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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

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
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
Integrated Planning Process

Ownership

EstatePlan

Strategic Plan

Family

Management

Succession Plan

succession in perspective
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
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

why don t they succeed
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 home or cottage
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

PERSONAL

FINANCIAL

SECURITY

PLANNING

BUSINESS

CONTINUATION

PLANNING

SUCCESSION

PLANNING

Where does Succession Fit?
financial priorities
Financial Priorities

Social

Capital

Legacy Goal

Family Legacy

Goal

Financial Independence Goal

start with first generation
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
Financial Priorities

Social

Capital

Legacy Goal

Family Legacy

Goal

Financial

Security

Lifestyle & Opportunity

Financial Independence Goal

financial independence
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
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
Financial Planning
  • Asset diversification
    • How available are their assets (liquidity)?
    • How secure is their future income and financial security?
financial independence business risk
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
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 priorities18
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
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
Net Worth Statement
  • Lists all assets and liabilities
  • Often new news to business owners
  • Demonstrate Estate Equalization
  • Value of company available for discussion
holdco
Holdco???
  • A “holding company” – holds assets
    • Cash
    • Shares of other companies
    • Real Estate
holdco how
Holdco How?
  • “Rollover” provisions in ITA
  • Tax free intercorporate Dividends
slide23

Estate Freezes - Mechanics

Before:

B/O

100%

Common shares

Opco

FMV = $1,000,000

ACB = nil

slide24

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
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
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
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
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
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
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
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
Family legacy - Other

Grandchildren

    • RESPs
    • Life insurance
  • Others?
financial priorities33
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
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
Gifting options
  • Gift Cash from estate
  • Gift insurance proceeds
  • Gift Shares then redeem
  • Redeem shares then gift
in conclusion what has our process accomplished
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
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
Health risk insurance – Key people
  • Disability income
  • Critical illness
  • Priority health care
  • Cost plus/Health and welfare trusts
  • Etc.
slide39

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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