Small business owners have especially complicated financial situations; you want to be sure your loved ones are taken care of if something were to happen to you. A bit of work with your CPA, lawyer, and financial planner can help you avoid leaving a mess for your family during a difficult time.
If you have a business, you need to have a plan for how the business, loans, mortgages, and investments should be handled if you were to pass away suddenly. You (or your estate) could end up paying more tax than is necessary. When you die, capital gains (and losses) are triggered, RRSPs are cashed out, and you will probably also need to pay tax on the wrap up of your business. So be sure to have a Will, or an Estate Plan, so your estate can be wrapped up and distributed in a way that maximizes the value to your beneficiaries.
Without a Will, the courts could decide how your estate is wrapped up and distributed. Involving the courts will also increase legal fees and add time. So let’s talk about how to avoid that.
What is estate planning?
Estate planning can be as simple as writing down who gets what, after you die. But it can also involve keeping your documents organized, writing instructions, and having some important conversations with your loved ones. Dying without a plan can leave your grieving family members with years of frustrating holdups, paperwork, and legal and accounting fees.
At minimum, everyone should have a Will and Enduring Power of Attorney. For larger estates, it can be an in-depth plan, created and maintained by a team of financial advisors, insurance brokers, real estate professionals, lawyers and accountants.
Objectives of estate planning
- Preserving family wealth ensure your spouse and kids are provided for
- Simplify the process for your family – don’t leave them with a disaster
- Business succession – don’t leave your clients, employees and vendors high and dry
- Minimize taxes – doing nothing can cost you big
Preserve family wealth
Cover your assets with insurance. Life insurance should be thought of as a replacement of the deceased’s income. For example, in a single income household, the primary breadwinner should carry enough life insurance to pay off any debts, and then generate enough income for the family to be able to continue their standard of living at least for a period of time. Work with your financial advisor to determine how much income your family would need if you were no longer there to provide.
The big banks don’t grieve you – if your name is on the mortgage, and you die, your family with immediately get a letter saying the mortgage must be paid down immediately. I just saw one of these letters from Scotia Bank. They sent it to a widow with a young family, just a few weeks after her husband died of a heart attack. Carrying mortgage insurance is also a good idea.
There are two main types of life insurance: term insurance and whole life (or universal life). Think of term insurance like renting, where you pay your premiums for the term of the policy and if you don’t die, then great! But you don’t get anything back. Whole life policies are more like owning – your premiums will be much higher, but a large portion of your payments go into an investment portfolio, which builds equity for you with each payment.
A $1 million 20-year term insurance policy for a 35-year-old healthy individual might cost $75/month. If you don’t die within the 20-year term, you don’t get anything back. A $1 million whole-life policy would cost roughly $2,000/month, and if you don’t die during the 20-year term, you retain the life insurance forever, without having to make another payment. The policy also has an asset value that could be cashed in. With current market conditions, this would be worth about $760,000.
Here is a calculator to help you determine the right amount of life insurance for you. Ask us, or your financial advisor/planner, if you have any questions.
Simplify the process for your family
Small business owners especially need to be aware of this. Your spouse and children will be grieving, and the weight of business and financial decisions will be overwhelming. Make sure they have clear instructions and support. This can be done by preparing a life binder to keep in your home office.
A life binder is a resource for your family to make their lives easier immediately after you pass. Here are a few things to keep in it:
- Your will. Make sure to update your will after major life events (i.e, marital status, children, country/province of residence, fluctuations in personal net worth)
- Life insurance policies
- Instructions: outline who your professional team is, including your lawyer, accountant, executor, banker and insurance broker. You can also explain what you want your funeral to be like (invite list, songs, burial wishes, etc..)
- Personal net worth statement: list your assets and liabilities, and keep copies of the purchase documents/invoices for properties and other assets.
- Passwords and logins: keep a list (on paper) of any critical passwords including phone passcode, password management app, online banking, email, safe combinations, insurance logins, digital file storage (Hubdoc or Dropbox. Note: store digital files of your will, life insurance policies and share certificates here as well.)
Being clear and organized will prevent family disputes as well. Having joint accounts with your spouse makes the process easier.
Business succession and continuity
Think about what would happen to your business if you were to pass away. Do you have a succession plan? Who do you want to take over; and who would you not want to take over? Is it ready to sell? What would need to happen? Do you have your policies and procedures documented? What is your business worth? Do you have a business continuity or disaster recovery plan?
The Business Development Bank of Canada has a library of great tools for Business Continuity Planning. Learn 8 tips for getting your business through an emergency or disaster.
If you die (and don’t have a spouse), all your assets are “deemed to have been sold” to your estate, immediately before your death. This triggers capital gains (or losses) on any of your property (including farmland and principal residence), stocks, business shares or assets.
If you plan ahead, you can decide how assets are distributed. With help from your accountant and other professionals, you can plan to minimize your taxes and transfer more of your estate to your children or your chosen beneficiaries.
Ranchers and farmers in particular have a lot to gain by planning for succession. Charitable giving, life insurance, family trusts, estate freezes, pipeline and butterfly transactions are all tax structures that can help minimize taxes for your estate.
We can help make sure you and your family have your estate in order. Book an appointment with us today!
Read more about Small Business 101 topics that may be helpful to you and your small business.
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