Estate planning is a comprehensive process that facilitates the transfer of your assets to chosen beneficiaries upon your passing. It considers ways to support loved ones and ensuring your wishes are carried out effectively.
For Canadian entrepreneurs, estate planning is vital to preserving hard-earned success and safeguarding both business and personal legacies for future generations.
Here’s what you need to consider when planning your legacy:
Why Legacy Planning is Critical for Business Owners
As a business owner, your legacy encompasses more than personal wealth. It includes the continuity of your business, the well-being of your family, and the broader impact on your community. Engaging trusted advisors—such as wealth planners, lawyers, and accountants—early in the process can help you navigate the complexities of estate and succession planning with confidence.
Key priorities in estate planning often include:
1. Maximizing the wealth transferred to beneficiaries while minimizing tax burdens.
2. Addressing fairness and equality within your family in alignment with your values.
3. Preparing the next generation to manage wealth responsibly.
4. Achieving philanthropic goals through strategic giving.
These discussions can be challenging, but open communication and informed guidance create a more effective and meaningful legacy planning experience.
Establishing Your Baseline: Assessing Current Wealth
To plan effectively, start with a detailed understanding of your current assets and liabilities. An inventory of your financial position should include (but is not limited to):
- Investment portfolios.
- Real estate holdings.
- Private business interests and shares.
- Insurance policies.
- Outstanding debts and liabilities.
For business owners, this step often involves a thorough review of the company’s financials, shareholder agreements, and tax exposure. Collaborating with your wealth advisor can help clarify your financial picture and lay the groundwork for productive discussions with legal counsel.
Tax-Efficient Wealth Transfer
Minimizing taxes and fees is particularly important for business owners, as assets tied to a business can complicate estate distribution. Some strategies include:
- Registered Asset Planning: Beneficiary designations for registered accounts (e.g., RRSPs, TFSAs) can avoid probate and reduce taxation. Charitable donations of registered assets can further minimize taxes.
- Life Insurance Solutions: Life insurance can be a cost-effective tool to address liquidity needs, such as covering estate taxes or funding business succession. Policies may also be integrated into retirement planning strategies.
- Trust Structures: Alter ego or joint partner trusts can provide tax advantages, maintain asset control, and protect privacy.
- Multiple Wills: Using a secondary will to address assets like private company shares or business interests that do not require probate can help minimize probate fees.
To determine the best approach for your unique circumstances, always consult with legal, tax, and wealth advisors. Their knowledge and insights can help tailor these strategies to your goals and priorities.
Choosing Key People for Your Plan
Executors and Trustees
The executor or trustee of your estate plays a crucial role in managing and distributing your assets. For business owners, this may involve overseeing or winding down business operations. Ideal candidates should typically have:
- Proximity to your primary residence or business.
- Objectivity and the ability to manage family dynamics.
- Financial literacy and experience working with professionals, including lawyers and accountants.
- Organizational skills and the capacity to handle extensive paperwork and legal processes.
- Is familiar with your advisors (wealth advisor, lawyer,
accountant, etc.).
Similarly, when trusts are involved, trustees play an important role in overseeing the wealth. It is helpful if trustees share a similar perspective on money and its use as the deceased.
When considering candidates to fill these roles, your advisor can objectively ask the necessary questions to help you identify who is most suited to support the family’s and business’s future success.
Guardians for Minor Children
If applicable, naming a guardian helps ensure your children are raised according to your values, even if that guardian is not a relative. Business owners may also wish to address how the guardian would handle the inheritance or responsibilities tied to the business.
Powers of Attorney
Appointing an enduring power of attorney (POA) allows a trusted individual to manage your financial affairs if you become incapacitated. Multiple POAs can be appointed to address individual needs, such as business or personal matters.
Protecting Your Legacy
Indirect (Use of Trusts) or Direct Distribution
Business owners often face decisions about how and when to distribute wealth. The Family Law Act can protect beneficiaries of an inheritance, but trusts offer additional protection against potential creditor claims. In certain situations, trusts can help provide asset protection, privacy, and reduce or eliminate probate. Here are some examples of how your advisor might implement these strategies:
- First Distribution: Upon the death of the first spouse, the surviving spouse typically receives the remainder of the estate. This can be done directly or through a spousal trust for added flexibility and protection.
- Second Distribution: Assets can be passed to the next generation directly, such as when they reach a certain age. However, this leaves them vulnerable to potential creditor and spousal claims. Keeping the principal in a trust for an extended period, like a "for life" trust, can offer more protection for future generations.
- Ultimate Distribution: In the event of a "catastrophic disaster," it’s important to plan how assets should be distributed, particularly for minors or young adults.
Letters of Wishes
Though non-binding, a letter of wishes can provide critical clarity to executors and beneficiaries. This document may offer guidance on:
Personal Considerations:
- Family Guidance
- Inheritance philosophy
- Care instructions for dependents
- Explanation of any unique distribution decisions
- Personal Document Management
- Location of critical personal documents
- Digital account access details
- Insurance and identification information
Business Considerations:
- Transition strategy
- Preferred succession method
- Recommended business successors
- Company vision and future direction
- Operational Insights
- Critical business knowledge
- Strategic initiatives
- Key relationship preservation
Recommendation: Store these sensitive documents in a sealed, secure envelope to be accessed only when necessary.
Fair and Equal Distribution
"A Will can be equal but not fair, and fair but not equal."
To address both fairness and equality in your estate plan, work with your advisor to consider how illiquid or “family use” assets—such as cottages—should be distributed. These assets may require special treatment depending on their use and ownership. Additionally, the tax implications of the deemed disposition of such assets should be carefully evaluated before distribution to beneficiaries.
Asset Management
One of the most significant concerns for business owners is ensuring that heirs are prepared to manage their inherited wealth. Many parents wonder: What will my 19-year-old do with this wealth if they suddenly inherit it? The answer often lies in education and structured asset management.
Before distributing assets directly, ensure that heirs—particularly young adults—are financially literate and prepared to manage wealth responsibly. Establishing a trust with a professional trustee or money manager can provide the necessary checks and balances, helping your heirs learn about money management while ensuring that the wealth is preserved.
Foundations for Charitable Giving
Establishing a Private Giving Foundation (PGF) can help business owners achieve several objectives, such as creating a lasting philanthropic legacy and mitigating taxes. Here’s how:
- Create an Ongoing Legacy: A PGF allows your family to remain actively involved in charitable giving for generations, strengthening your business’s values and teaching future generations about investment and philanthropy.
- Tax Mitigation: Charitable donations made through a PGF can help reduce the taxes due on assets like business interests, registered accounts, and capital gains. This strategy can preserve more wealth for your family while fulfilling philanthropic goals.
- Insured Giving Strategy: In addition to a PGF, you may also consider an insured charitable giving strategy. This allows you to receive a tax deduction and increase the future value of your charitable donations, further supporting your philanthropic goals.
The Business: Succession Planning & Shareholders Agreements
For many business owners, the future of their business is just as important as their personal wealth. Without proper succession planning or shareholder agreements, challenges can arise after death. To help secure your business legacy, consider addressing the following:
- Family Involvement or Exit Strategy: Will your children or other family members continue to run the business, or is an exit strategy more appropriate? Clear succession planning can prevent conflicts and increase the likelihood that your vision for the business is preserved.
- Shareholder and Buy-Sell Agreements: These legal documents define how the business will be transferred or sold in the event of death, helping avoid uncertainty or disputes.
- Funding Buyouts: Business owners need a clear plan for funding buyouts, whether through insurance, savings, or other financial vehicles, to ensure a smooth transition of ownership.
Addressing Family Considerations Beyond the Assets
Children
In addition to financial considerations, the letter of wishes can aid by outlining your values, lifestyle preferences, and educational goals for your children. This can help guide their decisions as they navigate their inheritance and preserve your legacy.
Caregiving Child
If one of your children takes on the responsibility of caregiving for aging parents, consider how to consider how to recognize their contributions. This ensures that caregiving children are treated fairly, especially if they have given up income or career opportunities.
Citizenship
Ensure that you account for the citizenship status of all family members, as this can have significant tax implications. Changes to citizenship, especially for Canadian beneficiaries acquiring U.S. citizenship, can trigger complex tax issues.
Continue the Conversation
Estate and legacy planning for business owners is a complex but vital process. Procrastination can lead to unintended consequences, including unnecessary taxes, family disputes, or the mismanagement of your business.
At Nicola Wealth, we understand the unique challenges business owners face and work closely with our clients to simplify the process and achieve their goals. By starting early and leveraging professional insights, you can preserve your wealth, secure your business legacy, and support your family and community for generations to come.
Connect with a Nicola Wealth Advisor today to discuss your personalized legacy plan.
Disclaimer
This material contains the current opinions of the author, and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax, or specific investment advice. Please speak to your Nicola Wealth Advisor regarding your unique situation. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required securities commissions.