An estate plan is a must for every family, and for business owners it's essential. An incorporated business is its own legal entity. Combine a successful small business with a bad lawyer, bogus 'financial planner,' and dysfunctional family, and you have a recipe for disaster.
I know. It happened in my family.
Here are tips for protecting your estate, saving taxes, and keeping the peace.
1. Get good advice. You need a team of qualified, experienced professionals – a lawyer, accountant, and investment adviser. Make sure they talk to each other and know what they're talking about. If the team doesn't have the skills to create and help manage an estate, replace them.
2. Pick the right Executor. Your sibling is too close to the family to be impartial. In our case, my step-father selected his brother who was blinded by love for his nieces and nephews, and put into a conflict with fighting siblings. In a complicated situation, consider hiring a trust company. They charge fees, but you save in the long run.
3. Get a proper business valuation and keep it current. Your family will pay tax and probate fees on the value of your estate, so know what it's worth. Many businesses are sold after the owner's death. A current, independent valuation helps keep everyone honest during the bidding.
4. Depending where you live, a dual will strategy – one will for the business shares and the other for personal assets – may reduce probate costs by excluding the estate's value from probate calculations. This would've saved my step-father thousands of dollars. His lawyer missing this simple technique was a red flag.
5. Buy adequate life insurance to provide cash for debts, and funeral and survivor expenses. It may take a year to process your estate, and funds may not be immediately released to beneficiaries. The business is often the family's primary income source. Insurance provides ready cash for bills, taxes and lifestyle.
6. Protect your Executor. This role entails personal liability. An Executor who pays out the estate too early or miscalculates debt repayments or taxes paid is on the hook. But the Estate can buy inexpensive insurance to protect the Executor from personal financial liability.
7. Be careful with joint accounts to avoid probate. For example, in Ontario the maximum probate fee is 1.5 per cent of the estate's value. Much more than that will be lost to bad planning through improper use of joint accounts. Sometimes it's better to pay the tax and move on.
8. Be organized. Use an estate memorandum to keep an inventory of pertinent information – financial contacts and phone numbers, passwords, location of documents. Make sure your Executor knows where this is and updates it regularly.
9. Remember your online footprint. We'll all leave an online legacy, so keep track of logins and passwords to all sites you signed up for. Use a password saver like LastPass so you have only one password. Include it on your estate memorandum for the Executor.
10. Talk. Talking to your family about death isn't easy, but an open dialogue with children about your estate plan is important. Mom or Dad can't resolve disputes from the grave. Make sure everyone is heard and their views acknowledged. This can keep your family together, and leave a legacy without headaches.
Darren Coleman is senior vice-president, private client group, associate branch manager, portfolio manager, with Coleman Wealth of Raymond James Ltd. in Toronto.