If you own a business, chances are that you have neglected your estate planning. Creating a plan that will outlive you can be daunting and complicated.
It can be even more complex if the owner decides to keep things in the family: Which offspring should inherit and/or end up running the business down the road?
"Many business owners invest the time when they are setting up the business and when they are growing the business, but they don't typically plan for exiting the business," says Abby Kassar, RBC Wealth Management's vice-president of high-net-worth planning in Toronto. Nearly three-quarters of family businesses do not succeed through the second generation, and 90 per cent fail to make it past a third, she notes.
If the plan is to pass on the company to the younger generation – or even to sell it to a third party – she advises business owners to make that eventual sale part of regular business planning.
For entrepreneurs who want to keep it in the family, the focus should be on identifying individuals who are willing and able to take the reins, and then figuring out how to keep the business going and fund the eventual retirement of the first generation, says Ms. Kassar.
The self-employed typically do not enjoy the generous pension plans that senior executives of large companies do, but business owners can create their own through an Individual Pension Plan, or IPP.
An IPP is essentially a defined-benefit pension plan established by the company for the business owner to receive a set amount upon retirement. As with retirement planning in general, it is better to start early rather than later. (And given the federal government's renewed focus on eking out more taxes from private corporations, it makes sense to take advantage of strategies today rather than count on them being available in the future.)
Even in cases where retirement is fast approaching, creating an IPP can make sense, says Ms. Kassar.
"The IPP is quite flexible, so if they haven't started it and they will be working in the business a few more years, it is possible to start at this point and go back and make contributions for prior years of service."
Beyond IPP payouts, business owners may count on future dividend payments to fund their retirement. Another strategy is to institute an estate freeze, which can provide them with preferred shares in the business that can be redeemed to provide cash flow in the future.
Because the complexity of estate planning typically rises along with assets, business owners should look to assemble a team of financial professionals, says Lydia Potocnik, vice-president and regional director, estate and trust services, with BMO Trust Co. in Toronto.
"What I have always told business owners is to really arm yourself with the right experts," she says. "Make sure that you have a tax planner on your team, a lawyer, a financial planner."
A lawyer, for instance, can make sure that you have two wills in place – one to deal with your personal assets and a secondary one to handle your private company shares to reduce probate fees on death.
Ms. Potocnik also advises business owners to determine whether they are operating a family business. "In many cases business owners think they are going to leave the company to the children, and often the kids don't want to take on that role."
Selling the business to a third party might prove easier than passing it on, especially if the plan is to transfer it to one child and leave the others out of the mix. "There could be potential friction when the business owner passes away and all of a sudden these kids are left realizing that there has been an unequal division of the estate," says Ms. Potocnik.
Future success of the business – not just who is going to end up owning and running it – is a critical issue.
"The owner, when they do sell their business, often stay involved in it as an advisor, and there is a good reason financially – often they are still receiving dividends," says Doug Bruce, vice-president of research for the Canadian Federation of Independent Business in Toronto.
"Generally for several years after they pass it over, transfer it to a new owner, they stick around as an advisor to make sure it stays on the tracks."
Often a business owner will not take his or her money "out" of the business in a sale and may be paid over time as part of their retirement income.