Estate Planning Strategies for Canadian Business Owners
Starting your own business can be consuming. A lot of business owners are too focused on running the business that they don’t often think about the future. As a result, some fail to anticipate what will happen if they suddenly develop an injury or sickness.
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Planning is crucial to every aspect of the business including your estate. Nearly one-third of business owners do not own an estate plan. Nonetheless, planning your estate will help keep your business matters in check and properly handled in case you become disabled or die.
While most people don’t want to talk about it, proper planning will protect your business, especially businesses that are family-owned. This way, owners can pass it down to the next generation. For small businesses, estate planning involves a long process including a financial advisor and lawyer. Make sure you get a professional advisor and lawyer who have experience in estate planning.
To help plan your way to success and ensure that everything goes smoothly, we gathered a couple of strategies that business owners should follow.
The Importance of Business Estate Planning
A lot of small businesses who do not have any estate plan feel that it is too complicated to discuss. However, what they fail to understand is that it can help you set up your business properly and ensure that someone can take over your company when you die and continue your legacy. This way, you won’t have to worry about the future of your business and you can have peace of mind knowing that you’re leaving your company to someone you trust.
At the same time, you can also make your family and business partners aware of the circumstance so they too, won’t have to worry about the future of the company in case you become incapacitated or die unexpectedly. Preparing them ahead will also help with the transition smoothly. Estate planning simplifies the process.
As a business owner, you should include this in your plan so that you can also ensure that your wishes are fulfilled even when you’re gone. Without estate planning, you may be putting your company at risk as well as the employees who are depending on you for their income.
Steps to Planning Your Estate
The process of estate planning is long and detailed. You’ll have to answer tons of questions with various scenarios in mind. Hence, you should try to create and plan your estate on your own.
However, remember that missing one particular issue can lead to hearings and lawsuits. Therefore, as you conduct your estate planning, make sure you get the help and advice of a lawyer and financial planner that you can trust. They should also have experience in the field of estate planning.
Hence, here are the basic steps to follow in estate planning for business owners. You can also visit Save Corporation Tax for more tips.
1. Write a will and estate plan.
Create a will indicating your wishes and instructions including how you want your business and other properties to be divided when you are gone. Make sure you have a power of attorney and appoint another person to manage your finances represent you in business transactions in case you are incapacitated.
Another thing you’ll need is to have a healthcare directive appointing another individual who can make medical decisions on behalf of you in case you can’t. Remember without any will, your company may be divided based on the laws in your state. Setting up a will, power of attorney as well as a healthcare directive in place ensures that someone you trust will inherit your company and manage your business transactions.
In some cases, these basic documents may not be sufficient to fulfill your needs. You should consider granting power of attorney to your spouse to operate the business if you become disabled. However, your spouse cannot use the business assets without filing a petition in court for approval. Make sure you work with an experienced financial advisor and lawyer that understand the details.
2. Plan for tax efficiencies.
Tax planning is an essential part of estate planning. Since tax laws change once in a while, you should discuss this with your financial advisor and lawyer. An estate tax should come from your estate before the inheritance can go to the beneficiaries.
You may be charged with additional taxes such as an inheritance tax depending on the state you are in. An inheritance tax comes from the people who will inherit the business. There are a couple of ways to help you minimize estate and inheritance taxes.
One option is to divide your estate into several trusts to reduce your tax. On the other hand, there other taxes you need to consider.
3. Use a buy-sell agreement.
f your small business has several owners, a buy-sell agreement should be on your estate plan. Buy-sell agreements can specify who can buy a share under certain conditions and price.
It also keeps your business within the existing owners when one of them becomes disabled, retires or dies. This agreement grants the existing owners rights to buy the owner’s share. The existing owners will buy out the owner’s share by paying the owner or the heirs.
It also lays down the rules when the ex-spouse claims the assets as part of a divorce settlement. Buy-sell agreements can be structured in different ways which is why you need to discuss your options.
4. Keep family-owned businesses in check.
Family-owned businesses are risky in terms of estate planning. In some cases, one of the business owner’s child may be planning on taking over the business. Your attorney and financial advisor can help you tackle this type of issue. You may give all of your business assets to one child and the rest to the other children to avoid any potential rivalries.
Another common issue with family-owned businesses is keeping the business within the family. Under marital property law, when a business owner passes away, the business assets get transferred to the spouse or future spouse.
5. Make a succession plan.
A succession plan is different from estate planning. The documents included in your estate planning specifies the beneficiary to your estate upon your death and who will continue your business. Succession planning, on the other hand, indicates how everyone involved can prepare for the transition in ownership.
This process helps keep the business running or help prepare the company in case it’s up for sale. It includes a written document similar to a business plan which includes information on your company, market, and competitors. The list also includes an organizational structure that identifies the succession including the key employees that will continue the business without you.
Other factors you should include are salary adjustments and financial status of your company such as the value, profit and assets. Keep it consistent with your estate planning documents.
6. Discuss the situation with all parties.
After drafting your estate plan, inform all parties involved so everyone knows what’s at stake. Consult with your family members as you go along the process to avoid any potential conflicts. Find out if any of your children or successors are interested to continue your business.
Afterward, go through the details with your financial planner and lawyer to make sure your family understands all the details. Your family should know where to find your estate plan documents and succession plan.
7. Add life and disability insurance.
Life insurance is a must for business owners as it provides coverage for your loved ones and financial support in case you die. At the same time, it guarantees a regular stream of income to the company so that it can operate even with you gone.
On the other hand, disability insurance also provides similar coverage in case you become disabled. Business owners should get life and disability insurance. You can name your family as the beneficiary of both policies while adding a key person life insurance to make your company the beneficiary.
8. Keep your estate plan updated.
Make sure you update your estate plan regularly to ensure that it is still in line with the current laws as well as your instructions. Keep in mind that tax laws change from time to time. At the same time, certain life events may change or affect your estate planning.
Plan Your Estate Now
Business owners should not neglect or delay planning their estate and succession plan. Estate planning is a significant step for business owners whether or not you are operating a small or large-scale company. Your business is one of the biggest assets you have and by making sure that you have an estate plan in place, you are ensuring that your company can continue to operate, thrive, and grow even without you in the picture.
By selecting your successor, you are also making sure that your company is left in good hands and will continue to guide your company to success. Make sure you get the right financial advisor and lawyer to help you through the process.
