Legal Tip 313: Estate Planning Consequences of Recording Beneficial Ownership Wrongly

Estate Planning Consequences of Recording the Beneficial Ownership of Shares in a Private Company Wrongly

If someone dies and owns shares in a company those shares will pass via their will, but only if they are the beneficial owners of the shares. If the shares are being held as trustee then they cannot pass via the will. A new trustee will take over.


You could imagine what happens when this is recorded incorrectly. A trust might be thought not to hold the shares or vice versa.

It is confusing too for most people. The question is ‘are the shares beneficially held?’


See related posts on this:

Legal Tip 312: How to Record Ownership of Shares in a Private Company When acting as Trustee Legal Tip 312: How to Record Ownership of Shares in a Private Company When acting as Trustee


Example

Homer sets up the Simpson family trust with himself as trustee. He then sets up a company with himself as the sold director and secretary and the shares he wants the Simpson Family trust as the shareholder. Homer indicates that he is the shareholder, which is correct, but he indicates that he holds the shares beneficially – he thinks that means he is acting as trustee, but it actually means he is not acting as trustee.

The company buys a property which doubles in value over time and all its earnings are reinvested. The trust has never done a tax return or never received any interest.

Homer dies and his will says he leaves all of his assets to his spouse.

The trust deed says the next appointor is Homer’s legal personal representative (which is bad!) and Homer has his neighbour Ned Flanders as his executor.

This means there will be a fight between Ned and Marge.

Ned as the executor is now the Appointor of the Trust and he appoints himself as trustee. He is not a beneficiary, but he controls the trust and is not happy how Marge entered into a new relationship days after Homer’s death.

Marge is the sole beneficiary, and she thinks she now owns the shares of the company and the $1mil in retained earnings and property in it.

This ends up in a court case. All because Homer ticked the wrong box.