When someone appoints you as their estate executor, they're placing immense trust in your judgment and capabilities. But what happens when the deceased was a business owner? Suddenly, you may find yourself temporarily at the helm of an enterprise - a responsibility few executors anticipate. What follows are key considerations and practical steps for executors who discover a business among the estate assets.
Understanding Your Authority
Your authority to act depends on the business structure:
- Sole Proprietorship: The business assets (equipment, inventory, goodwill) are estate assets. As executor, you step in to operate, sell, or wind down the business.
- Corporation: If the deceased was the sole shareholder, the shares are estate assets. You control those shares, which means you effectively control the corporation and can elect yourself as director or officer.
- Partnership: The partnership agreement typically includes clauses about a partner's death. Often, remaining partners buy out the deceased's interest, or the partnership dissolves according to predetermined terms.
The Critical Decision: Continue or Wind Up?
One of your first and most important decisions will be whether to continue operations or wind up the business. Consider:
- Is the business profitable?
- Are competent managers or employees in place?
- What do the beneficiaries want?
If beneficiaries will inherit the business and want to maintain operations, you may continue until the transition is complete. If no one can run it, or the responsibilities are overwhelming, your best option might be selling it as a going concern or liquidating assets.
Managing Risk Effectively
Running a business carries inherent risks and potential personal liability. Be especially cautious if you become a director of a corporation, as this role comes with specific liabilities for unpaid wages, taxes, and sometimes environmental obligations.
While corporate structures offer some protection, as an executor-director, you must ensure the business remains compliant with all regulations, particularly payroll remittances. Consider quickly selling the business if these responsibilities seem daunting, and maintain proper insurance during your interim management.
Leveraging Existing Management
If you lack business expertise - particularly in the deceased's industry - try to rely on existing management or hire a temporary manager. You can compensate them from business revenues. Some Wills even include specific authorizations like: "I authorize my executor to continue my business and to employ such persons as necessary to manage it."
Valuation Considerations
Professional business valuation becomes essential when:
- The business will be sold
- The business will transfer to some beneficiaries but not others
- The business must be listed as an asset in a probate application
This process can be complex, accounting for inventory, customer relationships, intellectual property, earnings potential, and more. A professional valuation promotes accuracy and fairness in distribution.
Checking for Buy-Sell Agreements
The deceased may have had a shareholders' agreement or partnership agreement with buy-sell clauses requiring the sale of their interest to surviving owners at a predetermined price. These agreements might be funded by life insurance. If such an agreement exists, your main responsibility is to follow it—provide required notices, collect the buyout price, and transfer the ownership interest.
Navigating Tax Implications
Businesses create complex tax scenarios that require careful planning:
- If a corporation is sold or shares transferred, capital gains tax may apply
- The Lifetime Capital Gains Exemption (LCGE) might apply if it's a Qualified Small Business Corporation (QSBC). The current Lifetime Capital Gains Exemption (LCGE) in Canada is $1.25 million for dispositions that occur on or after June 25, 2024, until December 31, 2025. This exemption applies to QSBC shares, farm property, and fishing property. The increase to $1.25 million was part of the 2024 Federal budget, and indexation is set to resume in 2026.
- For ongoing businesses, income generated post-death must be properly reported
- Final business returns for sole proprietorships must be filed appropriately
- Asset sales might trigger HST/GST obligations
Consulting with a qualified tax professional is strongly recommended for any business disposition.
Transferring to Beneficiaries
If the will specifically leaves the business to a particular person (e.g., "I give my company to my son"), your task is to transfer the shares to them. This might qualify for tax-free rollovers in certain situations (spousal rollovers or transfers to children for qualifying businesses).
Multiple beneficiaries sharing a business creates additional complexities. Consider whether the will intended co-ownership or if selling and distributing proceeds might better serve everyone's interests.
Operating During Administration
When continuing business operations during estate administration:
- Maintain separate, detailed records for business operations
- Avoid co-mingling business and estate funds
- Keep the business's bank accounts active
- Pay employees and vendors promptly
- Preserve business value by maintaining operations as the deceased did
A faltering business can rapidly lose value, ultimately harming beneficiaries.
Seeking Professional Help
Involve professionals who can provide specialized guidance:
- Corporate lawyers (ideally the company's regular counsel)
- Accountants familiar with the business
- Business brokers or M&A advisors if selling
These experts can navigate technical requirements such as share transfers, regulatory notifications, and final tax filings.
Executor Compensation
Managing a business adds substantial work beyond typical estate duties. Courts sometimes allow additional compensation for executors managing businesses, particularly for extended periods. If the will specifically authorizes a salary for this work, follow those instructions. Otherwise, document your additional efforts to justify appropriate compensation later.
Case Example: Putting It All Together
Consider Jane, who died owning a small manufacturing company. Her two adult children are equal beneficiaries, but neither has experience running the business. As executor, you might:
- Immediately meet with the company's general manager and accountant
- Ensure continued payment of employees and suppliers
- Resolve any temporary banking issues with proper documentation
- Appoint yourself and possibly one child as interim directors
- Arrange professional valuation and market the business for sale
- If one child wants to take over, structure a fair buyout of the other's share
- Engage legal counsel for all ownership transfers
- Work with accountants to leverage available tax exemptions and file all required tax returns
- Document all steps to justify appropriate executor compensation
By acting decisively and prudently, you can preserve the business's value rather than allowing it to collapse, which would significantly diminish the estate.
Conclusion
Serving as executor for an estate containing a business requires careful navigation of legal, financial, and operational challenges. By understanding your authority, making timely decisions about business continuity, managing risks effectively, and leveraging professional expertise, you can fulfill your fiduciary duty while preserving the business's value.
Whether the ultimate outcome is continued operation, sale, or orderly dissolution, your diligent management during this transition period is crucial to protecting the interests of all beneficiaries.
Recognized by Best Lawyers in Canada for trusts and estates and family law, she previously chaired the Canadian Bar Association Wills and Trusts Subsection (Vancouver).
Contact Nicole by email or phone at (778) 742-5005
Heritage Trust is a leading non-deposit taking financial institution, regulated by the BC Financial Services Authority (BCFSA), a government agency of the Province of British Columbia. Heritage Trust offers caring and professional executor, trustee, power of attorney, committee, escrow and family office services to BC resident clients.
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