Acting as the executor1 of an estate for a parent or other loved one can be challenging and emotionally exhausting. When an estate includes a corporation, the executor’s responsibilities are even more complex.
A medical practice can be unincorporated or incorporated. Incorporating involves creating a separate, legal entity that owns the medical practice. Incorporation can offer tax advantages, among other benefits.
If your parent (or partner or sibling) has already retired from their medical practice, they may have chosen to keep the corporation instead of dissolving it. They would have converted it from a medical professional corporation to a holding company, but it is still a corporation.
When a physician passes away and you are the executor, these are some of the things you will need to deal with — some of them at the same time.
You likely need to name a new director
When your parent dies, their corporation continues to exist. All corporations have one or more voting shareholders who appoint one or more directors to supervise the activities of the corporation and to make decisions about those activities.
If your parent was the only voting shareholder and director, the executor controls the shares and, as a result, the ability to appoint a director to decide whether to maintain or wind down the corporation.
You need to have a valuation of the corporation prepared
When an individual passes away, they are deemed to have disposed of all their capital property, including any shares they hold in a private corporation, for proceeds equal to their fair market value. To determine the fair market value of the shares your parent held, a valuation of the corporation is required.
Depending on the assets held in the corporation, the valuation may be simple or complex. If it is complex, the executor needs to hire a chartered business valuator to prepare the valuation. The valuation is an important tool in managing the tax liabilities discussed below that arise when an incorporated physician or retired physician passes away.
You may need to close the medical practice
If your parent’s medical practice was still actively serving patients, as executor you will have a role to play in bringing that aspect of the corporation to a close.
This means notifying patients and professional associations that the practice is closed, ending any business relationships such as leases, and ensuring that patient medical files are properly stored.
You are responsible for distributing the corporate shares
This sounds technical, but your parent didn’t own the corporation. They owned shares in the corporation.
If there is a shareholders’ agreement in place, this document sets out what the shareholders agreed to in advance would happen in a variety of situations, and so it may include direction about what happens to the shares when your parent dies.
If there is no shareholders’ agreement in place, the shares will be distributed according to the direction provided in your parent’s will or wills.
In either case, it is the executor’s job to ensure that the corporate shares or the proceeds from winding up the corporation are distributed according to the directions provided.
You have to decide whether to wind down the corporation or distribute its shares to the estate’s beneficiaries
As the executor, you and the corporate director will evaluate the corporate assets and your parent’s estate plan. Then you will decide whether to distribute the shares of the corporation to beneficiaries to continue the corporation or to wind it down.
The decision to wind down a corporation can be influenced by factors such as the following:
- whether there are shareholders or directors in addition to your parent
- the types of assets held by the corporation, if any
- the tax consequences of continuing to operate versus winding down
Notably, where the spouse of the physician survives the physician, it is possible to transfer the physician’s shares to that spouse without triggering tax consequences.
The directors are responsible for the corporation if the shares are distributed and it is left to continue. Alternatively, with the shareholders’ consent, the corporation can be wound down, or dissolved, once all its assets have been sold, all liabilities paid and the net corporate proceeds distributed to the shareholders, which would include your parent’s estate. The exception to this rule is for bankrupt and insolvent corporations, which cannot be voluntarily dissolved.
You have to manage the taxes
Taxes will likely take a lot of your time and can be complex, so it’s a good idea to get advice. Without careful planning, taxes can take a substantial bite out of your parent’s estate. Missing a deadline on a capital loss carryback for a corporation, for instance, could have significant tax consequences.
When the owner of a corporation dies, there are typically three ways taxes might become due:
- capital gains on the deemed disposition of the shares of the corporation at the shareholder’s death
- capital gains on the sale of any investments owned by the corporation
- dividend tax on the distribution of net corporate proceeds to the shareholders
With effective tax planning, which may draw on different post-mortem corporate tax strategies, the impact of taxes can often be managed.
An executor’s role can be demanding and requires specialized knowledge
Grappling with the loss of a loved one is hard. Unfortunately, the additional demanding and complex requirements of being an executor of a complex estate come at an already difficult time.
To help ensure your role as executor is carried out effectively, you may want to consider professional estate services.
A professional can help you navigate complex estate issues and provide you with clarity during a challenging and emotional time. MD Private Trust Company offers professional executor services and can act as an agent for executorship, allowing you to take some of the responsibilities off your shoulders while retaining your decision-making authority.
To learn more about MD Financial Management’s estate and trust offerings, contact an MD Advisor* to find out how we can help.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 An “executor” is called a “liquidator” in the province of Quebec and an “estate trustee” in the province of Ontario.