Articles
Your Business Is an Asset Too: Why It Belongs in Your Estate Plan
Author: Philippe Richer
A Winnipeg contractor came in to do his will. Forty-eight, two kids, a wife who’d been asking him to do this for three years. He’d finally booked the appointment because a guy he knew from the industry had died at fifty-one and it had rattled him.
We went through the house, the RRSPs, the life insurance, the kids. Straightforward, and he was relaxed because it was going faster than he’d feared.
Then we asked about the company. He had twelve employees and a shop on Dugald Road. He looked at us for a second and said, “The business? That’s not really part of this, is it? That’s separate.”
It’s not separate. It’s usually the biggest thing he owns, and it was the only asset in the room with no plan attached to it.
The thing owner-operators miss
If you own a corporation, you don’t own a business. You own shares. That distinction sounds like lawyer pedantry until the day it matters, and then it’s the whole ballgame.
Shares are property. They’re an asset, like the house or the RRSP. When you die, they go somewhere. Your will decides where, if your will says anything about them. If it doesn’t, they go to whoever inherits the rest of your estate, which for most married Manitobans means your spouse.
So picture that. Your spouse now owns a trades company with twelve employees, a shop lease, receivables, a line of credit you personally guaranteed, and four jobs in progress that were priced off your head. She has never run it. She may never have wanted to. On the worst week of her life, she’s the owner.
That’s not a plan. That’s a default, and defaults are what happens when nobody made a decision.
What the estate plan for a business actually answers
None of this is complicated to understand. It’s just uncomfortable to think about, which is why it doesn’t get done.
Who ends up owning the shares? Your spouse, your kids, a partner, a key employee, or nobody in particular. Pick one on purpose.
Who runs it on Monday? Ownership and operation are different jobs. Your spouse may inherit the shares and have no ability to run the company. Somebody has to be able to sign, pay people, and answer the phone in the first week, and that authority has to exist before it’s needed.
Does anyone want it? This is the question owners avoid hardest, and it’s usually the most important one. A lot of Manitoba owner-operators assume a child will take over. A lot of those children have no intention of doing so and have never said it out loud, because how do you tell your dad that?
If it gets sold, who’s buying? A business without its owner is worth substantially less than a business with one, and a business being sold urgently by a grieving family is worth less again. Buyers know when they’re dealing with an estate.
What about your personal guarantees? Most owner-operators have signed personally on the line of credit, the equipment lease, or the shop. Those don’t die with you. They land on your estate, which is to say they land on your family, alongside everything else.
Where the shareholder agreement fits
If you have a business partner, this is where the estate plan and the corporate side meet, and it’s where the wheels come off most often.
Two partners, fifty-fifty, no shareholder agreement. One dies. His shares go through his will to his widow. She now owns half the company alongside a man she’s met at three Christmas parties. She wants to be bought out, because she has no interest in the plumbing business. He can’t afford to buy her out, because the company’s money is in trucks and receivables.
Now they’re stuck with each other. She can’t get her money and he can’t get his company back. That situation lasts for years and it usually ends badly for both of them, and they’re both entirely reasonable people who wanted reasonable things.
A shareholder agreement solves this in advance. It says what happens to shares on death, who has the right to buy them, how the price gets determined, and where the money comes from. That last part is usually life insurance owned by the corporation or by the partners on each other, sized so the buyout can actually happen instead of merely being written down.
If you have a partner and no agreement, that’s the most urgent piece of legal work in your life and it has nothing to do with your will.
What this looks like in Manitoba
A few things worth knowing if you’re a Manitoba owner-operator.
Your corporation is a separate legal person under The Corporations Act (CCSM c. C225). It doesn’t die when you do. It keeps existing, keeps owing money, and keeps having filing obligations, whether or not anyone is looking after it.
If you’re the sole director and sole officer, your death creates a company with nobody who can legally act for it. The bank freezes the account because the signing authority is gone. Payroll is Thursday. Your executor may not have authority over the company’s affairs until the estate is sorted out, and that’s weeks at best.
Twelve employees don’t get paid while that resolves. Neither does the fuel bill. Sole-director corporations are common among Manitoba owner-operators and this is their specific exposure.
And t
he estate has a tax problem. On death, you’re generally treated as having disposed of your shares at fair market value, which can trigger a capital gain on a business you built from nothing and never sold. The estate owes that tax in actual dollars. If the value is locked up in a company nobody can sell quickly, the family has a bill and no money. Your accountant is the right person to size that number. Our job is to make sure you’re asking them before it’s an estate problem instead of a planning one.
What to sort out
Six things. None of them take long individually. Together they’re the difference between a plan and a default.
- Does your will mention the shares? Look. Most wills we review for owner-operators don’t say a word about the company beyond a general clause about “the residue.”
- Who can sign on Monday? If you’re the sole director, work out what happens to signing authority and banking access in the first week. This is the one that hurts fastest.
- If you have a partner, do you have a shareholder agreement? If not, this is first. Before the will.
- Is the buyout funded? An agreement that requires your partner to buy your shares, with no money to do it, is a promise, not a plan. Insurance is usually how that gets funded.
- Have you asked your kids? Out loud. The succession plan built on an assumption nobody tested is the most common failed plan we see.
- Is your corporate house in order? Minute book current, filings up to date, share register accurate. If a buyer or an executor has to reconstruct who owns what from a shoebox, everything above gets harder and more expensive.
Back to the contractor
He didn’t do all of it that day. Nobody does.
We started with the will, because he was already in the chair, and we made it actually say something about the shares instead of letting them fall into the residue by accident. Then we told him the truth about the sole-director problem, and he went quiet, because he’d just done the math on payroll.
He came back six weeks later. We added a second director. He talked to his accountant about what the shares were worth and what the tax on death would look like, and the number was bigger than he expected. He talked to his oldest, who is twenty-four and does not want the business, and told us afterward that the conversation was easier than he’d built it up to be and that he was relieved to know.
None of that was a crisis. All of it would have been, on a Tuesday, without warning, with twelve families waiting on a payroll run.
What owner-operators tend to believe
“The business is separate from my personal estate.” The shares are personal property. They’re in the estate. The corporation is separate; your ownership of it isn’t.
“My spouse will just sell it.” To whom, at what price, in what month, with what advice? A business sold by a grieving family in a hurry sells at a grieving-family-in-a-hurry price.
“My kid will take it over.” Ask them. This week. You may be right. You may also be planning around something that was never true.
“I’ll deal with it when I’m closer to retiring.” The plan isn’t for retirement. Retirement you can see coming. This is for the version you can’t.
Where to start
If you own a business in Manitoba and your will is silent about it, that’s the gap. It doesn’t take long to close and it’s the single highest-value hour you’ll spend on your legal affairs this year.
Come to one of our webinars on business succession and estate planning. No pitch and no follow-up call. You’ll hear what the questions are, what they cost to leave unanswered, and where your own plan currently has a hole in it. Then it’s up to you what you do about it.