Estate Planning for Business Owners: Why Your Business Succession Plan Cannot Waitiness Owners

For most business owners, the business is the asset. It is where the majority of their wealth is concentrated, where their life’s work lives, and, if things go well, where their legacy begins. Yet the majority of business owners do not have a plan for what happens to that asset when they die or become incapacitated.

The consequences of that gap can be severe, for the business, for the family, and for the people who depend on both.

Here is what Ontario business owners need to think about.

Your Will and Your Business Are Not the Same Thing

Many business owners assume that because they have a will, their business succession is handled. In most cases, it is not, at least not adequately.

A will can direct who inherits your shares or interest in the business. What it cannot do, on its own, is ensure that the business continues to operate smoothly during the transition, that co-owners or partners are protected, that the right person ends up in control, or that the transfer happens in a tax-efficient way.

Effective business succession planning requires a combination of documents and structures working together, a will, powers of attorney, a shareholder or partnership agreement with appropriate provisions, and in many cases a separate succession or buy-sell arrangement.

The Shareholder Agreement: Your Most Important Document

If you own a business with partners or co-shareholders, your shareholder agreement is the single most important document in your succession plan. Without one, or with an outdated one, your death or incapacity can trigger a crisis that threatens the business itself.

A well-drafted shareholder agreement will address what happens to your shares on death, who can acquire them, at what price, and on what terms. It will typically include a buy-sell mechanism, sometimes called a shotgun clause or a put/call option, that allows surviving shareholders to purchase the deceased shareholder’s interest rather than finding themselves in business with the deceased’s estate or family members who did not choose to be business partners.

It will also address what happens if a shareholder becomes incapacitated, a scenario that is just as disruptive as death but often overlooked in succession planning.

Life Insurance as a Succession Tool

Many business succession plans are funded, at least in part, by life insurance. If a shareholder agreement requires surviving shareholders to buy out a deceased owner’s interest, the surviving shareholders need the money to do so. Life insurance held by the corporation on the lives of the shareholders, with the corporation as beneficiary, is a common and tax-efficient way to ensure those funds are available when needed.

The structure of corporate-owned life insurance has specific tax implications that should be addressed with your accountant and a lawyer experienced in business succession. Done correctly, it can significantly reduce the tax burden on the transfer of wealth.

Powers of Attorney for the Business

If you are the sole owner or the controlling mind of your business and you become incapacitated without a power of attorney for property in place, no one has the legal authority to manage the business on your behalf. Contracts cannot be signed. Employees cannot be paid. Decisions cannot be made. The business can grind to a halt while your family seeks a court-appointed guardian, a process that can take months.

A continuing power of attorney for property, combined with specific authority granted to a trusted person in the business context, is the minimum protection every business owner should have in place.

Tax Planning and the Lifetime Capital Gains Exemption

For owners of qualifying small business corporations, the lifetime capital gains exemption (LCGE) allows you to shelter a significant amount of capital gain on the sale or transfer of shares, currently over one million dollars, from tax. Accessing this exemption requires that the shares qualify under specific criteria in the Income Tax Act, and those criteria must be met at the time of the transfer.

Estate and succession planning that incorporates the LCGE can make a significant difference to how much of what you have built actually transfers to your family versus going to the government. This is an area where the legal and accounting work must be done together, and where the cost of planning is a fraction of the tax savings available.

What Happens Without a Plan

Without a succession plan, your business becomes part of your general estate on death, subject to probate, potentially exposed to creditors, and transferred according to the terms of your will or, if you have no will, according to Ontario’s intestacy rules. Your family may inherit shares in a business they do not understand, cannot operate, and cannot easily sell. Your business partners may find themselves with an unwanted co-owner. The business itself may suffer or fail while the estate is sorted out.

These outcomes are not inevitable. They are the result of not planning, and planning, in this context, is not complicated. It requires a conversation with a lawyer and your accountant, a review of your existing documents, and a clear articulation of what you want to happen.

Starting the Conversation

The best time to put a succession plan in place is before you need it. If you are a business owner and you do not have a current shareholder agreement, updated powers of attorney, and a will that addresses your business interests specifically, the conversation is overdue.

At Yombo Grossman Law, we work with business owners to build succession plans that protect what they have built, coordinating with accountants and financial advisors where appropriate to make sure the legal and financial pieces work together.

This article is for informational purposes only and does not constitute legal advice. Contact Yombo Grossman Law to discuss your business succession needs.