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

Integrated Planning Process

Family Management

Ownership

Estate

PlanStrategic

Plan

Succession Plan

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

Holdco???

• A “holding company” – holds assets– Cash– Shares of other companies– Real Estate

Holdco How?

• “Rollover” provisions in ITA

• Tax free intercorporate Dividends

Estate Freezes - Mechanics

Opco

B/O

100%Common shares

FMV = $1,000,000ACB = nil

Before:

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)

Family legacy - Other

Grandchildren– RESPs

– Life insurance

• Others?

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.

Banff School – August 19, 2007Mary-Ellen Gaskin, CA, CFP, TEPLondon Life/Great West LifePrivate Wealth and Estate Services