It’s surprisingly common for enterprising families to lose track of property when ownership changes hands or passes from one generation to the next. It can come as a nice surprise when a forgotten bank account or overlooked investment comes to light, as discussed in Part 1 of this two-part series.
Much more sinister, however, is the lurking possibility of unknown liabilities. An executor is expected to track down any monies owing during an estate settlement, but in families of complexity, this can be trickier than one might think.
“Unpaid taxes, personal guarantees or unresolved business obligations can quietly linger long after the original owner has passed,” says Elke Rubach, president of Rubach Wealth, who is based in Toronto.
“When they resurface, they can derail estate settlements or even create family conflict. The key is not to wait until death to discover what’s been left behind,” she says.
When a business has been in operation for many years, memory of some details can become blurry. This is especially true of events in the early days and during transitional times, when an entrepreneurial leader may have been accustomed to handling important transactions independently and with minimal documentation.
“It’s not uncommon that entrepreneurs do handshake deals,” says Michael Louie of D+H Group LLP, based in Vancouver. Family members who are not directly involved in business dealings likely have no knowledge of informal partnerships or guarantees that may date back many years by the time an estate is settled or a business is sold.
“Business is very fluid and often not documented; despite the fact that people have family offices, a lot of people are not that well organized in documenting these financial relationships that potentially could affect the family after they’re gone, especially in Canada, where we’re newer to all this,” Louie says.
“It’s very common in business transactions that an investor will put up some kind of covenant. And it may not be documented, especially in real estate,” he adds. “I have seen things that did go awry, especially in these times of downturn when these covenants were called upon after the passing of the principal,” he says. “The lender will pull out this piece of paper that the deceased has signed on behalf of the company.”
In the sale of a business, this sort of wrinkle should be ironed out as part of the due diligence process, says Eric Gilboord, CEO and founder of Warren Business Development Center Inc. (WarrenBDC) in Toronto.
“If you ran a business, you had turnover of many employees, vendors and customers, and it’s hard for something not to have slipped through the cracks,” he says.
“Normal life gets in there, and things happen: You bought some land with your partner 30 years ago, and you forgot that one of you owns 70 per cent and the other one owns 30 per cent. It’s those kinds of things, and they’re very real.”
It’s not uncommon that entrepreneurs do handshake deals.
Michael Louie, D+H Group LLP
A related situation might arise when the purchaser of a business fails to notice that the cost of certain supplies—or of the business premises itself—is artificially low, perhaps because of a 25-year-old favour rendered by the seller. Such a sweetheart deal may evaporate upon the death of the original business owner, or at the time of the sale.
“There’s a lot of that kind of activity,” Gilboord says. “Let’s say that it’s a very important supplier and you were getting 30 per cent off, and all of a sudden that price has gone up to the regular price. If you’re not a smart lawyer or a smart accountant, that can slip through the cracks.”
Private loans may be poorly documented. Staffing changes can trigger knowledge gaps.
Another area where liabilities may be overlooked is taxation, especially for firms that operate across borders and may have neglected to pay taxes owing outside Canada.
In short, “if you’re a family enterprise and the matriarch or patriarch passes away and you can’t go to them to find out what’s going on, that’s a big deal,” says Gilboord.
Families who did not take the proper steps, or who want to mitigate missing assets and overlooked liabilities, will find some solutions available, though they are not foolproof, says Scott Binns, partner with Richter in Montreal.
“Snail mail” can be a lifesaver. Binns recommends a review of bank and investment statements, life insurance notices, credit card statements, property records and legal or accounting invoices as well as any correspondence relating to tax. Any of these, he says, “may reveal hidden assets or liabilities that the liquidators would otherwise not know of.”
If possible, the family should verify each e-mail account for digital notifications. However, “this is a tough one. If the decedent was not organized and didn’t leave passwords behind, it’s likely their e-mail box will not be accessible by the liquidators,” he says, adding that another useful avenue for locating potential liabilities is a credit bureau report.
“We encourage families to think of their wealth as a living ecosystem. It needs ongoing care, documentation and communication across generations,” says Rubach.
“When your advisors, accountants, lawyers and investment professionals work collaboratively—not in silos—the risk of ‘lost’ assets or surprise liabilities drops dramatically. Organization isn’t just a technical exercise; it’s an act of stewardship that preserves both wealth and family harmony.”
With family offices, half the battle is sweeping all the assets and liabilities into a pile to figure out where we stand, says Louie.
“What is the best solution?” he says. “Begin and just do it!”
Sarah B. Hood is a Toronto-based writer and book author. She has served as editor of three national magazines and written weekly columns for the National Post. She also serves on the editorial board of Spacing magazine. She writes frequently on business, urban affairs and culture. As a food writer, her work has been translated into Japanese and Arabic. She has taught writing at George Brown College for more than 20 years.
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