Till death do us part: business succession and estate planning
Are you in business with partners? Have you thought about what would happen if your partner passed away and her spouse inherited the shares in the company? Just like that you will inherit a new partner, whether you wanted one or not.
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A better solution is to have your lawyer draw up a Buy-Sell Agreement that ensures that you will be able to purchase the shares of your partner upon her death, and vice versa. A Buy-Sell Agreement also ensures that heirs will not be required to run a business in which they have no interest or expertise. That is probably good news for the business.
Once a solid Buy-Sell Agreement is in place, you need to fund the payment of these shares to the estate or surviving spouse. Life insurance allows you to do this. Each partner purchases an insurance policy on the other for the estimated value of the shares.
The purchaser of the policy is the beneficiary. When the unthinkable happens, funds from the policy are available to purchase the shares as per the Buy-Sell Agreement. The survivors receive their funds and the remaining shareholder can carry on the business as sole owner.
Both term and whole life insurance will work for this. Each situation is unique. While term is less expensive initially, consult a professional to determine which would work best for you and your partners. We will help your understand the various options.
You should also consider the effect of taxation of your estate when you pass. Some people don’t want to pay any more tax than necessary so that their heirs can have the lion’s share of the estate, and others don’t care. So ask yourself, “Do I care about this?” If you want to leave a lot of money to your children or grandchildren, one option is to use insurance to cover off the taxes. As with the Buy-Sell Agreement, the insurance policy will be bought for a face value amount that is estimated to cover the future tax, and the heirs will use it to do just that.
The process of planning identifies the issues around estate planning and allows you to deal with them. Professionals are up to date with new laws and can proactively deal with them. Our knowledge and experience are both important: we may have seen unfortunate things happen with other clients that can be avoided by planning differently for you.
Don’t overlook the simplest things like setting up your wills and powers of attorney. Many people just don’t take time to think things through and do the paperwork. It is not uncommon for clients who’ve gone through a transition in life to forget to change the beneficiaries on insurance policies or RRSPs. One of my colleague’s elderly female clients hadn’t changed the beneficiary on her RRSP even though her husband had pre-deceased her. It wasn’t until the client herself passed away that her daughter realized that no one had been informed of the father’s death, and he was still listed as the beneficiary. Getting the proceeds of this policy became very complicated.
Contact me at email@example.com or 416-939-2000 for assistance with your business succession and estate matters.
It’s just good advice.