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Passing It On Before Passing On

You’ve worked hard to build wealth for your family. What’s the best way to pass it on?

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For many business owners, passing on an inheritance, not the business itself, to the children is the end goal. How can this be done in a way that encourages the children to use the inheritance responsibly, while avoiding financial opportunists with dubious motives? When it comes to entrepreneurs providing long-term for their children, our experts have some good advice.

Gordon Wusyk is the CEO and founder of Predictable Futures. He’s spent nearly 40 years helping business families “identify and attack real issues, not each other.” The firm focuses on family business succession, and his reasons for launching Predictable Futures is very personal.

“When my father passed suddenly in his 50s, he didn’t leave a masterpiece. He left a mess,” says Wusyk. Now, he and his team are determined to assist entrepreneurs when it comes to future planning, so the next generation does not have to struggle, like he did, to untangle an estate.

“Retirement and death are not optional events,” Wusyk says. “That means they are inevitable events. They should be treated pro-actively, not reactively. When business owners realize that these events are not optional, they proactively plan before the event happens. This leads to much healthier results.”

Are Edmonton’s family businesses prepared for the inevitable?

“Statistics suggest that 70 per cent of wealthy families don’t effectively preserve their wealth because the emotional issues of trust and communication have not been dealt with,” Wusyk answers. He also says the issue is not the money, it’s about the purpose of the wealth that makes all the difference. “When the purpose of wealth is discussed, the transition goes smoother.”

“If you give an allowance to your kids, teach them about budgets and financial management,” Wusyk adds. “And teach your children that entrepreneurship is an honourable role in life that creates employment and builds a community.

“It’s extremely important to teach about values before sharing your valuables. Families that build their future on values as opposed to valuables have a much better opportunity to have successful transitions where the money is not squandered, and the children do not get distracted by consumption or opportunists.

“Children must understand that what is attached to wealth is a significant responsibility, which focuses on stewardship rather than consumption. Stewardship is managing something for others beyond self.”

He continues, “When advising families, we empathise to treat the family like a family and the business like a business, and not to get the two confused. To take over a business requires competency, leadership, risk, training, and passion, etc. If the next generation is ready to do that, then a transition can be considered. If not, the owner needs to pass the business to a third party, or to the employees, or to sell it and consider passing the cash to the next generation.

Predictable Futures has a proprietary approach. They first look at the whole family they work with before they look at the money involved. This is because Wusyk knows that healthy relationships are more important than the size of the inheritance.

He explains, “We have a mandate called the discovery process. We need to know how the values of the owners developed the business over the years. We want those values to be passed on because those are the roots. If you can pass on the roots, you know the future fruits will flourish.”

David Schumacher is a partner and financial advisor with Abacus Wealth Management. Abacus helps businesses and individuals with financial, retirement, estate, tax and portfolio planning, and also with insurance analysis.

“Business owners should start laying the groundwork for passing on an inheritance as soon as possible,” says Schumacher, “Ideally when they start to accumulate retained earnings inside the corporation. This is when a proper wealth allocation/transfer strategy becomes very important. In some circumstances, I’ve set up the strategy in anticipation of future growth, but that is less often, and certainly more based on a clear upward trending business model. Sometimes it’s imperative that the strategy be put in place as early as possible and ‘locked in’ in certain circumstances.”

He understands the legitimate concern business owners have about the hard-earned wealth they wish to pass on to their children being squandered or attracting opportunists, and he has products that can offset those threats.

“The most common strategy for full control by the business owner would be a trust. Sometimes it’s an inter-vivos (living) trust, so that one can set up the structure, as well as maintain control over the assets and the beneficiaries of the trust. This is commonly used in conjunction with an estate freeze scenario. Another common option is the testamentary trust, which is established at death.”

There are other ways to leave a legacy that do not directly involve cash.

“Paying for education is common and can be a very functional bequest, as post secondary education can be fairly costly these days,” says Schumacher. “Purchasing an asset such as a house is another common strategy I see. But in a case where a successful business owner would rather leave a legacy outside of their family, there are some interesting charitable donation strategies one can utilize as well. Just be careful of those 3-for-1 tax schemes, as they’ll always end in a headache for the donor.”

Should children grow up with the expectation that an inheritance is coming?

Schumacher says, “There’s a lot of ‘it depends’ in that question. I would lean towards letting someone know they’re getting an inheritance, but that’s my planning mind saying that. Certain strategies are better set up sooner than later; so, knowing an inheritance is coming could allow for the funds to be maximized with greater efficiency than a surprise windfall given to someone not at all equipped to handle it. It’s such a case-by-case scenario in my opinion. There are certain strategies that allow funds to be passed tax free to children/grandchildren, but they need to be made aware of the scenario and be a part of it.”

When it comes to leaving an inheritance, there are a lot of variables, but as Schumacher points out, nobody has to go it alone.

“One should definitely seek professional advice for many reasons when it comes to their wealth preservation. Tax efficiency is a big one. Another would simply be that we [Abacus Wealth Management] spend a great deal of time researching these types of strategies. Getting a second opinion is definitely a good idea when it comes to something as important as your hard-earned business wealth. I’ve seen some pretty ‘interesting’ advice given to clients over my 18 years as an advisor in Alberta!

“When it comes to protecting one’s wealth, find a circle of trusted advisors that can help with all aspects of the planning process: a good legal team, a good accounting team and a good wealth management team. They all need to work together for the business owner’s benefit.”

Schumacher mentioned taxes, and that is something families must consider when planning a legacy of any kind.

Etienne Biram, a spokesperson of the Canada Revenue Agency (CRA), points out, “CRA’s general position is that recipients do not have to pay tax on most gifts and inheritances.” However, “The disposition of shares would generally be considered a taxable event for the business owner that would give rise to a capital gain.  In most cases, only one half of the capital gain is taxable. The tax treatment of the disposition is not affected where the after-tax proceeds form part of an inheritance of a spouse, child or other individual.”

Biram adds, “If the business owner were to die holding capital property, which would include shares of the company, we would consider them to have disposed of all capital property immediately before death. We call this a ‘deemed disposition’ that would generally give rise to a capital gain or loss. Depending on the type of property held at death, special rules may apply to the transfer the property (on and as a consequence of death) to a spouse or child of a deceased taxpayer.”

Starting and running a successful business is never just about the daily operations. It’s about the owner’s passion for what they do, their family, and their ultimate legacy. Passing that legacy on in the form of an inheritance, property, education, or the business itself is never easy. There are financial, business, emotional and tax implications to consider. It’s not a decision to take lightly, but there are advisors ready to help that have your best interests in mind.

The most important step is to get started. As Wusyk says, retirement and death are not optional. You can leave a true legacy – peace of mind and an estate in order – by getting started on the process today.

 

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