January 2003: by Darrell Nordstrom

Business succession planning

Over the years, you've invested a lot of time, effort and money into your business and built it into a successful operation. Congratulations. But have you contemplated its future without you?

Most small businesses are sold or liquidated on the death of the owner. Few survive to a second generation and only a fraction of those remain after a third. Canadian and U.S. studies indicate that failure to plan carefully for succession accounts for nearly half of failures of family-owned businesses. No business plan is complete without a succession plan that provides for the orderly transfer of business assets upon your retirement, or in the event of your premature death or disability. Not surprisingly, any effective succession plan starts with well-articulated goals and objectives.

What's your vision? Do you want to cash out and retire, or draw an income from a continuing operation? How involved in the business do you wish to remain? While most business people seek to minimize taxes in their retirement and beyond, other non-tax objectives like keeping the business in the family, equalizing benefits among heirs and avoiding conflict among various stakeholders may be equally or more important.

A business succession plan typically includes some or all of the following strategies and techniques:

Implement an estate freeze: An estate freeze is the cornerstone of many succession plans. It can be used to maintain control after you retire and to cap the growth and tax liability of your estate. It involves restructuring the corporation so that future growth of the business is transferred to your children - either directly or indirectly through a family trust.

Crystallize the capital gains exemption: Business owners are advised to take advantage of the $500,000 capital gains exemption on shares of a qualifying small business corporation at the earliest opportunity. The strategy, which can be implemented and multiplied across generations as part of an estate freeze, can save each individual $100,000 or more in taxes.

Maintain a current will: While the majority of business assets may be dealt with as part of an estate freeze and trusts set up during your lifetime, a will is still required to distribute other business and non-business assets and provide liquidity to your heirs. Naming a competent executor with business acumen is critical with a small business.

Draw up a shareholder/partnership agreement: Without proper planning, death, disability, divorce and disagreement among partners can wreak havoc on a business, its owners and their families. A shareholder agreement is a legal document that sets out what would happen in each scenario, including how remaining partners would establish a price and buy out a partner's share.

Use insurance to fund specific needs: Insurance can be used to fund a buy/sell agreement, to provide for the family in the case of death or disability, or to eliminate a potentially debilitating tax liability on death.

Consider a spousal trust: Capital assets can roll over tax free to a surviving spouse or a spousal trust on your death. The advantage of a spousal trust is that it can not only defer tax and provide income for the life of your spouse but also ensure assets pass to your own children (rather than children of a subsequent marriage) and that your spouse does not become an unwelcome business partner.

Establish a portfolio of non-business assets: Many business owners have all their assets and income sources tied up in the company. Where possible, non-business assets should be accumulated within an RRSP, retirement compensation arrangement (RCA), individual pension plan (IPP) or investment account to diversify and reduce reliance on the company's success in retirement. These assets can also be left to children who are not actively involved in the business. A holding company can be used to protect assets against your creditors.

Note that if company shares are held by children, you will also need to protect the business from their creditors and former spouses. This can be accomplished through discretionary trusts, marriage contracts and gifting of assets after marriage.

A financial professional can help you identify other potential issues and evaluate potential strategies based on a sound understanding of your personal and business situation. Working with your accountant, lawyer, banker and other key advisors, he or she can co-ordinate and integrate the various components of your business and succession plans to help you preserve the value of your business and achieve intended results.

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About the author
Darrell Nordstrom, CLU, Ch.F.C., CFP, RFP, Senior Financial Advisor, Assante Financial Management Ltd. He can be reached at 1-877-837-3377 or 306-665-3377, or click to email Darrell Nordstrom.

Disclaimer
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. This material is not intended to provide and should not be construed as providing individual financial, investment, tax, legal or accounting advice. You should consult your professional advisor(s) prior to acting on the basis of the information herein.

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