Why is estate planning important for business owners? (Part II)
Part I of this series focused on the importance of a business owner’s Will and shareholders’ agreement as part of the estate planning for the succession of your business on your passing. Part II of this series focuses on the equally important estate planning considerations business owners must make in determining how their business is going to be managed in the event they become incapable to manage property. Powers of Attorney are at the centre of this discussion.
What is a Power of Attorney?
A Power of Attorney, like a Will, is an important estate planning document that appoints a person or persons (called an “Attorney”) to make decisions on behalf of the person giving the Power of Attorney (called the “Grantor”). A Will becomes effective on death, whereas a Power of Attorney is effective while the Grantor is still alive. Powers of Attorney cease to be effective on the death of the Grantor. There are two forms of Powers of Attorney commonly used in Ontario — a Power of Attorney for Personal Care and a Power of Attorney for Property. A Power of Attorney for Personal Care grants your Attorney decision making over a broad scope of your health care decisions, whereas a Power of Attorney for Property grants your Attorney decision making capabilities over your financial matters, which can include your business. Powers of Attorney for Property will be the focus of this article.
Powers of Attorney for Property
Pursuant to legislation in Ontario, once acting, an Attorney for Property is permitted to take any action with respect to the Grantor’s property subject to a few exceptions, such as preparing a new Will, engaging in transactions for their own benefit, or any restriction specifically added by the Grantor. Powers of Attorney are commonly prepared as Continuing Powers of Attorney, meaning the Power of Attorney is effective upon the date of signing once the Grantor chooses to invoke it by instructing the Attorney to begin acting on their behalf. Powers of Attorney can also become effective on a designated time as set out in the documents, sometimes upon a determination of incapacity of the Grantor. Legislation in Ontario dictates several factors that are relevant to determining if someone is incapable of managing property, including if they have a general understanding of their assets and liabilities and if they are unable to understand the consequences of a financial transaction or decision.
Additional considerations for business owners
Sole proprietors and small business owners ought to be particularly concerned about planning for their incapacity. For example, pursuant to business legislation, an individual who suffers incapacity is disqualified from acting as a director of a corporation. Accordingly, if an individual who is integral to business operations and management is incapacitated without a valid Power of Attorney in place, business could be halted and suffer.
It is important to note that being a named Attorney may not immediately entitle such individual to act as a director of a corporation, as appointment of director(s) must be approved by the shareholder(s). This is especially a consideration in corporations with multiple shareholders, where a shareholders’ agreement and/or other shareholders’ perspectives may impact who can be appointed. However, the Power of Attorney remains an important step to clarify whom the incapacitated person intended to make decisions on their behalf.
It is common for business owners to have multiple Powers of Attorney in place at a time. A business owner can grant one Power of Attorney limited to business assets or shares (a “Business POA”) and one Power of Attorney to cover all other assets (a “Personal POA”). The benefit of having multiple Powers of Attorney is the ability to appoint different Attorneys for each, allowing someone involved with the business, such as a child or a business partner, to act under the Business POA and a spouse or child who is not involved in the business to act under the Personal POA. It is important to ensure the Attorneys appointed can work together as there will be some overlap in decision making.
It is crucial to consider whether the Business POA should become effective immediately upon signing or can only be used upon the finding of incapacity to manage property.
The former allows for the greatest flexibility and practicality but requires the utmost trust in the named Attorney. There may be situations where the business owner is mentally capable but is physically unable to act on behalf of the business as a result of travel or infirmity. If the Attorney is restricted from acting unless there is evidence of mental incapacity, the Attorney would be prevented from acting in those circumstances, which could have negative consequences on the business.
As alluded to above, in businesses with multiple shareholders, owners should also consider a shareholders’ agreement to address questions such as who may replace them as a director in the event of incapacity as well as what happens to their shares in such event. In that case, it is vital to ensure that your Power of Attorney and shareholders’ agreement are aligned in addressing your succession planning intentions.
Preparing Powers of Attorney for business owners requires careful planning and preparation to have the intended use and benefits. Our business and estate planning lawyers can consult with you to ensure your Powers of Attorney align with your larger business and estate planning goals.
If you require assistance with creating an estate plan or reviewing your estate plan, or with navigating the incapacity of a loved one who owned a business, please feel free to reach out.
This article was originally published by The Hamilton Spectator.
