Many of my successful Business Owner clients are looking for advice on succession and estate planning, so I thought I would share this case that I have recently finished, working closely with my client's other professional advisors. I first met John shortly after he bought his company (out of bankruptcy) in 1994 with the last 4 remaining employees still working. I helped him put together a Group Benefit program as well as a Group Retirement plan; there are now 87 employees. As part of the planning process, the company was evaluated in 2019, resulting in a FMV of $62 million. John is 72 and his daughters Liz and Mary Beth, who both earned their business degrees at UNB Fredericton, have been taking on more and more responsibility.
As of this past January 1st Liz is now the new CEO while Mary Beth, whose has almost completed her CPA at a national accounting firm, has been acting as the CFO for the past 2 years and will soon make that her full time occupation. John owned 100% of the shares but despite my constant recommendations over the past 26 years, had never started any planning until May 2019. An estate freeze was completed, and John set up a HOLDCO with his wife Jeanette as an equal shareholder, taking back super voting preferential shares and giving Liz and Mary Beth new Common Shares in OPCO. With a capital gain in OPCO prior to the freeze of approximately $45 million, tax planning became especially important and to which life insurance became a key part. OPCO has very good cashflow and is showing excellent growth under the girls leadership, but they didn't want to tie up the cash paying the large premium for the $9 million policy on John, so an IFA (Immediate Financing Agreement) was entered into, whereby the insurance premium for John's policy, is being paid by OPCO who then immediately has it repaid by the bank as a loan, allowing the company to carry on expanding and delivering their high quality products and excellent customer service for which they are best known. The interest on the loan is paid monthly by OPCO, as it is a tax-deductible item and once a year that total amount is added to the next years "loan” that repays the next premium.
On John's death, the outstanding loan will be paid off and the balance of the proceeds then paid to OPCO. But the credit to the Capital Dividend Account (CDA) of OPCO will be the full death benefit (less the ACB of the policy), thus allowing OPCO to pay out significant tax-free capital dividends to the shareholders moving forward. These Capital Dividends can be paid to Jeanette to buy back the preference shares or used in other ways that Liz and Mary Beth deem appropriate. In addition, HOLDCO took out a Joint Last-to-die policy on John and Jeanette that will pay off whatever taxes would be owed on the last of their lives. Once that planning was completed, John and Jeanette wanted to provide for their 5 grandchildren. They moved $7.5 million from their accounts at the bank and their other investments into 5 Segregated Fund (SEG Funds) policies with the insurance company with each of the grandchildren as beneficiary. (John is the owner and Jeanette is the Successor Owner). SEG Funds are to the insurance company what mutual funds are to the banking and brokerage world, with significant enhancements enshrined in them by the Insurance Act of Canada, including bypassing Probate, offering creditor protection, and having guaranteed death benefits. The investment funds they chose have records of good returns with low volatility. These funds are still available for disbursement at the discretion of John and/or Jeanette if necessary and on the last of their deaths, the balance of the funds will go directly to either trust funds or the grandchildren themselves if over 25 years of age, in under 30 days, without going through Probate. We estimate that this will save the estate more than $600,000 when factoring in executor, legal and accounting fees over and above the Probate taxes. All in all, it was/is a great plan and they were all amazing people to work with.... they have already referred me to other business owners and a couple of incorporated Medial Doctors that they know.
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#IFA #lifeinsurance #taxandestateplanning #SEGfunds #Probatetaxes