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The Companion Advisor: General Interest
Death, disability and the family business



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 disabled.

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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