Banff School – August 19, 2007 Mary-Ellen Gaskin, CA, CFP, TEP London Life/Great West Life Private Wealth and Estate Services Business Succession Planning General Considerations

Business Succession Transfer or sale of business Ownership AND Management AND Family –Viable financial exit for owner –Maintain family harmony Focus on retirement –With contingency plans for death and disability

Integrated Planning Process FamilyManagement Ownership Estate Plan Strategic Plan Succession Plan

Primary role of business Current income 78% Retirement income/wealth 46% Legacy to future generations 14% Source: Deloitte & Touche, University of Waterloo study: “Are Canadian Family Businesses an Endangered Species?” Succession in perspective Important 33% Not sure24% Not important43% Important that business remains in family?

Odds of Family Business Surviving to: Second Generation Third Generation 100% 30% 10% Family Business Succession: The Realities First Generation Business Owners (Founder) Source: Canadian Association of Family Enterprise

Why don’t they Succeed? Lack of forward thinking Lack of forward planning Lack of skills to help with the above Lack of communication AND a general uneasiness to do the above!!!!

Analogy to Selling Family Home or Cottage Decisions are financial Do I need cash flow? Will there be a market if I wait to sell? What is it worth (in $$) Decisions are emotional Involve family members Memories Ongoing personal effort It is human to procrastinate !!!

PERSONAL FINANCIAL SECURITY PLANNING BUSINESS CONTINUATION PLANNING SUCCESSION PLANNING Where does Succession Fit?

Financial Priorities Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal

Start with First Generation Hierarchy of financial security issues 1.Financial independence How much? Where is it? 2.Family legacy How much? To whom? Estate equity? Taxes and final expenses 3.Social capital legacy Philanthropic interest? Excess family legacy? Desire to redirect tax to charity?

Financial Priorities Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal FinancialSecurity Lifestyle & Opportunity

Financial Independence Financial planning What do you need/want? What do have? Are you there yet? What do we do if you’re not? Business person is a PERSON!!!

Financial Planning Sources of Retirement Income –RRSPs –RPPs or IPPs –Non-Registered Assets –Other personal Assets – (OH, OH, more tough decisions!) –Income Splitting opportunities –Shareholder loans from business –Access to ownership in business

Asset diversification –How available are their assets (liquidity)? –How secure is their future income and financial security? Financial Planning

Financial Independence Business Risk Business Loans Key Persons – risk of Death or disability Retaining Key Persons in business Management Succession

Great Analysis! How do I get paid ??? Personal or Corporate Life insurance Liquid Access cash values via collateral loan Access cash values via periodic surrender Business operations protection Investment products Other risk products (DI, CI, Long term care)

Financial Priorities Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal Family legacy How much? To whom? Estate equity? Taxes and final expenses

Tools for Family Legacy for Incorporated Business Owners Net Worth Statement Corporate reorganization changes –Introduce a New Company (Holdco) Ownership changes –Via Estate Freeze Introduction to trust

Net Worth Statement Lists all assets and liabilities Often new news to business owners Demonstrate Estate Equalization Value of company available for discussion

Holdco??? A “holding company” – holds assets –Cash –Shares of other companies –Real Estate

Holdco How? “Rollover” provisions in ITA Tax free intercorporate Dividends

Estate Freezes - Mechanics Opco B/O 100% Common shares FMV = $1,000,000 ACB = nil Before:

Estate Freezes - Mechanics Opco B/O FMV = $1,000,000 ACB = nil Common (growth and votes) 1. Preferred (non-growth & non-voting) =$1M 2. Special voting shares Step 1: (exchange shares) *** Exchange of shares done tax-free ***

Estate Freezes - Mechanics Step 2 - Subscription of common shares: B/O Opco 100% Common shares 1. Preferred (non-growth & non-voting) =$1M 2. Special voting shares Trust, Spouse, Child(ren), or Employees

Estate Freezes - Mechanics End Result : B/O Opco Future Growth and Value With or without votes Votes and Current Value Trust, Spouse, Child(ren), or Employees

Benefits of Holdco Separate inactive assets from Operations Dividend net profits to Holdco for –Creditor protect the excess cash –Future Income to Shareholders –Good place to own the Life Insurance

Benefits of the Freeze B/Os can retain voting control over company Fixes B/Os tax liability Passes future appreciation of the company value to children and/or grandchildren Potential to reduce probate taxes Opportunity to crystallize their enhance capital gains deduction (now at $750,000 each) Potential to creditor protect assets

Benefits of Trust in Structure Flexibility in distributing the shares, including: –When to distribute –To whom to be distributed –“thawing the freeze” Income splitting possible with adult children and their spouses through dividends Splitting of the future increase in value of OPCO and multiplication of the capital gains exemption of $750,000 Protection of the children’s shares in case of legal action, bankruptcy or divorce Protection of OPCO assets from creditors

Family Legacy – Will Planning Consider: –Spousal trust –Separate testamentary trusts for each child to control use of assets after death and save up to $17,000 in annual tax per trust created –Will and Shareholders Agreement must work together –If no Shareholders Agreement, Will can give active child right of first refusal to acquire shares as part of their inheritance

Great Referrals, what about me? Corporate Life insurance –Asset transfers –Equalization –Tax reduction on death – CDA –Business Operations protection –Buy Sell (including redemption of deceased B/Os shares)

Family legacy - Other Grandchildren –RESPs –Life insurance Others?

Financial Priorities Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal Social capital legacy Philanthropic interest? Excess family legacy? Desire to redirect tax to charity?

Social Capital Legacy Philanthropic interest? Notwithstanding philanthropic interest, equation is: A $1.00 to tax OR B $2.22 to charity and eliminate tax

Gifting options Gift Cash from estate Gift insurance proceeds Gift Shares then redeem Redeem shares then gift

In Conclusion: What has our Process Accomplished? By working through the Financial Priorities Pyramid: We uncovered their wants, needs, fears (or started to) We introduced them to someone who can help them in their business plan and, if necessary, family issues. Analysis clarified issues like financial independence and estate quantification making future planning decisions easier Support and facilitate saving away from the business Made B/Os more aware of business and family relationship issues We provided suggestions/plans/solutions to aid in their succession

In Conclusion Life Insurance Planning Opportunities Business Owners –Family legacy (taxes) –Social capital legacy (estate donation) –Health risk management (critical illness, long term care) Business risk management –Business succession (buy-sell) –Key person (life and health) The children –Income replacement –Family legacy –Health risk management

Health risk insurance – Key people Disability income Critical illness Priority health care Cost plus/Health and welfare trusts Etc.

Banff School – August 19, 2007 Mary-Ellen Gaskin, CA, CFP, TEP London Life/Great West Life Private Wealth and Estate Services