Estate and Succession Planning for Business Owners

Introduction
As a business owner, you are probably more focussed on the immediate and ongoing requirements of your business than planning for what will happen to it once you are no longer around. This can have unfortunate results, as a lack of planning and preparation can cause a significant reduction in the value of an asset that you may have worked (or will work) your whole life to build.

Whether you want to give your family business the best chance of surviving or you merely wish to maximize the value of your business interest for the benefit of your loved ones, you need to develop an effective succession plan. And it's important to develop your plan as early as possible and to review it regularly.

The Role of your Lawyer
The three most important people on your personal financial planning team are: (1) your financial planner/ advisor, who helps you to turn your income into wealth through sound financial and investment advice; (2) your accountant, who helps you to preserve your wealth by avoiding paying excess taxes, service charges and administrative fees; and (3) us, as your lawyers, who will help you to pass on your wealth to your loved ones in a way that will minimize taxes and maximize your estate; to provide for an orderly an amicable transition of property; to minimize governmental and judicial intervention; and to ensure that your wishes are carried out.

We can advise you on the use of various tools as part of your estate and succession plan, a few of which are discussed as follows:

The Business Owner's Will
Wills are one of the most important tools of estate planning (see our brochure on Wills and Estate Planning). For the business owner, there are various possible Will provisions that you should discuss with us, including the following:

• provisions authorizing and directing your Trustees to deal with or restrict the use of your property, securities or shares held by your estate;
• provisions authorizing and directing your Trustees to continue or carry on, incorporate, sell, wind-up or lend money to any business or businesses that you may own or have an interest in;
• provisions granting a right of first refusal or option to purchase to a key employee or family member;
• directions to elect certain persons to the board of directors;
• directions to transfer business assets or shares to your children

Powers of Attorney for the Sole Proprieter
There are many reasons why every individual should have a power of attorney (see our brochure on Powers of Attorney). If you operate a business as a sole proprietor, you have an additional reason for having powers of attorney: To ensure that an appropriate person is given signing authority for bank accounts, contracts and other things that need to be done to operate the business in the event that you become disabled.

Shareholder / Partnership Agreements
If you are a shareholder or a partner in a business, you will likely not wish to have your estate continue as a co-owner of the business. The rationale is as follows: (i) there will be no more salary to support your family and any dividends or other payments from the business are usually too little to do so; (ii) the surviving shareholders or partners who continue in the business may resent sharing profits with your family members, none of whom are contributing to the business; and (iii) your estate may experience conflicts or complaints regarding the provision of appropriate information by your co-owners or about perceived mismanagement or overly generous salaries. For the same reasons, you do not want to have your co-owner's estate involved in your business in the event of his/her death.

For all of these reasons, and for a myriad of other business reasons, if you are a shareholder or a partner in a business, you need to have agreements in place today that will govern future occurrences. You must have a properly worded shareholder or partnership agreement containing buy-sell provisions that provide for the handling of your interest in the business upon your death or disability. The agreement will typically provide for a mandatory or optional buy-out of your interest by your co-owners (co-owners might be business associates, employees, your spouse or your children). The agreement may also contain provision for mandatory life insurance to fund the purchase of your shares or interest in the business upon your death.

Marriage Contracts
Marriage contracts are an important consideration for business owners, both for themselves and for their co-owners. Marriage contracts are important tools for protecting the business from any claims for equalization of the family property or for support or maintenance in the event of a separation or divorce involving either you or one of your co-owners.

Business Transfer Arrangements
Owners of family-run business will at some point be faced with the issue of succession. Who will run the company when the parents die? According to the Canadian Association of Family Enterprises, only one in three family businesses survives into the second generation. Only one in nine makes it to the third.

Should the children or employees be allowed to share in growth and ownership today? For both tax and planning reasons, it is common for the founders of incorporated companies to bring some or all of the next generation into share ownership as part of an overall succession plan.

One such tool available to the family business owner is an Estate Freeze, which takes advantage of the enhanced capital gains exemption available to certain small business owners. An Estate Freeze requires either the reorganization of the current capital structure of the business or the incorporation of a new company, and it operates to bring the next generation into share ownership and to cap the value of the owner's interest in the business. Future growth in value then accrues to the next generation of owners, which results in the smooth succession of the business from one generation to the next and reduces the tax burden on your estate. Consideration must, however, be paid to ensuring that you maintain control of your company while you are still alive and that your remaining interest in the business will be sufficient to maintain yours and your spouse's lifestyle throughout your lifetime.

Other Estate Planning Tools
There are various other tools of estate and succession planning that are very important for business owners and non-business owners alike. They include trusts, gifting programs, joint tenancies, beneficiary designations and insurance for administrative and probate fees. These are discussed in our brochure on Wills and Estate Planning.

Revision Date: October 26, 2001

Your choice of legal counsel is a critical and personal decision. The firm you select should be committed to your business and personal needs.

Since 1922, Pavey, Law, Wannop & Witteveen LLP has been providing its clients - large and small - with quality legal advice and services. Our purpose as a firm is twofold - to assist our business clients in the successful performance of their business, and to provide our individual clients with peace of mind through sound, understandable advice and advocacy.

We are a results-oriented firm. Our business clients receive our superior legal counsel that is practical, and guided as much by the potential impact on their businesses as by the law.

Equally, our individual clients are treated with respect and receive clear legal advice geared to resolve issues and find solutions.

For all of our clients, Pavey, Law, Wannop & Witteveen LLP is committed to delivering superior representation in a prompt, efficient and cost effective manner.

NOTE: This brochure provides general information and is not intended to be a legal opinion. Readers are cautioned not to rely on this information without obtaining legal advice with respect to their own circumstances.