As a family business owner, it's understandably difficult for you to imagine no longer being at the helm of the business you've worked so hard to build and grow. A second-generation business owner we recently helped with estate planning summed up this mentality well by relaying what her father used to say: "Don't worry about what will happen when I'm gone: I'm not going anywhere." The reality, of course, is that life sometimes has other plans for us.
Fortunately, our client recognized the importance of planning ahead, but her father certainly wasn't alone in his thinking. Although everyone knows they won't really live forever, many are not prepared for the unexpected, nor are they aware of what it would mean for their business.
That's why it's vital to develop an estate plan with the future of your business in mind so that your business and the financial security of your family members will be protected in case of your incapacity or death. Without a well-drafted plan, your wishes may go unfulfilled, your assets may not be protected, your business may falter, and what you intend to leave to loved ones may be diminished, not to mention the emotional toil this could take. While proper planning is vital for all businesses, it's especially prudent for family-owned businesses that may be passed down to the next generation.
The following considerations will help as you start to think about estate planning in relation to your business.
- A will is only one tool in the estate planning toolbox. While drafting a will is a fundamental step in estate planning, it's important to note it's only one tool among many. In many cases, in order to fully implement your wishes for the future of the business, or to utilize available tax efficiencies, your estate plan will include many other components beyond just a will.
- Powers of attorney can be business and personal. A power of attorney is a document which appoints an individual to make legal and financial decisions and to manage your finances in your place. Many business owners appoint two powers of attorney for financial matters: one to deal with business issues and another to deal with personal issues, as the people who are best placed to handle each of these matters may be different. In addition there is another power of attorney to deal with healthcare decisions should the need arise (note that in some provinces, an appointment to deal with healthcare decisions is not made through a power of attorney, for example in B.C. an individual will appoint a Representative under a Representation Agreement for healthcare decisions).
- Planning for tax efficiencies can help maximize the value of your estate. With proper estate planning, you can maximize the legacy left to your beneficiaries by implementing effective tax strategies. For example, a multiple-will strategy may help reduce the amount of probate fees your estate will have to pay (if applicable in your province) when you pass away. Another example is post-mortem tax planning, which can help reduce taxes in connection with shares in a private corporation.
- Life insurance may ease financial burdens on the business. A business-owned life insurance policy is designed to help the business continue in the event the owner or partner dies. For instance, there may be insufficient funds in the deceased's estate to pay the tax owing in connection with the shares held by the deceased upon death. This can place a financial burden on the business, which could cause it to fail. Or it could force the executor to turn to personal assets to satisfy the debt, which may be inconsistent with the deceased's intentions. In those instances, life insurance can help protect the business, see that the intentions of the deceased are honoured and provide potential tax advantages.
- A shareholders' agreement and family contracts should not be overlooked. When a business owner is not the sole shareholder of a business, a shareholders' agreement is an important, but often overlooked, part of an estate plan. The agreement generally addresses important business transition issues such as share ownership, the transfer or sales of shares, what happens on the death of a shareholder, and how to deal with disputes among shareholders. Beyond a shareholders' agreement, family contracts such as prenuptial or matrimonial agreements can help protect your estate and minimize potential issues or claims.
While it's never too late to develop and implement an estate plan, we often say to business owners: "Plan early and plan often." An estate plan is unique and personal to you, so it's wise to revisit your plan as circumstances in your life or business change. Planning for the unexpected may not be top of mind, but it does bring peace of mind.