What Happens to Your Business When You Die

Carlo wasn’t planning to die on a Tuesday. His tearful wife Brenda recalled it was a bright, sunny winter morning, the kind that chilled you to the bone.

Mourning in a funeral

Gone in a Flash  

Carlo was 39 and in the peak of health on his last day on Earth. He got up at 5:30 a.m., worked out for 20 minutes, got dressed and had breakfast with their seven-year-old twins, Leo and Lyn. He was out the door by 8 a.m., promising to pick up Leo for soccer practice at 4:15 that night. Carlo was halfway to his Oshawa bookkeeping office when a texting Sault Ste. Marie student sped through a red light and T-boned his Chevy Impala.

Life Changes Overnight

Never mind the 22-year-old student was at fault for distracted driving and speeding. Brenda and the twins were crushed. Carlo was a fixture in their Vanier neighbourhood, a well-liked junior soccer coach and United Way volunteer. He had his own business. She was a successful rehab therapist at a private clinic. They had big dreams for the future. 

Estate Planning for the Unthinkable

Carlo had been practical to a fault. His father was a retired tax auditor and Carlo had followed in his footsteps, gone to college and looked forward to being his own boss. The couple didn’t like to think about the unthinkable, but for the twins’ sake, they purchased a generous life insurance policy. Mortgage life insurance would pay for the Vanier townhouse. 

Making the Best of the Worst of Times

Brenda had to act quickly to stay on her feet. Her parents were a rock with the kids. She could qualify for survivor’s benefits. Carlo’s auto insurance would pay for the funeral, lost income for time off and more (Ontario’s Statutory Accident Benefits Schedule). A personal injury lawyer advised her to sue, but that seemed overwhelming. She put it on hold for now.

Business Succession When the Founder Dies

The new widow had bigger troubles. Carlo’s three employees were devastated, of course. They could carry on for a short while with the receipts already in the bank. The company was young and profitable. Realistically though, how long could they go on without their founder and boss? Carlo’s receptionist bailed two days after the funeral, leaving a newly graduated accounting intern and the office manager to juggle phones and reassure Carlo’s frantic clients. 

Unwinding Business Interests

Brenda recalled their discussion two months earlier about changing an estate to make a succession plan. She had never owned a small business. She wasn’t even good with numbers. Now, as she cruised the Internet, she realized there was so much she didn’t know about unwinding a business after death.

Business management

Six Questions for Ontario Small Business Owners 

Six questions kept popping up:

  1. How complex was his business?
  2. Was there any kind of emergency plan?
  3. Had he acted on the succession plan they discussed?
  4. Could she legally sell the business?
  5. What would happen to the couple’s capital gains exemption?
  6. Did they owe estate taxes and how did that work?

Keep Calm and Carry On

Brenda’s first inclination was to panic. Her second was to phone Carlo’s dad Milo. He was widowed and knew more about the company. To be honest, she hadn’t paid much attention. Milo had a simple answer to most of her questions. Carlo’s company was a partnership. It was registered in Ontario and Carlo owned 75% of the shares. Carlo and Milo had joked once about what would happen if Carlo died. His son scribbled a few notes on a cocktail napkin and signed it. The rest could wait.

Transferring Ontario Partnership to a Spouse

The company was now 75% Brenda’s. Carlo had transferred his shares to his spouse on the cocktail napkin, avoiding capital gains taxes. Milo owned the other 25%. Brenda and Milo could agree to keep or sell the company. 

A Brilliant Succession Plan

Milo was Carlo’s secret weapon. He showed Brenda two different ways to restructure a company to reduce estate taxes for an Ontario family business.

  1. Gift the business to Leo and Lyn in her will. If the business grew in value, Brenda’s estate would pay capital gains tax (50% of the increase), leaving less for the twins. But, along with life insurance and other assets that Leo and Lyn could inherit without paying probate taxes, it could give the twins some income. 
  2. Create a family trust. The trust could own all the shares and business assets, while a trustee Brenda and Milo appointed operated the company, based on their directions. Leo and Lyn could be paid by the trust. 

It was a bit more complicated than that. For now, it was enough that Milo would run the business (hopefully successfully) until Carlo’s estate got settled.

Four Options for Selling a Company You Inherit 

Brenda’s and Milo’s business was pretty new. It made money but Milo thought they could do better. So they ruled out four other options:

  1. Sell shares on the TSE (Toronto Stock Exchange). That was complicated and costly.
  2. Sell or issue shares to an investor. Finding investors could be a full-time job.
  3. Sell their shares to another company. That had possibilities. They could make a clean break. 
  4. Sell to an employee. The accounting intern seemed ambitious.

It was a start. Thanks to Milo, Brenda felt better than she had in weeks.

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