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Thursday, January 2, 2020

What happens when a will says to give away assets that the testator doesn't actually own?

Many of my clients own businesses, either on their own or with other shareholders. They tend to mingle personal and business assets at times. This may (or may not) work while the business owners are alive, but it can cause problems on the death of the owner. This is because business owners sometimes want to make wills in which they personally give away assets that are owned by the business.

I explore this concept with business clients and every now and then one of them will say, "I own the business so why can't I give away the business assets?" Well, the business and its owner are separate legal entities so it doesn't really work that way.

The owner of an incorporated business should be making a will in which he or she gives the shares of the company, which in turn gives the new shareholder the assets. This is the simplest idea. However, this is not necessarily the answer for every testator and every business. Perhaps it would be a good idea for a business owner to discuss some other strategies with an estate planning lawyer, and perhaps his or her accountant as well. For example, if the business owner really wants to divide up the business assets among her children, the will might contain instructions for the executor to wind down the business and divide the assets. Or perhaps the business should be sold and the funds divided.

In any event, the key is to make a will that is clear about what the executor is supposed to do. Making a will in which you ask an executor to do something he or she cannot legally do (that is, give away something you don't own) is just not a good idea. Your will is almost guaranteed to end up in court either for an interpretation or for a challenge. Nobody wins when that happens.

Recently, this idea was explored further by Professor David Freedman on a blog for a Toronto law firm called Wagner Sidlofsky. This is a blog I read often. In this case, the article, entitled What happens when a testator’s Will attempts to gift assets that the testator doesn’t actually own?, looks at the case of Trezzi v. Trezzi. This is a new case decided in Ontario recently. Click on the title of the article to read it or on the name of the case if you want to read the case in more detail.

In that case, a business owner did exactly as I described in this article and left his children assets that belonged to his company. The will ended up going to court, and the judge did a great job in figuring out how to save the will so that the owner's intentions could be carried out. But look at it this way: the distribution of the will was delayed while matters went though court, and thousands of dollars were spent on lawyers. It would have been so much better for the family if the business owner had left better instructions.

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