Effective Estate Planning Tools

You have decided you need the liquidity from the sale of your family business, and do not intend to set up a family office. You’ve defined what the liquidity will be used for, and also the roles for the family to carry on as a redefined family enterprise. Now you want to ensure that your estate plan is technically sound and meaningful.

Estate Planning is an essential part of the continuity plan of any Family Enterprise.  Demographically, our society is rapidly aging, and also has far more wealth to leave behind to heirs than ever before. Income tax, estate tax and Provincial probate considerations will affect just about every successful family.

Intestacy (i.e., dying without a Will) can cause a more expensive and complicated estate result for our heirs, and much more income tax to be payable than may otherwise arise on our passing.  We most definitely do not want to leave the burden of intestacy to our heirs.  And any foreign asset ownership can potentially expose us to taxes and formalities beyond our own border. Did you know that while Canada has no gift or estate tax (it was abolished in 1971!), we have something almost as expensive, called the “deemed disposition.”

Under the “deemed disposition” provisions in our Income Tax Act, we are deemed to sell all our assets at fair market value either on death, or on transferring (gifting) assets at an undervalue to anyone other than our spouse during our lives.  

A spousal rollover is permitted for assets left to a spouse under our Wills, but for all other beneficiaries, we have a taxable disposition at fair market value. And for wealthy families, this needs to be planned for well in advance, or there may not be enough liquidity to continue owning the business after Canada Revenue Agency collects the taxes.

And its not only death we need to plan for, but also disabilities. Estate planning also includes contingency planning for any disabilities we may suffer while alive, where we are unable physically or mentally to express our decisions.  It can be disastrous for a family enterprise to have its sole signatory incapacitated, with no one else legally able to sign checks and contracts to keep the business going.

The main goals of estate planning are therefore to minimize or defer taxes during lifetime, provide an orderly transition of assets/affairs at death or on a serious disability, minimize or defer taxes arising at death, minimize probate fees (for Provinces where they apply), and minimize family disputes.

Some of the leading estate planning tools in Canada include:

• Up-to-Date Wills / Multiple Wills
• Powers of Attorney for 1) Personal Care and 2) Property ownership
• Family Trusts (inter-vivos and testamentary trusts)
• Alter Ego Trusts / Joint Partner Trusts
• Philanthropic Giving
• Shareholders’ Agreements
• Life Insurance
• Beneficiary Designations / Joint Ownership / Joint Accounts
• Gifting Unappreciated Assets During Lifetime
• Estate Freeze of Appreciating Assets Held in a Corporation

Up to date Wills are critical tools to articulate all of your wishes on your passing, not only for burial wishes, but also for the disposition of all of your worldly assets.  It is also a document that names the legal guardian for your minor children or pets, the Executor selected to administer your estate, and Trustees chosen to oversee the administration of any trusts.  Wills can also cover your non-physical and intangible assets, like reward points and the like.

Where probate applies, it is sensible to have multiple Wills (where allowed) so that you are able to minimize the probate fees and formalities.

And where you own overseas assets, you may also want to have a foreign Will to enable those assets to pass separate and apart from your domestic probate considerations.

Powers of Attorney are essential to govern decisions in the event of a disability which limits your mental or physical capacity, to name your trusted attorneys to represent you while incapacitated.  A power of attorney is critical to ensure a second signatory is legally in place over family enterprise assets while disabled.

Failure to execute Wills and Powers of Attorney can leave you vulnerable to a freezing of your assets, erosion of value and possible expensive litigation.

Trusts are an effective estate planning tool used widely around the globe to own assets of varying types, accepted in almost all common law jurisdictions, and many civil law countries.  In Canada, they can be used for income tax planning, as well as for avoiding probate formalities.

Philanthropy is a widely used estate planning tool to give back to one’s community or favourite causes, create a lasting role for future generations to oversee the charitable assets, and also to enjoy considerable tax advantages in so doing.  There are several available gifting techniques (i.e. outright donation, Donor Advised Fund, Charitable Foundation), and specialist philanthropy advisors who can help families set up these solutions.

Shareholder Agreements are an extremely important tool to leave behind for the next generations of a family enterprise who are or will become shareholders, to define the mechanisms to cover material business  decisions, dispute resolution, buy-outs on death and the need for life insurance, buy-outs on retirement, disability, and divorce, restrictions on shareholders outside the family unit, permitted estate planning reorganizations, and mechanisms to ensure fairness of minority share ownership.

Life insurance plays a crucial role in most estate plans as the preferred mechanism for funding buy-outs on the death of a key shareholder, as well as for key person replacement in the event of an untimely death, and debt repayment.  In Canada, it is particularly tax-effective to use monies trapped on a corporate balance sheet to purchase and own such life insurance.

Beneficiary designations and joint ownership of assets is another effective estate planning tool.  However, professional advice is needed before implementing this technique, to avoid unintended tax and legal results.

Gifting unappreciated assets to the next generations is also worth considering, as there is no gain on personal cash, or unappreciated assets in Canada.  It is important to get professional advice to ensure the gift does not trigger any tax consequence.

The Estate Freeze is the leading tool used by owners of private corporations to shift the future growth in value of the corporation to the next generations.  As it is not possible to gift existing appreciated corporation shares to anyone other than a spouse without a deemed disposition arising at fair market value, the estate freeze is the technique widely used to avoid the disposition by passing on the future growth.  It requires a valuation of the corporation at the time of the freeze, and the services of a tax accountant and lawyer to oversee the execution of the documentation.  

We live in a digital age, and another consideration worth mentioning is digital inheritance tools, to pass down access to digital assets to heirs. Digital assets include all forms of digital ownership, typically retrieved by electronic devices accessible by password authentication.  A digital estate plan can be very effective to ensure the continuity of access to digital assets following death.  An up-to-date list of passwords would be essential, left either informally or in the Will document.

A final tool worth mentioning for protecting assets from the risk of divorce is the Pre-Nuptial Agreement (entered into before marriage) or Post Nuptial Agreement (entered into after marriage), or Co-Habitation Agreement (for homes shared by unmarried individuals).

Estate planning is the essential foundation of every succession and continuity plan.  Please speak to your financial and legal advisors to develop an estate plan based on your family’s precise circumstances.  And don’t forget to update your estate plan from time to time as circumstances change (e.g., death, divorce, new child, etc.).

Congratulations! Continue as a Family Enterprise

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