Effective succession and estate planning require a holistic approach.
It can take a lifetime – sometimes two or three generations – to build a thriving and prosperous family business. However, a lack of planning around succession and estate strategies can leave both the family and the business in ruins.
Regardless of the size of a family business, the owners will inevitably have to decide whether they intend to sell it or transfer it to the next generation. If the decision is to transfer, then proper planning needs to be undertaken. An essential part of the plan includes providing for sufficient liquidity to meet the inevitable financial liabilities that accompany any succession. “A family business may be worth $10-million, $100-million or over a billion, but that doesn’t mean it’s sitting on mountains of cash it can easily access to meet the estate tax and other financial obligations that will arise on the passing of the older generation,” says Paul Tompkins of Tompkins Insurance Services, a leading provider of life insurance solutions to some of Canada’s largest and most successful family businesses for more than 25 years. “Life insurance can provide the liquidity necessary to pay taxes arising upon death, as well as fund any buyouts of family members who wish to sell their shares.”
If there is insufficient liquidity to meet these obligations, there are often few alternatives other than to sell the best and most liquid assets. In some cases, this is the business itself, “and if your goal is to pass it along, that’s the last thing you want to do.”
Unfortunately, discussions within family businesses about estate and succession planning are, in far too many cases, put off. There are many reasons for this, including concerns about how these discussions may impact family dynamics or create internal conflicts, or being unsure of how to begin the process. However, the consequences for procrastination can be catastrophic and have the potential to result in the loss of the business altogether.
One question may be where to turn to for advice on these matters. Based on his extensive experience, Mr. Tompkins recommends creating a team of advisers. “A well-executed estate and succession plan includes not only obtaining the best technical advice in the tax, legal and insurance areas, but also establishing strong family business governance and communication within the family,” says Mr. Tompkins. “And this can best be provided by pulling together experts with experience and perspective in dealing with these unique types of issues. Creating a multi-disciplinary team that works together for the benefit of the whole family is considered best practice.”
And it’s never too late. “Life insurance has become a critical component in the estate and succession plan because it’s a proven tax-efficient way of pre-funding these known future liabilities,” he explains. “And it can be structured in a variety of ways at any stage to meet any circumstance.”