Business plans must include retirement planning

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Many business owners focus on their business and must remember to invest seriously for retirement.

The Retirement myth of the Entrepreneur: Most business owners believe their company will provide investment capital when sold, or if passed on to the next generation, a salary or dividend payments. For some, their financial stability rides on the company’s future success.

Make hay while the sun shines. Don’t be overly optimistic that your company will succeed and create good revenue forever. Planning becomes necessary when a business represents an estate’s significant value. You may make hay while the sun shines, but be sure to stack a lot of it away for future use.

Many are not convinced that they need to plan their estate or the succession of their business. Despite the economic importance of their business, most business owners are still determining the tax liability if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

  • Life insurance
  • The business, from cash flow or liquid assets
  • RRSPSs/RRIFs (taxed when both spouses die)
  • TFSAs
  • Sale of real estate or a significant asset.
  • Non-registered investments

We are all ageing despite our business successes. Please take the time to do some essential estate planning to figure out who will take over the company and where your retirement income will come from. Review your personal and corporate-owned life insurance, disability coverage, and key-person insurance. Revise or complete both your will and power of attorney.

In some cases, paying relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems or generate capital to replace the tax that may be payable in your estate. It is essential to purchase insurance currently versus when older or health declines. If your health is a concern, ask your life insurance specialist if he can search the market for you.

Life insurance can eliminate company debt and help a succeeding son or daughter with new business capital. Finally, it can equalise the division of your estate among all of your heirs.

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

Can life insurance offer my heirs capital security?

Life insurance has provided families with basic financial security for well over 100 years. For example, a healthy, non-smoking 40-year-old male can purchase up to $500,000 worth of insurance for approximately $50 per month. That life insurance policy would pay out a death benefit, the equivalent of up to 10,000 times the amount of one monthly premium payment.

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In this case, the $500,000 could provide necessities such as groceries, shelter, home repairs, means of transportation, and education for dependents. In this sense, the value of life insurance is tangible. Contrasted against the assets and services such a large death benefit can purchase, we realize how small the premium cost really is.

When does life insurance begin covering my family’s financial risk?

Even if death occurs one day after the initial premium payment, the full benefit is payable tax-free, thus instantly creating new capital, sometimes far exceeding the insured individual’s net worth. Most accountants and financial advisors agree that life insurance is foundational for families with dependents to build financial security.

An immediate foundation of financial security. In addition to savings, life insurance is designed to immediately provide the capital necessary to create ongoing investment income for dependents after income taxes and other liabilities are paid.

When you are not financially independent Life insurance can make up the shortfall when investments assets have not yet grown to the extent that your net worth enables you or your heirs to live in total financial independence.

When your health is not the best Many people who are not in perfect health are surprised to find that they can also purchase life insurance to ensure their financial security.

Note: Life insurance premiums vary according to the policy type. In some cases, paying a little more premium offers enhanced benefits Be aware that tax-deferral strategies may change due to legislation.

How can I empower the process of Business Succession?

Here is how you can empower the process of Business Succession

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  • Establish appropriate forums Family retreats and regular meetings can allow the family to discuss the issues that will promote the continuation of a profitable company.
  • Develop teams and design tasks Select the most promising successor candidates to test their mettle. Include all the constituent players: the owner(s) and spouse(s); the owner’s children (including nieces or nephews) who are involved in the business or are shareholders; key executives; and once the successor is chosen, the following professionals:
  • Corporate tax accountant To value the business and assess capital gains tax liability; and to recognize if an estate freeze makes sense. Have the company financials been explained to the successor?
  • Corporate lawyer To install buy-sell and share redemption agreements, to advise all parties of various legal risks, and assess all historic agreements to see if they need to be changed in light of the succession.
  • Succession consultant These specialists can consult and quarterback the sessions through the entire planning process, keeping it on track.
  • Insurance specialist There are various insurance solutions to mitigate succession planning risk.
There can be no real communication without a reciprocity of ideas.— Ernest Holmes

Select the right successor

  • Look for leadership skills The selection of the right successor is vital to the continuation of a successful company. The most suitable candidate will probably have leadership potential made obvious by willing and capable followers; care for employees; decisive self-confidence; ability to plan strategy and deliver on promises; amiable interaction with peers and colleagues; integrity; ability to inspire others with a vision; skilled at listening to others and can resolve conflicts; and holds others accountable, encouraging them to meet the company’s objectives.
Man does not simply exist, but always decides what his existence will be, what he will become in the next moment. — Viktor Frankl

Ask yourself “Whose destiny is it?”

  • Understand limiting paradigms Some parents believe that the business was developed for a certain child. But perhaps this child has his/her own alternative career-dream. If a son or daughter is bribed or cajoled into becoming a successor, hard feelings may arise later when the realization of lost opportunity to be an artist, a doctor, or a zoologist sets in.

From the beginning, try to find a contingent successor, as no one knows what the future may hold—change is part of life.

 

 

 

 

Who is best suited to use Universal Life for the investment benefits?

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The individuals who may gain the most from Universal Life are those who:

• plan to carry life insurance all your life;
• have considerable extra cash flow after you contribute to your Registered Retirement Savings Plan (RRSP) and (Tax Free Savings Accounts) TFSAs;
• have a tax bracket approaching the highest level;
• have a desire to earn interest without taxation;
• may have a future tax liability in your estate;
• have a consistently good cash flow with excess money to invest;
• have good future business prospects for large profits, increasing business valuation and capital gains;
• desire to enhance RRIF income in retirement;
• desire to pass wealth to the next generation or to a charity; and
• have large loans that reduce your potential net worth.

What are the administrative fees? First, you make deposits, similar to deposits made to a bank account. Then, just as your bank charges service fees to your account each month, the insurer subtracts charges to cover the various expenses in the policy associated with the cost of insurance, administration fees, policy fees, rider fees, etc. The account is then credited with any interest earned. This interest is without taxation while remaining in the plan. If you keep the policy long enough, some companies add a bonus percentile to the interest earned factor.

Why is Universal Life Insurance an excellent Estate Planning tool?

There are several reasons why people use Universal Life (UL) for estate planning.

  • The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect your changing needs. If the death benefit remains level, eventually the major portion of the benefit, over a long period of time, can consist of the cash reserve (CSV). As the need for the insurance shrinks, the cash can increase, providing the insurance cost doesn’t reduce the cash value and its growth. If the death benefit grows, the cost of insurance will increase with age, and continues to be paid from the cash value.
  • You can insure more than one life in the plan. You have the option of insuring yourself, your spouse, both of you, your children, or business associates using one or more of these policies. In some cases, the ownership can be transferred or lives added and the premiums paid from the original tax advantaged funds. Your death benefit can be payable after the first spouse’s death to provide an income for the surviving spouse. Alternatively, you can arrange to have the benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities.
  • UL works to protect you from the potential tax liability of your estate. Discuss your estate use of UL with a good tax advisor, CA, or financial advisor specializing in estate taxation. You may also want to seek counsel from an estate-planning lawyer. Make sure you, along with your financial representative, assess the estate’s need for life insurance and the various solutions. The best estate-planning solutions are most often insurance related because life insurance is designed to pay a large capital benefit at precisely the time it is needed.
  • Mitigate tax erosion of the value of a significant estate. If you own stocks and bonds, equity investment funds, a family cottage, a second residence, or business assets you may face capital gains taxation in your estate. Upon death, taxes will also be due on funds remaining in an RRSP/RRIF (after the death of both spouses in the case of a married couple). One policy can replace or pre-fund such taxes due. With a joint last-to-die policy, the insurance proceeds can be used to cover the estimated estate taxes. The advantage is that one’s entire pre-tax estate valuation can pass, as desired, to the family heirs.
  • Circumvent probate and/or estate administration tax (EAT). When the tax-free benefit is paid directly to beneficiaries, there is no need to probate this money or have it reviewed by the government. In fact, other beneficiaries have no recourse to complain about monies paid to heirs in this manner. Depending on the province, such legislation may be under review or currently changing.
  • Business owners can protect their asset value. The death benefit of a UL policy can create immediate capital to take a business through the transition of losing one of its leaders, or key employees, while allowing surviving partners to buy out the outstanding interests via a payout of the share ownership of the deceased partner. This is commonly done within the framework of a well structured buy-sell agreement.
  • Other tax advantages. A UL policy owner can earn and accumulate tax deferred interest to potentially increase the after-tax yield of your investments and policy cash value over the long term. The UL deposits are protected from secondary annual taxation on interest earnings until withdrawn.

EN 3.13

 

 

Fund your Emergency Plan to care for loved ones

Emergencies happen when we least expect them.  Depending on the severity of the emergency, it can equate to a massive financial loss, including the expense of connecting with loved ones, travel expenses, and lodging expenses etc.

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Emergencies often occur when families are not together. When the 911 incident occurred parents (the most financially able and responsible) thought about the safety of their kids at school or elderly parents across town.

During times like these, if phones don’t work, or some neighbourhoods aren’t accessible, what plans do your family members resort to? Having a plan, and previously discussing it with loved ones, will save time and real-time stress.

Know how to connect in case of an emergency  In a catastrophic emergency such as one that can occur during a hurricane, you’ll need a simple way to contact and/or meet one another if going home isn’t a possibility. Consider a safe place to meet like a community centre, library, or school.

The phone or mobile is usually the first method of connection. Establish a plan that includes contacts that can help your family communicate and find each other. Young school children, if they’re in class or day care will need to be picked-up. Know the emergency policies, and designate someone to pick them up. If your children are in university or living away from home, include them in your emergency plan. Teach them how they can identify themselves if they become separated from you and who to call, like 9-1-1 or your local emergency numbers, to get help.

Get updates from the radio, television or Internet  Listen to the radio or television for information from local authorities and follow their instructions. Call 911 if appropriate. They may advise of dangerous areas or evacuations. You may need to turn utilities off such as electricity, water or gas valves. Ensure that everyone also knows the location of your family emergency kit and fire extinguisher.

Everyone should know your home’s safe exits and best places to go. And remember your pets, who may not be allowed in shelters or hotels. Identify kennels or friends’ homes where they can go in an emergency.

Elderly family members and/or those with special needs should also be a part of your plan. List the medications and supplies they may need and have them ready to transport with your luggage, in the event of an evacuation. Know any information caregivers will require. If they live alone, ask a friend or neighbour to check in on them or help them evacuate.

Have your personal documents ready  In addition to your plan, documents will help you stay organized. Make copies of birth certificates, passports, wills, and insurance info. These documents, along with photos of your family members, should be kept at work, or other safe locations.

Having a plan is also part of being a responsible family leader and citizen. Local authorities will react swiftly, but they can’t reach everyone at once. Being prepared allows these responders to help those in urgent need first. So, do your part! Learn about the specific emergencies that can happen where you live.

How do you fund emergencies?  Make sure you have put aside enough money to respond to urgencies such as flying a family member (or the entire family) out of a location. You may need money for lodging, clothing and or food.

By reviewing what occurred in Japan when nuclear reactors were damaged, we are humbled to acknowledge our dependence on one another and need of financial independence to be able to act swiftly, or make expenditure when the need arises.

Source Excerpts: Environment Canada

How can Universal Life help business-related estate planning?

Universal Life strategies can help business related estate planning in these ways:

  • Protect your business assets.

If you own a business and die, will your partners be able to pay for your share of the company? Why not insure your life, and the lives of the other partners and key employees?

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The death benefit of the policy can create immediate capital to take the business through the transition of losing one of its leaders, while allowing surviving partners to buy out the outstanding interests (payout share ownership of the deceased partner, using a buy-sell agreement), pay off creditors or in the case of the key person, provide head-hunting monies to replace him or her.

  • Business owners can protect spouses.

If a spouse who was not active in your company survives, chances are he or she would rather be paid cash for the value of their shares and leave the running of the business to the surviving children or partners. It is difficult for executors to make sure that a wife, for example, is paid enough money to live on if she continues to share ownership.

In some cases, surviving spouses constantly need to be updated on the business’s finances, and performance and all too often have issues getting their due income. An insurance policy could rid the executors of the responsibility of ensuring that the company’s remaining owners pay the spouse. The insurance benefit could be paid directly to the spouse or flow through the business or the business partners as per a pre-established buy-sell agreement.

  • Who is the tax-advantaged plan designed for?

As with any life insurance policy, it is designed to pay beneficiaries a tax-free benefit upon the policy owner’s death. That is the main reason to buy such a life insurance policy.

The taxation scenario is a great secondary benefit, but the main purpose should be to ensure that needs are covered by the life insurance component.

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.

 

An Estate Plan for the business and the family

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A comprehensive estate plan includes a will, a plan to minimize the capital gains liability and provide for any family income needs. This often involves life insurance which is an effective tool to maximize the size of your estate and pay any tax liability cost effectively. I will design an estate plan tailored specifically for your situation because every person is a unique individual.

We provide both personal and business insurance solutions for your financial security.

Business Insurance solutions:

• Partnership insurance
• Buy/Sell agreements
• Key Person insurance
• Business Disability insurance
• Business/Office Overhead
• Collateral Loan insurance
• Group Health Benefits

Personal Insurance solutions to protect you and your family:

• Life Insurance
• Critical Illness insurance
• Long-Term Care insurance
• Estate Preservation
• Individual Health and Dental Plans

Life insurance to reduce business owner risks

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Start-up firms and smaller companies are especially vulnerable to potentially devastating financial risk because they often lack big company sophistication and in-house risk-control expertise. We will help you gain control of your financial risk.

  1. Life Insurance We help business leaders provide appropriate life insurance to pay off debts and/or the mortgage, educate the kids, and/or provide income for a spouse or a disabled dependent.
  2. Disability Income Replacement Insurance We will examine your need for income replacement insurance that can help replace your paycheque in case you get hurt or sick.
  3. Key Person Insurance We will assess your need for an insurance policy designed to provide money to help you hire the right person if a key individual became sick or died.
  4. Critical Illness Insurance If a business owners develop cancer, a heart attack, or a stroke, the illness can wipe out a small business. We have many plans to protect you from such concerns.