that the value should have been assessed at 50% of the market value of the company at the time of trial, which would reflect the decline in the fishery since death, and that the judge erred in awarding the book value of the loan valued as at the date of death. The estate led no evidence of the actual value of the company at trial and sought to introduce this as fresh evidence on appeal.
The appeal was allowed and a new trial ordered on the question of the value of the loan and the company as at the date of the new trial. Fresh evidence as to the value of the company was not allowed. The judge intended to award a monetary remedy in lieu of a proprietary remedy, and therefore the valuation date should have been the date of trial.
If you are interested in a more in depth consideration of the case law on constructive trusts, unjust enrichment and quantum meruit, and whether/when an in personam monetary remedy or proprietary remedy is appropriate, you should refer to the decision for some helpful comment on these issues.
Sharon Davis – Click here for more information on Sharon Davis.