Does Your Estate Plan Need A Check-Up?

Peter thought that estate planning was something you did when you were older…too bad, he didn’t have the benefit of hindsight.  Twenty-five years ago, Peter and his brother incorporated a company to manufacture bicycle widgets.  By the time of his untimely death a few months ago, their hard work had built the company to the point where it had increased considerably in value.  Only one of Peter’s four children, Jane, has any interest in working in the family business.  She is currently an employee of the corporation, but holds no shares.

The company had recently been valued at $1 million.  Unfortunately, Peter and his brother had not yet gotten around to implementing a shareholders’ agreement to specify what should happen in the event of one of their deaths, nor did the company own an insurance policy on either of their lives.

Peter’s wife, Carolyn, inherited all of his shares in the company.  She is currently undecided regarding the course of action she should take.  To make it even worse, she is not that fond of her brother-in-law and does not know if she could work that closely with him.  She has to decide whether or not she wants to continue as a shareholder of the company or to sell her interest in the company to her brother-in-law, or some other third party.  She has considered transferring some of her shares to Jane, but is concerned that the other children might not be treated equitably.  In addition, she is uncertain that Jane is ready or willing to take on such a huge responsibility.

Peter and his brother were so busy building the business, they failed to consider the critical importance of estate and succession planning.

What Is Estate Planning?

Estate planning is a complex subject to deal with briefly.  It means different things to different people, and it is an ongoing process.  However, it primarily means arranging your financial affairs during your lifetime in such a way that income taxes and estate administration fees are minimized upon death and the estate will have sufficient liquidity to pay income taxes and other liabilities arising on death.  It can also allow you to minimize taxes while you are alive, through income splitting and other tax reduction strategies.  Even though you may want your spouse and children to receive the benefits of your estate, poor planning may allow the government to take a disproportionate share.

An up-to-date will is mandatory to a good estate plan.  However, estate planning is much more than just writing a will.  It can involve estate freezes, the establishment of family trusts, asset protection, income splitting and the use of life insurance to fund a tax liability or buy-out on death.

Estate Planning also addresses such issues as:

  • Considering whether your spouse and/or child has the management skills and experience to carry on the business after your death;
  • Determining how your estate can be split fairly and equitably among your children and/or grandchildren (or at least according to your wishes);
  • Keeping inheritances away from estranged spouses of children;
  • The best way to transfer your estate to future generations.

What Could Peter Have Done Differently?

If the goal was to have either Carolyn or Jane take over his role as an owner-manager of the company, steps could have been implemented earlier to facilitate this objective.  Had he sought professional advice, he may have instituted an estate freeze and brought Carolyn and/or Jane in as a shareholder of the company.  A family trust could also have been set up to allow for income splitting and multiplication of the capital gains deduction.  Rather than having his shares pass directly to Carolyn, his will could have provided that they be left to a spouse trust.  This would have allowed a significant amount of corporate distributions to be taxed each year at lower rates.

Also, where a corporation has more than one shareholder, it’s advisable to draw up a shareholders’ agreement to establish the ongoing rights and responsibilities of the shareholders, as well as to specify what should happen in the event of the death or disability of one of them.  Such agreements generally establish a purchaser for the shares of the deceased, a formula for determining the purchase price and a method for funding the purchase.  With proper planning, the buy-out can be structured to minimize a drain on cash flow for the company and survivors.  A sound arrangement can also minimize or defer the tax liability of the estate.

How Do You Know If You Need An Estate Planning Check-Up?

If you died today, would you be comfortable knowing who will be running your business, how your spouse and other family members will be remunerated, who will pay the creditors?  Do you know if your shares will be sold?  Will the other shareholders buy them and at what price?  Where will they get the cash?  The list could go on and on.  In any event, due to constantly changing tax and legal rules, it goes without saying that you should make it a priority to have your estate plan reviewed on a regular basis.  Your adviser can assist you in this area.  It is your money…Plan.  Preserve.  Pass it on.

If you have any questions, please call us at 905-528-0234 or email Joe at joetruscott@josephtruscott.com.