banff school – august 19, 2007 mary-ellen gaskin, ca, cfp, tep london life/great west life private...
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Banff School – August 19, 2007Mary-Ellen Gaskin, CA, CFP, TEPLondon Life/Great West LifePrivate Wealth and Estate Services
Business Succession Planning General Considerations
Business Succession
Transfer or sale of business
• Ownership AND Management AND Family
– Viable financial exit for owner
– Maintain family harmony
• Focus on retirement
– With contingency plans for death and disability
Primary role of
business
Current income 78%
Retirement income/wealth 46%
Legacy to future generations 14%
Source: Deloitte & Touche, University of Waterloo study: “Are Canadian Family Businesses an Endangered Species?”
Succession in perspective
Important 33%
Not sure 24%
Not important 43%
Important that
business
remains in family?
Odds of Family Business Surviving to:
Second Generation
Third Generation
100%
30%
10%
Family Business Succession: The Realities
First Generation Business Owners (Founder)
Source: Canadian Association of Family Enterprise
Why don’t they Succeed?
• Lack of forward thinking
• Lack of forward planning
• Lack of skills to help with the above
• Lack of communication
AND a general uneasiness to do the above!!!!
Analogy to Selling Family Homeor Cottage
• Decisions are financial • Do I need cash flow?• Will there be a market if I wait to sell?• What is it worth (in $$)
• Decisions are emotional• Involve family members• Memories• Ongoing personal effort
• It is human to procrastinate !!!
PERSONAL FINANCIAL SECURITY PLANNING
BUSINESSCONTINUATION
PLANNING
SUCCESSIONPLANNING
Where does Succession Fit?
Financial Priorities
Financial Financial Independence GoalIndependence Goal
Family LegacyFamily LegacyGoalGoal
SocialSocialCapitalCapital
Legacy GoalLegacy Goal
Start with First Generation
Hierarchy of financial security issues
1. Financial independence• How much?• Where is it?
2. Family legacy• How much?• To whom? Estate equity?• Taxes and final expenses
3. Social capital legacy• Philanthropic interest?• Excess family legacy?• Desire to redirect tax to charity?
Financial Priorities
Financial Financial Independence GoalIndependence Goal
Family LegacyFamily LegacyGoalGoal
SocialSocialCapitalCapital
Legacy GoalLegacy Goal
FinancialFinancialSecuritySecurity
Lifestyle & Lifestyle & OpportunityOpportunity
Financial Independence
• Financial planning
• What do you need/want?
• What do have?
• Are you there yet?
• What do we do if you’re not?
• Business person is a PERSON!!!
Financial Planning
• Sources of Retirement Income– RRSPs– RPPs or IPPs– Non-Registered Assets– Other personal Assets – (OH, OH, more tough
decisions!)– Income Splitting opportunities– Shareholder loans from business– Access to ownership in business
• Asset diversification– How available are their assets (liquidity)?– How secure is their future income and financial
security?
Financial Planning
Financial IndependenceBusiness Risk
• Business Loans
• Key Persons – risk of Death or disability
• Retaining Key Persons in business
• Management Succession
Great Analysis! How do I get paid ???
• Personal or Corporate Life insurance• Liquid
• Access cash values via collateral loan
• Access cash values via periodic surrender
• Business operations protection
• Investment products
• Other risk products (DI, CI, Long term care)
Financial Priorities
Financial Financial Independence GoalIndependence Goal
Family LegacyFamily LegacyGoalGoal
SocialSocialCapitalCapital
Legacy GoalLegacy Goal
Family legacy• How much?• To whom?
Estate equity?• Taxes and final
expenses
Tools for Family Legacy for Incorporated Business Owners
• Net Worth Statement
• Corporate reorganization changes– Introduce a New Company (Holdco)
• Ownership changes– Via Estate Freeze
• Introduction to trust
Net Worth Statement
• Lists all assets and liabilities
• Often new news to business owners
• Demonstrate Estate Equalization
• Value of company available for discussion
Estate Freezes - Mechanics
Opco
B/O
FMV = $1,000,000ACB = nil
Common (growth and votes)1. Preferred (non-growth& non-voting) =$1M
2. Special voting shares
Step 1: (exchange shares)
*** Exchange of shares done tax-free
***
Estate Freezes - MechanicsStep 2 - Subscription of common shares:
B/O
Opco
100% Common shares
1. Preferred (non-growth& non-voting) =$1M
2. Special voting shares
Trust,Spouse,
Child(ren),or Employees
Estate Freezes - MechanicsEnd Result:
B/O
Opco
Future Growth and ValueWith or without votes
Votes and Current Value
Trust,Spouse,
Child(ren),or Employees
Benefits of Holdco
• Separate inactive assets from Operations
• Dividend net profits to Holdco for– Creditor protect the excess cash
– Future Income to Shareholders
– Good place to own the Life Insurance
Benefits of the Freeze
• B/Os can retain voting control over company• Fixes B/Os tax liability • Passes future appreciation of the company value to
children and/or grandchildren• Potential to reduce probate taxes• Opportunity to crystallize their enhance capital
gains deduction (now at $750,000 each)• Potential to creditor protect assets
Benefits of Trust in Structure
• Flexibility in distributing the shares, including:– When to distribute– To whom to be distributed– “thawing the freeze”
• Income splitting possible with adult children and their spouses through dividends
• Splitting of the future increase in value of OPCO and multiplication of the capital gains exemption of $750,000
• Protection of the children’s shares in case of legal action, bankruptcy or divorce
• Protection of OPCO assets from creditors
Family Legacy – Will Planning
• Consider:– Spousal trust
– Separate testamentary trusts for each child to control use of assets after death and save up to $17,000 in annual tax per trust created
– Will and Shareholders Agreement must work together
– If no Shareholders Agreement, Will can give active child right of first refusal to acquire shares as part of their inheritance
Great Referrals, what about me?
• Corporate Life insurance– Asset transfers– Equalization– Tax reduction on death – CDA– Business Operations protection– Buy Sell (including redemption of deceased
B/Os shares)
Financial Priorities
Financial Financial Independence GoalIndependence Goal
Family LegacyFamily LegacyGoalGoal
SocialSocialCapitalCapital
Legacy GoalLegacy Goal
Social capital legacy• Philanthropic interest?• Excess family legacy?• Desire to redirect tax to
charity?
Social Capital Legacy
• Philanthropic interest?
• Notwithstanding philanthropic interest, equation is:
A $1.00 to tax
OR
B $2.22 to charity and eliminate tax
Gifting options
• Gift Cash from estate
• Gift insurance proceeds
• Gift Shares then redeem
• Redeem shares then gift
In Conclusion:What has our Process Accomplished?
By working through the Financial Priorities Pyramid:• We uncovered their wants, needs, fears (or started to)• We introduced them to someone who can help them in
their business plan and, if necessary, family issues.• Analysis clarified issues like financial independence and
estate quantification making future planning decisions easier
• Support and facilitate saving away from the business
• Made B/Os more aware of business and family relationship issues
• We provided suggestions/plans/solutions to aid in their succession
In ConclusionLife Insurance Planning Opportunities
• Business Owners– Family legacy (taxes)
– Social capital legacy (estate donation)
– Health risk management (critical illness, long term care)
• Business risk management– Business succession (buy-sell)
– Key person (life and health)
• The children– Income replacement
– Family legacy
– Health risk management
Health risk insurance – Key people
• Disability income
• Critical illness
• Priority health care
• Cost plus/Health and welfare trusts
• Etc.