Business – Page 2 – Adviceon Library

Potential pitfalls of Succession Planning

Ten Business Succession Pitfalls

Various circumstances can make succession planning either difficult or impossible:

The suitable successor quits. A son or daughter may decide to leave the firm after having worked in the family business for years without a commitment to a concrete succession plan.

Business succession isn’t viable. Perhaps there is no child-successor or executive available or willing to take on the responsibilities of your firm. There may be changing circumstances such as a new competitor, loss of massive contracts, or the product or service is becoming obsolete.

You might want to sell. The success of the business is not necessarily based on flourishing over successive generations. It might even be achieved by selling the company at the right time to create investment wealth. Or unexpectedly, a competing business or a group of executives may offer to buy it.

The owner’s inability to relinquish control. One may hold on to a company because it has provided income for years, offering a means to control one’s destiny. Much of the owner’s self-identity may have evolved out of the business.

Power struggles with partners. Some situations incite resentment among co-owning siblings or partners, preventing a succession process.

No retirement goals. Many founder-owners have no interests outside the business. If their work is their life, they may have no intention of retiring.

Can’t face mortality. Many owners (including sensitive children) find it hard to discuss the issues associated with ageing, loss of health or death. Entrepreneurs, who have carved out their destiny, may believe they are somewhat immortal, even if facing real health risks.

No trust of successor’s skill. It is often problematic for parents to see their children as capable successors. They may criticize even their reasonable efforts.

The owner dies. Even before considering succession planning, the owner may die, leaving the responsibility to a spouse or child to conclude or abandon.

There is no life insurance solution in place. Talk to your advisor about how to use life insurance planning for maximizing your estate as you create a strategy for your business succession. There are ways to fund taxes and buy out partners and equalize an estate fairly among heirs. The real risk is doing nothing.

Universal Life Insurance (UL) offers cash accessibility

When you purchase a Universal Life policy you have certain amount of flexibility and accessibility to your money.

• Premium payments are flexible. You can pay what is referred to as a minimum premium. If you want to pre-fund the policy with more money, you may be able to increase your annual premium on a monthly, annual, or occasional lump sum basis, up to a specified maximum. A maximum premium is calculated and pre-set in order to keep your policy exempt from accrual taxation. Once your cash value increases, you may be able to reduce or skip premium payments altogether, without jeopardizing insurance coverage, while the cost of the premium (insurance, administrative charges, any additional benefits, and riders) is eventually paid from within the plan. A well-funded policy’s money reserve (cash account) can continue to grow even as it pays for the cost of insurance.

• Borrow against cash account’s reserves. The cash surrender value (CSV) is just another name for the remaining cash in the policy. For example, if you had $100,000 in a policy’s tax-exempt fund, you would be able to borrow against it or withdraw it with some potential taxation.

The most important business insurance coverage

Financial products and services can address specific needs in your financial security plan and help you build a successful business. I have access to a broad range of insurance, investment, employee disability and group benefit products to help meet your individual and business needs and goals. You may have put all your focus and hard work into your business. It makes sense to protect it properly against the risks that can bring financial hardship.

How to Protect Your Business

I offer unique planning solutions using:

• Life insurance

• Disability insurance

• Critical illness insurance

How to Protect Your Employees

The people employed in your business or organization help you succeed regardless if you depend on three key employees, or a team of 100. We can offer your firm a comprehensive group benefit plan which may help you to retain your most important staff:

• Benefits plans for small business

• Health care and dental care benefits

• Wellness and disability benefits

• Life and accidental death and dismemberment benefits

Considerations when designing an Estate

Estate planning is a process that allows one to determine how their assets will be distributed upon death. As we prepare to pass our lifetime assets to our heirs, there are key components of an estate plan that should be given careful consideration.

The fundamental component of any estate plan is the Last Will and Testament commonly referred to as the will. It is also important that an individual maintains and updates their will and two powers of attorney documents: 1) for property such as real estate, bank accounts, and investment assets, and 2) a power of attorney for personal health care.

Review your estate planning documents

Life changes can affect the integration of each of the above strategic solutions. Therefore, it is important to review the above aspects of an estate plan every three to five years. For example, there may be a change in family structure, so beneficiaries may need to be reviewed. Or, if you remarry, your existing Will may automatically become nullified.

Your net assets can change Keep an eye on your net worth. Other life changes that require updating your estate plan include changes in your net worth, or if the value of your residence or investment changed. If you have significant changes in net worth, have your accountant make sure that the best tax arrangements are in place.

Business strategies to protect your net assets If you are the shareholder of business assets, make sure that a buy-sell agreement is in place in the event of your death or disability, assuring that every owner is covered with life and disability (income replacement) insurance.

An estate plan may benefit from using formal trusts to reduce taxes. Life insurance products such as segregated funds and term funds can also be used to circumvent or minimize probate or government estate administration taxes (EAT) or attending legal fees. In most cases when a beneficiary is named in a life insurance policy, proceeds will pass and the capital in most cases will transfer on a tax-free basis to beneficiaries, thus avoiding probate or EAT scrutiny.

For an estate plan seeking to transfer large capital assets to named heirs, it would be wise to discuss these capital-transfer techniques with an accountant and/or tax lawyer.

How can I minimize the need for estate probate?

There are a few tactics whereby you can reduce the need for an estate to be probated by the government:

• Defer possible probate by holding assets jointly. Probate fees may be charged when that asset is transferred later through the will of the second spouse.
• Establish a person as a beneficiary on your life insurance policies independent of the estate. This way, all monies pass to the heirs tax-free. If the estate needs probating, this portion of the assets will not be included in the estate, as the death benefit will flow directly to the heirs circumventing scrutiny. Life insurance strategies are excellent financial tools to circumvent probate on larger wealth transfers to heirs. Family wealth can be positioned to pass through life insurance policies, delivering tax-free benefits without probate. Any tax due on policy investments will be taxed to the estate of the deceased policy owner. This method has frequently been used to transfer inter-generational estate wealth in the millions. Your advisor can keep you up to date on potential taxes in the estate.
• Name your beneficiaries on your registered investments such as RRSPs and RRIFs. Insurance products may allow you to side-step probate in this way. To protect themselves, banks and trust companies will probably require probate or a letter of indemnity from the estate’s lawyer if the assets are significant. If your spouse is your beneficiary, consider a secondary beneficiary should your spouse die at the same time you do.
• Consider setting up a spousal testamentary trust in your will to avoid double probate. When the second spouse dies, the assets can be distributed via the trust directives as opposed to a will.
• With your spouse, set up mutually-owned property as ‘joint tenants with rights of survivorship’ to transfer these assets automatically outside of the will.

Once a will has been probated paid the estate administrative tax (EAT), the executor can start transferring assets as directed by the will. Some assets can be transferred easily within a short period of time. Others have to wait until the estate expenses have been paid, including any final income taxes due to Canada Revenue Agency (CRA), after which they will issue a tax clearance certificate.

Solving Capital Gains Tax Exposure

Capital gains from a business, cottage, second residence, rental property, or non-registered investment are subject to taxation when the property is disposed of. How and when the property is disposed of requires serious consideration, as the tax implications can be enormous.

Here are some areas where capital gains tax may develop:

If you own a Family Business Many family businesses have accrued large capital gains over time, due of course to the success of the businesses. When sold, the business will incur a taxable disposition that could be subject to high taxable capital gains.
If you own non-registered Investments Any capital asset that is held outside of an RRSP, whether a stock, GIC, or investment fund to name only a few, will be taxed on the difference between its fair market value at time of sale, and the cost of the asset. The difference between the purchase price and the sale price will be either a taxable gain or loss.
If you own a Cottage When you sell your cottage, or you and your spouse die, capital gains tax will be triggered on the difference between the cost and the fair market value at the time of sale. One major consideration is how to keep the cottage in the family.

Assuming the kids want the cottage, how can the tax problem be handled? What if there are not enough assets in the estate to pay the taxman? If there are not enough assets or cash to pay for the tax bill, it may be that the cottage has to be sold.

Can A Solution Cost Pennies on the Dollar?

One solution that can help overcome tax issues, and provide enormous estate savings, is a permanent life insurance policy. A permanent life insurance solution will create a non-taxable death benefit that can pay the capital gains tax on the accrued increase in value of a family business, cottage, second residence, or unregistered investment. The most common form of estate policy purchased is a Joint Last-to-Die Life Insurance contract. These types of policies can insure both spouses’ lives, but only pay out on the last death. The cost of the product is often more affordable than an individual policy since the insurance risk is lessened by insuring two lives.

The problem of Estate Capital Gains Tax

You and your heirs may think that all of your assets will pass over to them tax free. Let’s examine how estate taxation can erode the value of one’s property and cause business succession problems

The Family Business Many successful family businesses have accrued capital gains in the millions, from the time the owner started years ago. The tax payable is so high that the business cannot afford the liability once the owner dies, at least without liquidating. One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, or the money gets used for an emergency or a new opportunity; or if the savings goal is impossible for the company to achieve. A better method might be to simply buy life insurance to immediately cover the entire estimated liability risk, which is due at the same time the benefit is paid upon the owner’s death (or the death of a surviving spouse). A sole owner may buy enough life insurance to add additional capital to offer stability if the company were to be sold, or where a wife, son, or daughter wants to take it over.

Investments Any capital asset that has accrued value over the initial purchase price, will have capital gains (if yet unrealized) taxed in the estate. At that time if there is no surviving spouse or dependent, an RRSP will all be taxed fully as income. Again, life insurance allows the payment of any gains tax and/or a capital replacement of the estate’s lost RRSP value.

The Cottage Perhaps you acquired a cottage that has increased in value from next to nothing, over several years of inflation while people have sought after vacation properties. Just like the business, a cottage can have capital gains growth. Thus, that asset can also later present you with a tax liability. If you die, or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested. Consider passing the cottage on to the children. Personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance for business needs, or create future income for a spouse, or dependent child, if necessary.

Does your family want to keep the cottage after your death? If so, would you want them to inherit the cottage together with a large income tax bill? Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once.

The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a life insurance policy on the owner(s) for the projected amount due in the estate. Purchase a permanent life insurance plan. These plans often offer a competitive rate of return on your investment and the full amount is payable at death entirely tax-free. An additional benefit is that by virtue of the life insurance guarantee, the entire coverage needed is available after the payment of just one monthly premium. If you die, your beneficiaries will have the cash to pay the debt, rather than having to quickly sell the cottage to pay taxes due. Consider taking out a permanent policy on your life (or a joint policy that insures your spouse as well) that will increase in value to meet the tax on the rising capital gain on your cottage property.

What is Disability Insurance?

Disability Insurance provides a monthly income if you are incapacitated and incapable of working due to an injury or illness. Often called “Income Replacement Insurance”, this coverage is essential for self-employed individuals and those without disability insurance via their employer.

The risks of income loss Your ability to earn income may be compromised through injury or illness if you become disabled. Your ability to pay bills or save for retirement could remain the same. Disability insurance plans are designed to help you meet necessary income requirements enabling you to concentrate on recovering from your disability and returning to an active income-generating life.

Do you know who can be covered? Income protection can provide peace of mind for professionals such as lawyers or doctors, small business owners like plumbers or carpenters, leading business executives, and full- or part-time or home-based workers. You can also supplement the disability coverage you have with an employer or an association such as the Canadian Association of Retired Persons (CARP).

How do you collect disability benefits? Your policy contract determines how soon and for how long you can collect benefits. Generally, disability benefits are received if you can’t perform the duties of your occupation, a similar job in your field, or any job at all.

How are befits paid? Disability insurance benefits are payable every month during a disability for the benefit period of the contract, which can vary. When you recover from a disability, the policy continues, usually payable again for a subsequent or recurring disability.

I’m healthy: why should I be covered? Most people know the importance of life insurance but rarely think about having a disability despite the statistics indicating they are pretty standard. Death is inevitable, while disability is probable at any given age.

Develop your backup plan today! If you are running a business (or work as an employee), you should be covered by some form of disability insurance (income replacement insurance). Such planning is the only way to avoid the financial and emotional stresses resulting from long-term disability.

Note: Life and disability insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide significant business strategies relative to succession or an estate.

Is Mortgage Life Insurance practical?

Mortgage insurance is creditor insurance which financial institutions offer to pay off the indebtedness of a mortgage if the mortgagor died during the term of the mortgage.There is another strategy to achieve this using personally owned life insurance which offers you flexible choices with more freedom as to how you will approach insuring your mortgage liability.

Compare the mortgage insurance your bank or financial institution uses for your mortgage creditor life insurance to buying your own personally owned term insurance.

Mortgage Life Insurance from the financial institution

Premiums can be much higher.
The death benefit replaces only your remaining balance of mortgage indebtedness.
Premiums do not reduce when your mortgage debt is reduced.
The death benefit only pays off your remaining mortgage debt.
The contract stipulates that the financial institution is the only life insurance beneficiary.
You cannot alter the irrevocable beneficiary of the contract.
The entire amount of life insurance is lost upon mortgage repayment, or when in default.
The mortgage life insurance is not transferrable to another financial institution or private lender.
Because so few health questions are required, underwriting is often done at time of claim, resulting in denied claims.
When you move your mortgage to another firm, you generally lose the coverage issued from an existing institution. If you have health concerns you may not be able to buy more coverage.
Creditor insurance may cover two parties who jointly mortgage their property. However, it pays only on the first death, even if the two were to die. When one spouse dies, creditor insurance no longer covers any survivors.
- In contrast, by owning your own insurance policy, two spouses or partners may each own separate life insurance death benefits. In the case where both parties die, double the benefit would be paid, thus adding increased value to the estate. If one survives, the coverage on that life continues.

Your own Term Insurance

You have full control over the type of life insurance plan.
You can set up multiple beneficiaries, including a fund to pay off some or all of your mortgage debt.
Beneficiaries can choose to not pay off the mortgage if they prefer to pay off higher interest debt.
You can add or revoke beneficiaries.
Your life insurance face benefit amount does not shrink with a reducing mortgage debt, and can actually increase with some plans. Your coverage level is controlled by you.
Many term plans offer level premiums for longer periods or are convertible to Term to Age 100 plans, without a medical exam, even if your health declines.
- In time, in most cases, you can reduce your coverage to have enough for the proceeds to pay your final expenses to take the financial burden from your loved ones.
You needn’t qualify for new mortgage life insurance if you move your mortgage to a new financial institution. You just continue using your existing term plan, which covers you regardless where your mortgage is.
Once your mortgage is repaid or reduced you will have life insurance to cover other liabilities or for other estate planning purposes.
Term insurance allows you to look at your entire capital needs and buy coverage applicable to you total needs, in the event of death.
A custom life insurance plan often offer other optional benefits that you can include, such as riders which can include: life insurance coverage for children, disability coverage, and critical illness coverage.
More control over the cost of premiums which can go up over time if you don’t own and control the life insurance contract.
Your insurer underwrites your policy when you apply for it. Other mortgage life insurance from a financial institution offer you little control and may choose to underwrite your health history at claim time.
Ask your advisor how to shift out of mortgage life insurance into personally owned life insurance to achieve the above advantages.

When should you review your Life Insurance planning?

You may want to replace the income of the life insured—either you or your spouse. Ask your advisor to do a capital needs analysis. It is easy to calculate the capital needed over any short or long period of time in any situation if the life insured were to die. Many professional calculators allow advisors to prepare accurate life insurance assessments.

It may be time to review your Life Insurance at these life junctures:

After you have finished your career training and begin a new job, you will want to buy life insurance as you start the foundation of your goal-setting strategy to gain financial independence. Life Insurance proceeds can pay off any OSAP or car loans so that the family has no financial burden should you predecease them.
If you have recently married or are engaged, your finances take on a new scope of responsibility for spouses jointly planning to protect one another’s financial security. Also, review your Life Insurance needs together to protect your income if one of you die or become disabled. This is a key foundation for developing a sound financial strategy when you are young and newly married.
- If either of you had a will, it might be revoked upon marriage unless it specifically states it was created in contemplation of marriage. When planning your Life Insurance together, consider how to set up your beneficiaries carefully. Often it is best to do so outside of a will.
If you work at a trade, make sure that you have Disability Insurance. This insurance is also called Income Replacement Insurance because it provides a paycheque if you become disabled. Your children and spouse are dependent upon your income. What if you became disabled – will that source of income dry up or become minimal?
When you have children, Life insurance is purchased to provide capital if one of the parents should die. A young mother would not be forced to work, reduce her lifestyle, or leave her children cared for by others.
When children go to college, many of us tap into our savings to help meet their tuition and housing expenses. We may purchase a child’s first car or provide an income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds.
Suppose you have a change of executor, lawyer, accountant, or guardian. If one of these key people dies or becomes incapacitated, or is replaced regarding your estate plan, it is wise to review that aspect of your plan, which may include an entire rewriting of your will as you appoint new people.
If you want to establish planned giving, Life Insurance works well. If you desire to leave money, for example, to a charity, church or religious organization, an art gallery, or a school, you will need to do some estate planning. Consider using advanced life insurance planning. Life insurance can assign a beneficiary, allowing the monies to go directly to the charity or foundation. Consider that your will may need to be changed if you use Life Insurance to circumvent your will.
If you have grandchildren, you may want to ensure that they are provided for, perhaps through life insurance planning.
If you have experienced a significant change in your level of wealth, replanning may be important. If you inherit money or inherit Life Insurance proceeds, you may want to talk to your advisor about implementing Life Insurance in your own estate planning. Also, look at Disability Insurance and Long-term Care Insurance to see if financial risks can be insured to protect or enhance your wealth. If your assets decline, consider altering your bequests and newly establish this in your will.
If special care is needed for a loved one, make sure to plan. When a spouse, parent, or child has become disabled and needs future care, consider: Long-term Care costs are very high if you want a private room or special personal attention (such as defining when you want to take a nap or go to the washroom or bath, versus a strict schedule), for yourself, your parent, or another.
If you personally anticipate requiring costly long-term health care, you may want to alter the specific bequests in your will to reflect this new reality.
If you appoint a new or revoke a previous beneficiary, review your beneficiary designations with your Life Insurance representative and your beneficiaries.
If you have sold or will sell a business, your Life Insurance will need a review. If your assets become more liquid upon the sale of a business, you may want to pass that benefit along to beneficiaries or charities; or enhance your retirement. If a partner has bought or is buying your business previously bequeathed in your will, you may need to adjust your estate planning while using advanced life insurance planning for business-related solutions.
Replanning your Life Insurance may be necessary when you want to use or change a trustee or trust institution. You may, at some point, want to assign others to be in charge of investments within a testamentary trust directive.
A change of legislation can affect your plan. Changed government legislation can affect your estate planning. The validity of your will may be affected by changes such as estate taxation or probate laws.
Capital gains taxation on a major asset will eventually come due. When you own an asset that has appreciated, such as a cottage or business, or equity investment, make sure the tax payable will not harm the estate. Affordable Life Insurance solutions can pay off your estate liabilities after death.