Estate Planning Pitfalls: Control and Effect on Valuation.
Written on January 18, 2013 – 7:00 am | by Steven Frye
From time to time, I am asked to prepare, review or comment on structures for estate planning purposes with a mind to valuation issues at the time of the plan and after death (morbid but necessary exercise, nonetheless).
Recently, I was asked to look at a suggested structure for a personal investment corporation involving family members only. The suggested structure appeared to meet most of the current and future goals of the founder’s estate plan. A key was that he retained voting control until death but the suggested structure of the shares and the dividend and capital rights attached to them (now and upon liquidation) was such it was felt that upon death, the founder’s shares would be valued at a fixed value.
Then I was reminded of the concept of “competency to dispose” which means what could the founder have done prior to his death to dispose of assets and surplus in his company which could influence the value of his otherwise fixed value shares. The Tax Court has weighed in on this issue several times. The case of The Estate of Frank Barber v MNR (1966 DTC 315 – Tax appeal Board) is a case where the Court took the view that Mr. Barber was always in control such that he could amend or modify the share rights and conditions to affect the disposition of accumulated surplus in his company to his advantage. That the right was not exercised prior to his death does not alter the availability of the right i.e. competency to dispose. In this particular instance, the Estate found itself having to pay tax on additional value placed on the shares it was not planning on.
There was more to this case that what I have described but it illustrates my point: Be mindful (as I have to be) that creative structures are great but they can sometimes lead to unintended consequences particularly when the issue of control is not fully explored. It is always good “to pull the string” as they say by playing out likely scenarios to confirm the plan you are creating will have the desired results.
Thanks for reading
