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Family First or Company First? The Right Way to Plan Your Succession


Any business owner knows that estate planning and succession planning are important means of protecting both your company and your family—but what happens when choosing to protect one creates impediments for the other? For instance, when fairly dividing your estate amongst your family means putting the company at risk? Is there a correct way to reconcile this conflict of interests?

“Estate planning,” explains Paula R. Hoffman, associate, de Villars Jones LLP Barristers and Solicitors, “is the process of determining who to leave your assets to and when, during your lifetime or after your death. When you are a business owner, your estate plan should address what happens to your business.”

That means balancing what is best for the future of the company with the ambitions of your primary successors: your children.

“Let’s look at this common scenario,” continues Hoffman. “Bill owns ABC Company Ltd., a profitable business. Bill’s wife is deceased. Bill has three children: Suzie, Zack, and Caroline. Suzie works with Bill in the business, Zack is a schoolteacher, and Caroline is an executive in an unrelated company. Bill wants to start estate planning. The options available to Bill depend on his goals.

“Bill may want to retain the business in the family. One option is to gift his shares in the company to Suzie, but what if Bill wants his children to share equally in his estate? Is it possible for Bill to meet both of these goals? Yes, it’s possible. Bill would look at what other assets he owns, the value of those other assets, and the value of his shares. Bill may be able to gift these assets to Zack and Caroline. Or Bill may discover he does not have sufficient assets to equalize his children – but he may be able to move funds around to create more assets outside his business. Or Bill may discover that, if he purchases more life insurance, he can meet both of his goals.”

Bill has alternative options as well, Hoffman points out. For instance, an estate freeze “allows him to give growth shares to his child(ren) or to a family trust;” Bill could “sell his business directly to Suzie [to] generate funds that he could leave to Zack and Caroline. If Suzie doesn’t want to run the business, Bill could sell to someone outside of family and direct his executors to distribute sale proceeds equally among his children.”

Rick Harcourt, a family business successor with Capital Estate Planning Corporation and board member of the Family Enterprise Xchange here in Edmonton, points out that, when it comes to balancing estate and business succession planning, “Fair doesn’t always mean equal.”

“That is, a business owner leaving business assets to family can treat the next generation fairly without treating each of them exactly the same,” says Harcourt.

“Generally speaking, a business will have a monetary value to an owner, as will their other assets.  There may be savings, there’s likely a home, and maybe other properties. You’ll see the same situation with a family farm. There may be one child who wants to continue with the farm, and the others don’t. But you want to keep the farm (or business) intact. You don’t want to sell off parts of it in order to fund an inheritance. In a case like this, what we will see is that the founders will purchase life insurance equal to the business value. When the founders die, the business would go to the child inheriting it, and the life insurance goes to those that don’t. It’s a ‘fair’ payment – each side is receiving something, but not an ‘equal’ payment as they aren’t all inheriting shares in the company.”

“However, this also assumes that a business owner dies while still owning the business,” Harcourt points out. “Founders don’t often want to let go of something they’ve built with their hard work over the years until they have to.  I think there is a strong business case to be made for the transfer of ownership to happen before they are in a crisis situation. This gives a family the opportunity to make the decisions that are right for the business, and even to give the successor the advantage of being in control of the business while the founder is still available to help them navigate circumstances they may not have foreseen.”

He continues, “The thing that’s important for families to understand in this case, though, is that the business usually isn’t being inherited by the successor generation – unless the owner maintains ownership until they die. It’s being bought by the successor generation – the kid(s) working in the business. So, you wouldn’t normally see the same kind of equalization as we talked about before in that case because the founders have been paid out by their efforts. The cash from that is building their estate (which is then split among the kids).”

Stacy Maurier, founding lawyer of Estate Connection Law Office, points out that the type of business has an impact, too.

“An unincorporated sole proprietorship will have all the owners’ assets held by him or her,” Maurier explains. “These types of businesses traditionally are not worth much, and the business assets can be treated like any other personal property, such as a car or a Rolex watch. In this case, most times the value of the business is its products, and these can be transferred to the person who wants them with the business owner loaning these funds through a promissory note to the child so they can take over the business. The promissory note can have payments occur at a scheduled time, or maybe these payments will compound. When the business owner dies, they can forgive this loan in his will or treat it as an advance to the one child and provide the other children with an equal advance so that their gifts under the will are equalized.”

“Incorporated businesses,” Maurier suggests, “usually have more assets and value. The biggest mistake that business owners make is selling a business to their family members for a nominal value.” The CRA will examine and re-assess the value of the assets, leaving your child with capital gains taxes that vastly outweigh the value of their business share.

She adds, “The best way to transfer a valuable family business in Canada is through an estate freeze. An estate freeze provides a business owner with the ability to transfer their business to family members and avoid paying income tax on these funds, to still maintain control over the business they are transferring, and also to receive a regular income in their retirement.”

The important thing to note is that business owners have options when it comes to balancing succession planning for a business and estate planning for their families, and there are some key resources that can help the business owners who may be facing this challenge in its varying circumstances.

“Selling your company is a complicated and time-consuming process,” Maurier says. “It is best to start early and use experienced business professionals (mergers and acquisitions advisory firms specializing in the sale of privately-owned businesses, business and/or corporate lawyers and accountants who have handled estate freezes, tax lawyers, private banking advisors, small business appraisers). These experts are a great resource and are able to provide expertise that will guide you through the sale process.”

Harcourt points, as well, to The Family Enterprise Xchange, a national non-profit organization built for family businesses and their advisors, and to The Alberta Business Family Institute, a part of the University of Alberta that advises family businesses through transition issues.

“Every estate plan is unique, and all these options have tax consequences that need to be considered,” Hoffman concludes. The best resource is to “Surround yourself with a team of advisors so you can obtain the best advice for your particular situation.”