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Business Succession Planning General Considerations. Banff School – August 19, 2007 Mary-Ellen Gaskin, CA, CFP, TEP London Life/Great West Life Private Wealth and Estate Services. Business Succession . Transfer or sale of business Ownership AND Management AND Family

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Slide1 l.jpg

Business Succession Planning

General Considerations

Banff School – August 19, 2007

Mary-Ellen Gaskin, CA, CFP, TEP

London Life/Great West Life

Private Wealth and Estate Services


Business succession l.jpg
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


Integrated planning process l.jpg
Integrated Planning Process

Ownership

EstatePlan

Strategic Plan

Family

Management

Succession Plan


Succession in perspective l.jpg

Primary role of

business

Current income 78%

Retirement income/wealth 46%

Legacy to future generations 14%

Succession in perspective

Important 33%

Not sure 24%

Not important 43%

Important that

business

remains in family?

Source: Deloitte & Touche, University of Waterloo study: “Are Canadian Family Businesses an Endangered Species?”


Family business succession the realities l.jpg
Family Business Succession: The Realities

First Generation Business Owners (Founder)

100%

Odds of Family Business Surviving to:

Second Generation

Third Generation

30%

10%

Source: Canadian Association of Family Enterprise


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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!!!!


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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 !!!


  • Where does succession fit l.jpg

    PERSONAL

    FINANCIAL

    SECURITY

    PLANNING

    BUSINESS

    CONTINUATION

    PLANNING

    SUCCESSION

    PLANNING

    Where does Succession Fit?


    Financial priorities l.jpg
    Financial Priorities

    Social

    Capital

    Legacy Goal

    Family Legacy

    Goal

    Financial Independence Goal


    Start with first generation l.jpg
    Start with First Generation

    Hierarchy of financial security issues

    • Financial independence

      • How much?

      • Where is it?

    • Family legacy

      • How much?

      • To whom? Estate equity?

      • Taxes and final expenses

    • Social capital legacy

      • Philanthropic interest?

      • Excess family legacy?

      • Desire to redirect tax to charity?


    Financial priorities12 l.jpg
    Financial Priorities

    Social

    Capital

    Legacy Goal

    Family Legacy

    Goal

    Financial

    Security

    Lifestyle & Opportunity

    Financial Independence Goal


    Financial independence l.jpg
    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 l.jpg
    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


    Financial planning15 l.jpg
    Financial Planning

    • Asset diversification

      • How available are their assets (liquidity)?

      • How secure is their future income and financial security?


    Financial independence business risk l.jpg
    Financial IndependenceBusiness Risk

    • Business Loans

    • Key Persons – risk of Death or disability

    • Retaining Key Persons in business

    • Management Succession


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    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)


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    Financial Priorities

    • Family legacy

      • How much?

      • To whom? Estate equity?

      • Taxes and final expenses

    Social

    Capital

    Legacy Goal

    Family Legacy

    Goal

    Financial Independence Goal


    Tools for family legacy for incorporated business owners l.jpg
    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 l.jpg
    Net Worth Statement

    • Lists all assets and liabilities

    • Often new news to business owners

    • Demonstrate Estate Equalization

    • Value of company available for discussion


    Holdco l.jpg
    Holdco???

    • A “holding company” – holds assets

      • Cash

      • Shares of other companies

      • Real Estate


    Holdco how l.jpg
    Holdco How?

    • “Rollover” provisions in ITA

    • Tax free intercorporate Dividends


    Slide23 l.jpg

    Estate Freezes - Mechanics

    Before:

    B/O

    100%

    Common shares

    Opco

    FMV = $1,000,000

    ACB = nil


    Slide24 l.jpg

    Estate Freezes - Mechanics

    Step 1: (exchange shares)

    B/O

    1. Preferred (non-growth

    & non-voting) =$1M

    2. Special voting shares

    Common (growth and votes)

    ***

    Opco

    FMV = $1,000,000

    ACB = nil

    *** Exchange of shares done tax-free


    Estate freezes mechanics l.jpg
    Estate Freezes - Mechanics

    Step 2 - Subscription of common shares:

    Trust,

    Spouse,

    Child(ren),

    or Employees

    B/O

    1. Preferred (non-growth

    & non-voting) =$1M

    2. Special voting shares

    100% Common shares

    Opco


    Estate freezes mechanics26 l.jpg
    Estate Freezes - Mechanics

    End Result:

    Trust,

    Spouse,

    Child(ren),

    or Employees

    B/O

    Votes and Current Value

    Future Growth and Value

    With or without votes

    Opco


    Benefits of holdco l.jpg
    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 l.jpg
    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 l.jpg
    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 l.jpg
    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 l.jpg
    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)


    Family legacy other l.jpg
    Family legacy - Other

    Grandchildren

    • RESPs

    • Life insurance

  • Others?


  • Financial priorities33 l.jpg
    Financial Priorities

    • Social capital legacy

      • Philanthropic interest?

      • Excess family legacy?

      • Desire to redirect tax to charity?

    Social

    Capital

    Legacy Goal

    Family Legacy

    Goal

    Financial Independence Goal


    Social capital legacy l.jpg
    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 l.jpg
    Gifting options

    • Gift Cash from estate

    • Gift insurance proceeds

    • Gift Shares then redeem

    • Redeem shares then gift


    In conclusion what has our process accomplished l.jpg
    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 conclusion life insurance planning opportunities l.jpg
    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 l.jpg
    Health risk insurance – Key people

    • Disability income

    • Critical illness

    • Priority health care

    • Cost plus/Health and welfare trusts

    • Etc.


    Slide39 l.jpg

    QUESTIONS ...

    THANK-YOU.

    Banff School – August 19, 2007

    Mary-Ellen Gaskin, CA, CFP, TEP

    London Life/Great West Life

    Private Wealth and Estate Services


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