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Plan ahead to protect your family and business from unexpected events

Plan ahead to protect your family and business from unexpected events

Synopsis
3 Minute Read

Having a clear succession plan in place is essential to protect both your business and your family in the event of an unplanned situation or emergency. While this is sometimes a difficult subject for business owners to discuss, it is important to consider what would happen if you or your company leaders were suddenly not available.

Regular reviews of your documents and meetings with your advisors will help to ensure your business continues to operate in your absence. Proper planning is not only part of being a good steward to your business — it is also a gift to your family and future generations to come.

National Team Leader, ExitSmart

You’ve worked hard to grow your business into a valuable asset. But like every valuable asset, you need a version of insurance to protect both it and your family. Developing a clear succession plan will provide protection from unforeseen situations.

While it is a difficult topic for business owners to discuss, it is important to consider what would happen if you or your company leaders were suddenly absent. This is not only part of being a good steward for your business but can also be a gift to your family in the event of an unplanned emergency.

Why succession and emergency planning matters

Consider the story of one of our clients who founded a successful business to support herself and her children after her marriage ended. Anna (a pseudonym) felt a sense of pride as her enterprise increased in value each year. She dreamed of her children continuing her legacy in the future — but she didn’t have a succession plan governing when or how that transition would take place, or an emergency plan to direct the continuity of the business in the event of a loss of the key shareholder and manager.

At 50 years old, retirement seemed far away. Anna figured her business would fund her retirement as well as create generational wealth that would provide her children and grandchildren with options she never had.

In 2017, she decided to check an item off her bucket list and travel to Belize. During her visit, she experienced a serious accident and, despite the best efforts of first responders, passed away from her injuries.

Business calls began to come in at home, where both her family and her employees were processing the shock and grief of their sudden loss. Employees struggled to direct the calls and were uncertain of who was in charge of the business.

The bank wanted to know how Anna’s company and finances were to be managed. As the news began to spread, customers also started reaching out to ask what was happening. Without a clear succession plan or emergency plan in place, nobody could answer these questions and Anna’s children felt overwhelmed by the situation.

What happens to a business without clear planning?

Anna’s will was drafted when her children were young and before she started her business. It did not include clauses that would allow her estate executors to take control of the business or easily implement planning opportunities. As the sole voting shareholder of her business, she didn’t have a shareholder’s agreement in place to specify the value of those shares.

Taxes were another consideration. When a person passes away, they are deemed to dispose of all their assets at fair market value. Assets may transfer at cost to a surviving spouse, but in Anna’s situation this planning opportunity was not an option.

Anna’s estate was also responsible for the taxes on the capital gains arising from both the increased value of her shares and her company. Without a plan in place, there was a possibility of double taxation on the value of the corporation as dividends must be paid to the shareholders in order to withdraw funds. The taxes paid on the value of her corporation in the first year after Anna’s passing were 66 percent.

Take steps to protect your business and family

Anna was healthy, happy, and had big plans for the future. She had no reason to think the next vacation would be her last. But she could (and should) have done much more to plan for the possibility of an accident, illness, or her untimely death.

The first step Anna might have taken is to create a business emergency plan — ideally in collaboration with her business advisor, lawyer, and management team — delegating roles and responsibilities if she fell ill, died, or otherwise couldn’t function in the business. This would, at a minimum, designate an interim leader, allow access to bank accounts and computer files, and provide guidance on how to make key strategic and operational decisions.

She also would have benefitted from reviewing her will and estate plan on a more regular schedule. Ideally this should occur every five years or whenever there is a significant material change (e.g., birth of children or grandchildren, large acquisition of property, change in wealth, etc.).

A service such as MNP’s LifeBook™ program may have been a good option to offload some of the responsibilities of managing Anna’s estate while ensuring it remained up to date, tax efficient, and ensured her legacy for generations to come.

Finally, translating her intentions for her children to take over the business into a formal succession plan would also have helped to keep the business running and relieved some of the uncertainty that Anna’s family and employees experienced after her death.

Take our ExitSMART™ Succession Assessment

You’ve worked hard to create a successful business. Use our free assessment tool to discover if your succession planning is on the right track to get the most out of what you’ve built.

How to plan to protect your legacy

You don’t have to go on this journey alone. MNP frequently works with business owners to develop emergency plans to outline what steps can be followed when the managing shareholder or director is unavailable.

We also work directly with business owners to provide a LifeBook™ report, produced through ongoing consultation with our succession and tax experts. This report will ensure that your will and other documents achieve your goals and support your legacy. It also ensures that your personal and business documents will be readily available when you, your business, and your family need them the most.

When it comes to the event of an unforeseen absence and/or death, your advisors are critical team members in preparing your business, family, and employees for what happens next. Your advisor can assist you to:

  • Calculate your anticipated taxes on death
  • Identify options to decrease taxes, such as the use of donations to receive donation credits
  • Explore the use of life insurance as a source of funds for either business operations or tax payments
  • Determine if your business has sufficient liquidity to play the taxes if insurance is not available
  • Create an emergency plan to set out the necessary steps and information to ensure your business continues to operate in your absence

These considerations should all be explored as part of the succession planning for your business.

We encourage our clients to meet with each of their advisors as well as to hold regular group meetings. This approach ensures that each advisor is aware of the intricacies of your plan and are all working together to provide guidance and achieve your goals, while allowing for flexibility as life and business circumstances change.

It is also important to have open conversations about the future with your family members. Anna had thought all her children would take over her business — but while her sons were active in its day-to-day operations, her daughter was not interested in running it. Issues such as how to fairly divide Anna’s estate could have been discussed in advance through succession planning.

Proper planning will ensure your business will continue to run smoothly even in the event of an unforeseen emergency or absence. If you don’t have a succession plan in place, commit to getting started today to make sure that your family, business, employees, and legacy will thrive in the future.

Contact us

Michelle D. Coleman CPA, CA, TEP, CEA

Lifebook Champion

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