The Estate Plan Every Business Owner Needs (Before It’s Too Late)

All right, let's talk about some estate planning tips. I know it's not a very popular topic for discussion, but it's something that's super important if you want to make sure you protect your financial interests and you protect your family. So, estate planning tips. Here's the first thing. If you are a small business owner or not a small business owner, make sure you have a will in place. A will is a binding legal document that will allow you to identify who gets your assets when you're gone. A lot of times from a tax planning perspective, when we think of estates, if you and your spouse are essentially married or your common law, all of your assets roll to that spouse or common law automatically. No tax is triggered in that situation. However, if you don't want all those assets to roll to your spouse or your common law partner automatically, you have to set that out in your will. So, for example, we have a lot of split families. A lot of times people have kids from previous marriages. If you want those previous kids to get an essentially a portion of your estate, you've got to identify that ahead of time. So let's go back to the small business owner. You've now got a will in place. What else can you do? Well, as a small business owner who owns shares in a Canadian controlled private corporation, one thing that happens is when you pass away, there's probate. You've probably heard of this. It's just a general flat tax. It's a death tax. It gets applied to your asset value. Now, for small business owners, you might realize maybe your largest asset is your small business. This is where estate planning comes in. And it's very important. If you have a second will that only owns the shares of your small business corporation, those shares, and that value of worth is outside of probate. So you can avoid all of the probate tax on your estate related to the value of your business. If you have a secondary will in place, 100%, this is a great planning tool to help you save money and to help the transition from one generation to the next. Another area that we want to discuss when it comes to legal planning or estate planning is the actual transition of your small business to the next generation or to a third party. So what happens when, when we die as an individual, let's say we're the surviving spouse, we're not married, our assets are not rolling to our spouse automatically. It's just us, right? There is going to be one spouse that is the surviving spouse, unfortunately. And what happens is every asset that we own is deemed taxable at that time. So when we pass away, it's like we sold everything at fair market value. So we need to be consciously aware that there are going to be some tax liabilities that are going to be due related to this. Our principal residence is not going to be taxable as long as we're only claiming our principal residence over a period of time and we've owned that, and we're claiming it for every year that we've lived there. No tax on that principal residence. But if you've got RSPs, those become fully taxable. If you've got real estate, capital gains become taxable at the time of death. And one of the challenges that we see a lot of times, and I've seen this, you know, in multiple different circumstances, is that we've got this secondary property, maybe a cottage or an investment proper, and we want this property to go to the next generation because they've spent time there and, you know, it's a beautiful place and we just think that's what's best for them. We have to keep in mind though, when we look at transitioning this type of asset to the next generation, there's going to be tax owing on your death related to this property. So there is going to be a bit of a tax burden. And now you may say, well, that's fine. They've got this asset value, they can just mortgage against it. Just be cautious with this. Right? When we mortgage against the property, we've now given a debt obligation to the next generation. They now have a mortgage they have to pay. So this could be problematic for them. We also have property taxes that need to be paid, maintenance and upkeep on this property. So we may or may not be putting our next generation into a financial situation that they might not be able to afford it. So we want to be very conscious that if we're going to do something like that, we want to have life insurance in place to make sure that any taxes that we're going to owe ultimately on our death, we're using insurance to cover that tax liability and make sure that it's paid for. So, for example, if we've got $1 million property, let's say we owe $100,000 in tax on it. Instead of the next generation having to incur new debt and have a new mortgage payment. They might have kids in school. We, we do is we get an insurance policy in place so that for $100,000 so that when we do pass away, that insurance pays off the debt. The next generation gets the asset and they can carry on. So insurance is also a really great planning tool, especially from an estate planning standpoint. Obviously insurance is really only payable to you when you die, but it is a really great tool to help make sure that the next generation doesn't incur any of your liabilities. Because again, everything is deemed disposition at fair market value when you do die. Let's talk about your small business corporation and the disposition of that, either as part of a succession plan or as part of eventually passing away. Because if you still own your corporation, it is deemed disposed of. So the value of your company would be taxable to you if you do pass away. We could also think of this as a way to generate or succeed this corporation to a third party that's not our family. So what happens is everybody in Canada has access to a lifetime capital gains exemption. It's a million dollars in essence, give or take a few that allow us to, if we sell our business for a million dollars, that we aren't really going to pay tax, at least in theory, on the disposition of this sale. So this is a really great thing. However, we can be disqualified from this very quickly if we have too much cash or too many non active business like investments inside our company. If there's too much in there, then we don't get access to that capital gains exemption. Your kids or your spouse or your family or whoever might incur a quarter million dollar tax liability because you didn't plan properly. So let's make sure that those assets are in the right category. This is where we can do corporate tax planning and move assets and investments and cash into a different company to protect you. Make sure you qualify for your tax exemption in there. I know there's a lot of information around estate planning. A lot of it's legal and a lot of it's tax related. Make sure that you're planning for this in advance because we don't want to have something bad happen and your your family gets stuck with a liability or poor planning. So as a bit of a recap, let's one, make sure that our wills are in place. If you have a small business corporation, let's use a secondary will to prevent probate on that asset class. Let's ensure that your corporate structure is set up the right way so that you don't lose out or on any capital gains exemption tax planning opportunities. And as well, let's look at insurance planning and make sure if we have any tax liability or some future tax exposure, that insurance is in place to protect and preserve the wealth that you've worked so hard to create. So hopefully, that's a bit of a recap. Let's make sure that your assets are protected and that you have a plan in place to ultimately protect all the assets you've created.