Special to the Financial Independence Hub
Did you know that more than 50% of medium sized enterprises in Canada are controlled by an owner between the age of 50 and 64? Additionally, about 75% of Canadian business owners plan to exit their business before 2022. However, according to the Canadian Federation of Business, only half of Canadian business owners have a proper succession plan in place. If you are a business owner, you need to think about the future of your company, no matter your age.
When a family’s assets and income are linked to a business, if the business owner passes away, both estate and succession planning will ensure that the family is taken care of and the company remains viable. If a person passes away without a will, provincial wills and estate law will determine how their assets are dispersed. Without any kind of estate planning in place, their heirs could be hit with a hefty tax bill, and unexpected fees and administrative costs.
There are many steps to effective estate planning and whether they all apply to you will depend on your personal circumstances. Some of them include:
- ensuring your will is up-to-date
- appointing an appropriate executor
- establishing an Enduring Power of Attorney (EPOA)
- providing an income for your spouse and family in the event of your unexpected disability or death
- developing a plan for equitable and tax-efficient distribution of your assets
- creating an emergency business plan
- writing shareholder/partnership buy-sell agreements if applicable
- planning for succession
To accommodate the above, there are several financial strategies at your disposal to help you meet your goals. As a business owner you should investigate:
1.) Looking at insurance as a way to shelter assets for the next generation.
Permanent cash value life insurance policies, such as participating whole life and universal life, are attractive to corporations for the potential tax-free death benefit and the tax-preferred cash accumulation benefits they offer. These insurance policies provide the corporation with valuable life insurance protection on a key person or shareholder. Another benefit is they allow for tax efficient growth and access to policy values tax-free immediately or in the future. By using life insurance, the estate value available for future generations can be significantly increased by the tax-free death benefit.
2.) How to use corporate earnings to purchase life insurance policy – and avoid paying dividends. There are a number of reasons a corporation would want to access cash values from a life insurance policy. These include building a pool of tax – preferred capital to take advantage of business opportunities, to expand the business, to provide a source of additional income for key employees, or for emergency purposes. Your policy contains a guarantee that you can withdraw some, or all, of your policy’s cash values. You can borrow from this cash value. The loan received is tax-free, therefore you can access those cash values without having to pay yourself a dividend from the corporation triggering tax. Upon death, the loan is repaid, plus interest, out of the Life Insurance death benefit, and any excess funds are paid to your beneficiaries’ tax free. This strategy can reduce the tax liability of the business and the heirs, and preserve the value in the company.
There are additional considerations and risks associated with this strategy beyond those discussed here. Before implementing any strategy, always consult with your tax and legal advisors.
Each business owner’s circumstances, needs and goals differ. While there are a variety of creative solutions that exist when it comes to estate planning, it is important to remember that putting plans in place for the future sooner rather than later is best for everyone.