Nurturing a legacy: Empowering your children through planning and education

At this point, Maggie was in her mid-fifties, and she felt increasingly troubled by the prospect of what could happen if she suddenly passed away. Her kids would receive a substantial windfall. They would also be responsible for all the restaurants — which she didn’t think they were prepared to handle.

Shawn had been mulling over returning to school and pursuing a career unrelated to the family business. Britney showed more interest in following in her mother’s footsteps but had little experience in the restaurants and almost no exposure to the management or ownership side of the enterprise.

She turned to her MNP Family Office advisor, Danielle Walsh, for advice.

“It’s common to see entrepreneurs become so focused on building their businesses that they forget to prioritize their children’s financial education. The kids benefit from the money coming into the household, but they’re never exposed to the discipline required to manage it effectively," says Danielle.

“After the long hours and stress that go in hand with managing people and money at work, the last thing they want to do is bring that mindset home. Still, that conversation needs to happen at some point because the kids will eventually need to be able to make informed financial decisions about their future and potentially the future of the business.”

Visualizing the future through open conversations

Danielle suggested that Maggie begin a frank and open conversation with her children about their goals and how they see their futures playing out. Do they see themselves being involved in the business? Do they envision the business remaining in the family after Maggie retires?

Shawn’s answers were, as Maggie expected, noncommittal. He hadn’t considered a future without Maggie. He preferred to finish his degree and decide about his involvement later. On the other hand, Britney doubled down on her intention to join the company.

That conversation made Maggie feel even more uncertain about her intentions around the business, her children's potential involvement, and their abilities. Selling immediately would lift the burden of ownership off Shawn’s shoulders and provide Brittney with start-up capital to open her own business one day if that’s what she still wanted to do.

After some reflection, she told Danielle that she felt it was too soon for an exit strategy.

“The decision matrix is complicated for family business owners who have to factor in the legacy of the company they’ve built and the rewards they want to create for themselves and their loved ones,” says Danielle.

“If they were to pass away unexpectedly, what assurances do they have that the business would be effectively managed and sold (or transitioned to someone capable of operating it)? How do they ensure their dependents receive a fair portion of those proceeds? And, just as important, how do they ensure their dependents manage those proceeds responsibly?”

Maggie felt responsible for the business she had inherited and nurtured for most of her life. She also wanted to ensure that Shawn's education would be paid for and that both kids would receive reasonable stipends while avoiding large payouts during their twenties.

She needed to factor all these objectives into her plans. Danielle helped by providing several options to structure Maggie’s wealth and intergenerational wealth transfers.

The family trust

In Canada, a family trust is a powerful tool to provide effective wealth planning solutions for individuals like Maggie, who are concerned about their assets and the well-being of their heirs. A family trust is a legal entity created to own and manage assets for the benefit of its beneficiaries, usually family members. The trustee is the person who manages and controls assets owned by the trust.

By establishing a family trust, Maggie could transition assets, such as her restaurants, to the family trust, which she could be the trustee of during her lifetime, and another person could take over that role when she passes, as appropriate. This would ensure that her children did not receive an immediate windfall in the event of her sudden death.

Instead, the trust could be structured to provide controlled and structured distributions to her children over time based on her specific instructions. Such an approach would safeguard the assets from being mismanaged or squandered and allow for a gradual and responsible transfer of wealth.

Given Maggie’s anxieties about passing before she could sell or transition the business, Danielle suggested a family trust may be the most effective option. In this arrangement, the trustee would have the power to make decisions about the distribution of income and capital relating to a business. They would also have considerable discretion to make any necessary management decisions.

Securing the future while benefiting in the present

Transitioning Maggie's business into the trust could be done in a manner that would ‘freeze’ the current value of the business that has accrued to Maggie. Any future growth or appreciation of the business would be attributed to the trust and its beneficiaries, which include Maggie and her children.

The family trust could also provide additional benefits, including potentially significant tax savings upon selling company shares via Britney and Shawn’s lifetime capital gains exemptions. A trust could also protect against potential creditor claims in the event of financial hardship, as assets within the trust are separate from the beneficiaries' personal assets.

“Many business owners are initially reticent about trusts because they’re worried about how it will impact their ability to make decisions. Most are relieved to discover there is considerable flexibility. A beneficiary could still receive income generated by the business held in the trust during their lifetime.[i] They can also continue to access trust assets for their needs,” says Danielle.

Estate planning

A will and an estate plan are crucial to ensure that a family trust is an effective wealth management strategy. While the trust would focus on the protection and controlled distribution of assets, a will would address the distribution of Maggie's assets, which are not owned by the trust, upon her death.

Maggie had specifically mentioned her intention to pay for Shawn’s education and to pay stipends to the children throughout their 20s. Her will and estate plan could also provide directions for the circumstances where it might make sense for Brittney to take over the business — and, in that case, how to fairly compensate Shawn since he wouldn’t receive any proceeds from selling the business.

“The will and estate plan needs to align with the family trust to ensure a smooth and dispute-free process if and when the owner passes,” says Danielle. “It’s imperative that these documents are coordinated, and the directives are communicated with the beneficiaries. Even if they’re not created at the same time, it’s generally best to have them reviewed by a lawyer and family office advisor to avoid any miscommunication.”

A wealth of education

The final piece of the puzzle was introducing Britney and Shawn to responsible money management. Danielle encouraged Maggie to have open conversations about her concerns, goals, and intentions regarding her business — including Maggie's reasons for creating a family trust and the conditions contained within it.

“Conversations about money and business rarely come easy to families, regardless of their net worth. Still, they are vital to aligning expectations and minimizing potential conflicts in the future,” Danielle says.

Maggie explained to the children how the trust would work and that she would no longer fund their lives and interests on an ad hoc basis. Instead, funds from the trust would be made available to them on a limited basis during her lifetime and after her passing. This would allow them to pursue their interests throughout their 20s while helping them grow more confident in managing their finances. 

“Often, families will find that these conversations are a relief for the dependents and other family stakeholders. They feel grateful for the family wealth but also worried about their ability to manage it or the business legacy when the time comes,” says Danielle.

“Knowing the owner’s expectations — and that there are provisions in place to help them adjust to the new circumstances of inherited wealth over time — ultimately benefits everyone involved.”

Peace of mind to move forward

The family trust will be a powerful instrument to help Maggie preserve and manage her wealth. Her children are protected from receiving an unexpected windfall, and there will be a smooth and structured transfer of assets in line with her wishes.

To ensure its success, she worked with Danielle, an MNP Tax Advisor, and an estate planning lawyer to draft comprehensive trust documents that reflect her intentions. These included distribution rules, guidelines, and provisions to address various scenarios, such as appointing successor trustees and contingencies for unforeseen circumstances.

At the end of the process, Maggie felt relieved and better equipped to make decisions for her life and business. Danielle had helped her navigate conversations with her children and ensured that no matter what happened, she could make sensible and strategic wealth transfers for her benefit and theirs.

Other articles

Nurturing a legacy: Empowering your children through planning and education

Succession: Navigating the transition of a family business to the next generation

Smooth transitions: Making the most tax efficient exit through advanced business planning

The power of giving: Creating a philanthropic family legacy

Family ties: Sustaining legacy in family business through clear governance

Maximizing the multiple: How savvy business owners get top dollar for their business

Solving the post-work puzzle: How Serge and Marie planned their way to a financially secure
retirement