Plan ahead to protect your family and business from unexpected events

What happens to a business without clear planning?

Anna’s will was drafted when her children were young and before she started her business. It did not include clauses that would allow her estate executors to take control of the business or easily implement planning opportunities. As the sole voting shareholder of her business, she didn’t have a shareholder’s agreement in place to specify the value of those shares.

Taxes were another consideration. When a person passes away, they are deemed to dispose of all their assets at fair market value. Assets may transfer at cost to a surviving spouse, but in Anna’s situation this planning opportunity was not an option.

Anna’s estate was also responsible for the taxes on the capital gains arising from both the increased value of her shares and her company. Without a plan in place, there was a possibility of double taxation on the value of the corporation as dividends must be paid to the shareholders in order to withdraw funds. The taxes paid on the value of her corporation in the first year after Anna’s passing were 66 percent.

Take steps to protect your business and family

Anna was healthy, happy, and had big plans for the future. She had no reason to think the next vacation would be her last. But she could (and should) have done much more to plan for the possibility of an accident, illness, or her untimely death.

The first step Anna might have taken is to create a business emergency plan — ideally in collaboration with her business advisor, lawyer, and management team — delegating roles and responsibilities if she fell ill, died, or otherwise couldn’t function in the business. This would, at a minimum, designate an interim leader, allow access to bank accounts and computer files, and provide guidance on how to make key strategic and operational decisions.

She also would have benefitted from reviewing her will and estate plan on a more regular schedule. Ideally this should occur every five years or whenever there is a significant material change (e.g., birth of children or grandchildren, large acquisition of property, change in wealth, etc.).

A service such as MNP’s LifeBook™ program may have been a good option to offload some of the responsibilities of managing Anna’s estate while ensuring it remained up to date, tax efficient, and ensured her legacy for generations to come.

Finally, translating her intentions for her children to take over the business into a formal succession plan would also have helped to keep the business running and relieved some of the uncertainty that Anna’s family and employees experienced after her death.

How to plan to protect your legacy

You don’t have to go on this journey alone. MNP frequently works with business owners to develop emergency plans to outline what steps can be followed when the managing shareholder or director is unavailable.

We also work directly with business owners to provide a LifeBook™ report, produced through ongoing consultation with our succession and tax advisors. This report will ensure that your will and other documents achieve your goals and support your legacy. It also ensures that your personal and business documents will be readily available when you, your business, and your family need them the most.

When it comes to the event of an unforeseen absence and/or death, your advisors are critical team members in preparing your business, family, and employees for what happens next. Your advisor can assist you to:

• Calculate your anticipated taxes on death
• Identify options to decrease taxes, such as the use of donations to receive donation credits
• Explore the use of life insurance as a source of funds for either business operations or tax payments
• Determine if your business has sufficient liquidity to play the taxes if insurance is not available
• Create an emergency plan to set out the necessary steps and information to ensure your business continues to operate in your absence

These considerations should all be explored as part of the succession planning for your business.

We encourage our clients to meet with each of their advisors as well as to hold regular group meetings. This approach ensures that each advisor is aware of the intricacies of your plan and are all working together to provide guidance and achieve your goals, while allowing for flexibility as life and business circumstances change.

It is also important to have open conversations about the future with your family members. Anna had thought all her children would take over her business — but while her sons were active in its day-to-day operations, her daughter was not interested in running it. Issues such as how to fairly divide Anna’s estate could have been discussed in advance through succession planning.

Proper planning will ensure your business will continue to run smoothly even in the event of an unforeseen emergency or absence. If you don’t have a succession plan in place, commit to getting started today to make sure that your family, business, employees, and legacy will thrive in the future.