NOTE: The case studies illustrate Black Spruce Financial’s Three-step Process of Life Planning.  Although the individuals portrayed are fictitious, the scenarios are based on common cases we encounter.  In these cases, all individuals are assumed to be Canadian tax paying residents (Canadian Citizens, Permanent Residents or Landed Immigrants).

Explore – Business Continuity

Sue is the founder and a partner in a family construction company, Nomen Inc., along with her two daughters Samantha and Sally. Sue is looking to retire in the next ten years. The company has been growing steadily each year since Sue incorporated it twenty years ago. Nomen Inc. has retained earnings of $1,500,000 invested mostly in fixed income investments, making the interest earned subject to corporate income tax at nearly 50%.

Sue, age 59, owns 60% of the business leaving Samantha and Sally with 20% each. Sue is widowed, and has registered personal investments worth $350,000 inside her RRSPs, as well as a home that is paid off and an investment property worth $250,000. Her RRSPs are held in six different brokerage firm accounts and she wants to consolidate her holdings into one firm. She has a life insurance policy that has a cash value of $130,000.

Both Samantha and Sally are in their twenties and single without dependants, and neither have life insurance policies. They also have some RRSPs, $35,000 and $40,000 respectively. Both of their RRSP accounts are held in GICs because they simply have not yet received advice on where to invest and grow these accounts. The company does not have a group benefits plan that would cover drug, dental, or other medical expenses, nor do they have disability or critical illness insurance.

Sue has been considering selling her shares in the company to her daughters, thinking that this would help fund her retirement.  She has been contemplating this idea for some time but is not sure if she wants to sell the business just yet.  Luckily, both Samantha and Sally want what is best for their mother, whether she decides to keep the shares or sell to them.

Sculpting a Business Continuity Plan

Throughout the discovery process, Sue, Samantha and Sally meet with us several times, and their data is entered into Black Spruce’s Life Planning software. Although Sue’s initial concern was having enough money to fund her retirement from the business, additional issues are brought to light. For instance, Sue’s investment property will trigger an estate tax liability at death, and she wants to ensure that this additional cost will be covered by her life insurance policy, which it currently is not.

With assistance from the software, the ‘Know Your Client’ (KYC) questionnaire required for investments, and in-depth conversations with Sue and her daughters, the following business retirement plan is proposed:

• Sue will sell her shares of the business to her daughters in ten years. The sale will be funded by future profits of the company. In other words, as profits are accumulated annually, a portion of the money will flow to Sue as a payment schedule for the purchase of her company shares.
• The investments for Sue, Samantha and Sally are transferred to an investment dealership recommended by Black Spruce Financial. The KYC forms are used to ensure their investments are in alignment with their individual risk profiles.
• The software shows that all three have an estate gap – Sue does not have sufficient liquid assets or insurance in place to offset her taxes due at death. To supplement Sue’s current life insurance policy, a whole life policy is put in place, one with a cash value component. The policy, having a cash value which grows tax sheltered, can be used not only to cover any additional expenses, but will also fund Sue’s retirement in a tax advantaged manner.  As Samantha and Sally do not have any insurance, they decide to implement a partnership insurance policy to cover Sue’s importance to the company until she retires, as well as their own lives, should anything happen to one of them.
• Sue’s portion of the retained earnings will be used to fund her life insurance policy over the next ten years. The policy on Sue’s life will be held in a holding company owned by Sue separately from Nomen Inc.
• Sue’s will was created twenty years ago and last updated eight years ago.  It needs to be updated to reflect the transfer of her shares to her two daughters should she pass away before selling her shares to them.
• Samantha and Sally will update their wills, and they have decided to leave their individual company shares to each other upon death, with Sue as a backup beneficiary.
• Also, a living benefits plan for all three women is implemented. This includes a long term disability plan, health and dental plan, and a critical illness plan.

The Outcome – A Business Continuity Plan

Over the years, the plan is reviewed on an annual basis, with only minor updates required along the way. Sue, now in year ten of the plan has sold her company shares to her daughters to fund her retirement. The insurance policies are in place and serving the purposes we intended from the onset, namely to provide protection and a provision to pay for estate taxes, and to fund Sue’s retirement. All three wills have been updated and have been revised every two to five years as necessary. All investment accounts have been consolidated into one investment dealership for focus and clarity.

What is their next challenge?  Although Samantha and Sally are now both 50% shareholders of Nomen Inc., Samantha was married last year, and Sally is engaged.  They plan to start families, but would also like to continue working. They will be coming in to discuss their next steps shortly.  Areas of focus that will likely result from their life changes will include Business Continuity Planning focusing on a Partnership Buy-Sell Agreement, additional life insurance provisions, and updating their estate plans. The living benefits policies were put into place providing protection from unforeseeable health or accidental issues that may arise and interfere with their life plans.

The Life Planning process has helped the owners of Nomen Inc. to plan for their future.  For more information, please contact us.