The Companion Advisor:
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Death, disability and the family
An owner of a small family business is often too
preoccupied with day-to-day operations to make any formal plans to address
how that business would be handled if he/she dies or becomes seriously
The very fact that often the success of a family business rests on the
efforts of one or two people is precisely why creating a formal plan is
so important. Without a formal plan, there is no guarantee that the owners'
wishes will be considered when, in the event of death or disability, business
and personal assets are managed, sold or transferred.
This is really apparent in small family-owned businesses. Suppose a couple
own and work in a business where their personal relationship with the
suppliers and customers is integral to the success of the business. They
have four adult children, but only one works in the business. Without
wills or with "standard" wills, the estates of the parents ultimately
will be divided equally among the children. Although the couple may have
intended otherwise, the business would likely be sold with its value being
greatly reduced by the fact that the original owners gone and the business
relationships are severed.
To avoid this problem, there are a number of options that the couple chose,
depending greatly upon the couple's own philosophy, family, business and
other assets. A simple option is for the parents/owners to make wills
that give the business to the child involved in it. The wills could divide
other estate assets among the other children as the parents felt fair.
If the estate would be insufficient, the wills could provide an option
to purchase the business rather than a gift to the involved child. The
parents could place appropriate life insurance to fund the estate plan.
If the couple began now to involve the child in relationships with the
suppliers and customers, the value of the business would be maintained.
Another option may be to transfer the business or an interest in it to
a child during the owner's lifetime, by gift or sale. Alternatively, children
may be given an interest in the future growth of a business while the
owners retain control over daily operations through an "estate freeze".
This method involves the creating special shares which are issued to the
owner, which carry the voting rights. Common shares are transferred to
the children. Since capital gains may be triggered by a gift, sale estate
freeze, or death of the owner, any plan should be carefully reviewed with
a tax accountant to anticipate and minimize tax payable.
By properly implementing the plan, there should be no argument after the
surviving parent's death as to what the parents intended or promised or
what the children expect versus the terms of the parents' wills.
The change in the make-up of the traditional family can also effect the
formal plan. If only one spouse is involved in the business, the couple
can execute a marriage contract which will ensure that the owner dispose
of business assets or shares exactly as he/she wishes, regardless of the
wishes of his of her spouse. In second marriages, this can be a critical
document. Similarly, if the child that is to be the future owner of the
business executes a marriage contract, the business can be protected from
claims of his/her spouse.
To deal with the possibility of a serious disability, a business owner
must have a continuing power of attorney for the management of property
in place. Since a power of attorney provides a designee with some or all-encompassing
signing authority, an owner must be careful in choosing the designated
person, as well as the parameters under which that person can make decisions.
Often business owners postpone estate planning decisions and then leave
their surviving family members to sort out the difficulties later. We
recommend that you seek the advice of your lawyer and your accountant
and do not put off today what you may not be able to do tomorrow.
The information in this article is general and should not be relied upon
as a substitute for professional advice in specific situations.
Suzanne Michaud is a lawyer with the Mississauga firm of Pallet Valo
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