Financial Planning

Recover Your Long Term Care Costs (Back to Back Long Term Care)

Will your family be affected by the costs of caring for an aging loved one?

Statistics Canada states that over 350,000 Canadians 65 or older and 30% of those older than 85 will reside in long term care facilities.  With increasing poor health and decreased return on investments, the fear of facing financial instability in your declining years is real.

How will this impact your family?

Caring for an aging parent or spouse takes its toll emotionally and financially.  Adult children with families and job pressures of their own are often torn between their obligations to their parents, children and careers.  This often results in three generations feeling the impact of this care.

Is it important to you to have control over your level of care?

Consider this:

• The cost of providing for long term care is on the rise

• While many Canadians assume that full-time care in a long term care facility will be fully paid by government health programs; this simply is not the case. In fact, only a small part (if at all) of the costs of a residential care facility will be paid by government health care programs

• 28% of all Canadians over the age of 15 provide care to someone with long term health issues

• For the senior generation, the prospect of the failing health of a spouse puts both their retirement funds and their children’s or grandchildren’s inheritance at risk

• Capital needed to provide $10,000 month benefit (care for both parents) for 10 years is $ 1,000,000 (if capital is invested at 4% after-tax)

Advantages of the Long Term Care Back to Back Strategy

• Shifts the financial risk of care to the insurance company
• Allows for a comfortable risk free retirement
• Preserves estate value for future generations

When is the best time to put this structure in place?

• Remember, the older the insured, the higher the costs
• Do it early while you are still insurable!

Please call me if you think your family would benefit from this strategy.  Feel free to use the sharing icons below to forward this to someone who might find this of interest.

1 in 3 Canadians Will Become Disabled Before the Age of 65

What you need to know about your Group Long Term Disability
Having a source to replace your earned income in the event of an illness or accident is vital considering that on average, 1 in 3 Canadians will become disabled for a period of more than 90 days at least once before the age of 65.  For those that are disabled for more than 90 days the average length of that disability is 2.9 years.

If you are one of the approximately 10 million Canadians covered under a group Long Term Disability plan (LTD) it’s important to understand what your coverage provides. Don’t wait until after you’re disabled to read the employee handbook, because you could have a few surprises!

How much coverage do I really have?

• Generally, employee benefit LTD plans are designed to replace up to 85% of your pre-disability after tax
• The amount of your benefit is determined by formula. These formulas vary so it’s a good idea to know what yours is.

When do I start getting benefits?

• Usually, you are eligible for benefits to commence after being disabled for a period of 90 or 120 days.

Is this benefit taxable to me?

• If the LTD premium is paid by you personally then the benefit will be received tax free.
• In groups where the employer pays the LTD premium, then the benefit when received will be taxable.
  • Should this be the case, make sure you discuss with your employer or insurer what your options are for having tax withheld if disabled so there will be no nasty surprises come tax time.

What else do I need to know when I enroll in an LTD plan?

• Pay attention to the Non-Evidence Maximum (NEM).  This is the maximum amount of disability benefit you would be entitled to without providing medical evidence.  You may be eligible to receive higher coverage if you take a medical examination.
• You should also be aware that LTD benefits are usually offset (reduced), by any disability benefits you might receive from CPP/QPP or Workmen’s Compensation.
• Any benefits paid as a result of an accident from an automobile insurance plan may also reduce your LTD benefits.
• Most group plans have a waiting period, usually three to six months, before a new employee is eligible to join the plan.
• If you were formerly a member of a plan at another employer, request that your new employer waive the waiting period.
• If you’re an employee who was actively recruited or is considered a valuable addition, you should also make this request.

Are there other options?

• All of the above could certainly result in you receiving less disability income than you thought you were entitled to.  If this is the case, consider purchasing an individual disability policy to “top up” your coverage.
• The good news here is that most Group LTD plans do not offset against personal disability income policies.

Please call me if you would like to discuss your personal situation or feel free to use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.

The Corporate Extraction Strategy – Transferring a Life Insurance Policy to a Corporation

The Corporate Extraction Strategy involves transferring a personally owned life insurance policy to a corporation for its fair market value (FMV). When handled properly, it could result in withdrawing capital from the corporation tax free!

The preferred candidates for this strategy

• Own a life insurance policy that they wish to maintain;
• Own all the shares in a corporation;
• Are usually older and/or would be rated or declined for life insurance due to health concerns.

The life insurance policies best suited for this strategy

• Term insurance policies with an option to convert to permanent insurance;
• Permanent policies with or without cash value where the Adjusted Cost Base (ACB) exceeds the Cash Surrender Value (CSV).

There are two separate transactions with income tax implications

• The shareholder transfers his or her policy to the corporation. This will result in a disposition of the policy and the excess of cash value over the ACB will create taxable income. Where the policy has no cash value or cash value that is less than the ACB, no tax will result. The company receives the policy with its ACB set equal to the Cash Surrender Value on date of transfer.
• The company may pay any amount for the policy to the shareholder up to the FMV of the insurance. If the FMV is higher than the CSV, the proceeds of the transfer are received by the shareholder tax free.

Establishing the Fair Market Value of the policy

This will require the services of an actuary to provide a proper valuation of the insurance contract. Also required will be a projected age of mortality most commonly provided by a life insurance underwriter. The actuary will consider all factors relevant to the appraisal and provide a report indicating the FMV of the policy. This report will be used to justify the payment to the shareholder. Under ideal situations, this payment is often substantial. 

Factors to consider

• Since the life insurance will be now owned by and payable to the corporation, proceeds at death will no longer be creditor proof as the corporation is not a preferred beneficiary;
• Changing the policy back to personal ownership at a later date, could have adverse tax consequences;
• Even though the proceeds at death are payable to the corporation, those proceeds can still be received tax free by your heirs via the Capital Dividend Account.

Uses of life insurance in the corporation

It is always advisable to have a business reason other than just the tax results in any strategy involving life insurance. Below are some of the more common reasons for corporate owned life insurance:

• Key person coverage;
• Stock redemption or buy/sell coverage;
• Paying insurance premiums in a low tax rate (small business rate) environment;
• Corporate tax shelter – transferring highly taxed corporate investments into the tax deferred cash value account of a life insurance policy;
• Capital Dividend Account planning.

What does the Canada Revenue Agency say?

The CRA has acknowledged this strategy and refers to the tax result achieved as an anomaly under the Income Tax Act. In 2003 they stated, “The result of this transaction is that the shareholder is effectively receiving a distribution from the corporation on a tax-free basis. We previously brought this situation to the attention of the Department of Finance and have been advised that it will be given consideration in the course of their review of policyholder taxation”. These comments were echoed again in 2009.

The recent changes to the Income Tax Act introduced in 2013 were silent on this issue so the strategy remains viable. Given the CRA comments, however, we expect the door to close on this planning opportunity in the near future.

The Corporate Extraction Strategy Case Study Dan is a 66 year old lawyer. In 2003, he purchased a $500,000 term insurance policy that was issued at standard non-smoker rates. He had a series of health episodes between 2005 and 2008 that rendered him uninsurable.     As a result, Dan wanted to ensure that he maintained his life insurance for the rest of his life. In 2012 he converted his policy to a $500,000 Term to 100 policy with an annual premium of $15,800. Shortly after the conversion he requested an actuarial valuation of this policy.   The actuary involved concluded that based on the mortality assessment that put Dan’s life expectancy at 9 years (age 75), the policy had a fair market value of $282,000. The policy was then sold to his Law Corporation. As the policy was just converted and there was no cash value, there was no taxable disposition on the transfer. His Law Corporation paid to him the FMV of the policy – $282,000.   Dan received this amount tax-free.

The window of opportunity may close on this at any time, so don’t delay if you think this is appropriate for you.

Call me if you think want to explore this strategy further.

FAMILY BUSINESS PLANNING STRATEGIES

Family Business Planning Strategies

67% are at Risk of Succession Failure

If you are an owner in a family enterprise, the likelihood of your business successfully transitioning to the next generations is not very good.  This has not changed over the years. Statistics show a failure rate of:

• 67% of businesses fail to succeed into the second generation
• 90% fail by the third generation

With 80% to 90% of all enterprises in North America being family owned, it is important to address the reasons why transition is difficult.

Why does this happen and what can you do to prevent it?

Communicate

Family enterprises are often put at risk by family dynamics.  This can be especially true if the family has not had any meaningful dialogue on the succession of the business. And, while we are throwing around statistics, it has been estimated that 65% of families have not had any meaningful discussion about business succession.

• Family issues can often hijack or delay the planning process. Sibling rivalries, family disputes, health issues and other concerns certainly present challenges that need to be dealt with in order for the succession plan to move forward.
• Many times a founder of a family business looks to rely on the business to provide him or her with a comfortable retirement while the children view the shares of the company as their inheritance.
• Sometimes an appropriate family successor is not readily identifiable or not available at all.

Decide

• In these times a decision needs to be made as to whether or not ownership needs to be separated from management, at least until the second generation is willing or capable to assume the reigns of management.
• If the founder needs to receive value or future income from the business a proper decision as to who is running the company is vital. If this is not forthcoming, then there may be no other alternative but to sell the company.

Plan

Tax Planning

When planning for the succession of the business an important objective is to reduce income tax on the disposition (sale or inheritance). One of the methods is to implement an estate freeze which transfers the future taxable growth to the next generation.  The corporate and trust structure utilized in this strategy may also create multiple Small Business Gains Exemptions which can reduce or eliminate the income tax on capital gains.

Just as it is important for a business owner to plan to reduce taxes during his or her lifetime, it is also important to maximize the value of the estate by planning to reduce taxes at death.

Minimize Management and Shareholder Disputes

This can be accomplished with the implementation of a Shareholders’ Agreement.   Often there are multiple parties that should be subject to the terms of the agreement, including any Holding Companies or Trusts that may be created to deal with the tax planning issues.  The Shareholders’ Agreement will include the procedures to deal with any shareholder disputes as well as confer rights and restrictions on the shareholders.

The agreement should also define the exit strategy that the business owners may wish to employ.

Estate Equalization

Often the family business represents the bulk of the family fortune.  There are times that one or more children may be involved in the company while the other siblings are not.  Proper planning is necessary to ensure that the children are treated fairly in the succession plan for the business when the founder dies.

One method often employed in this regard is for the children active in the business to receive the shares as per the will or shareholders’ agreement while the non-business children receive other assets or the proceeds of a life insurance policy.

Founder’s Retirement Plan

It is problematic that often a business owner’s wealth may be represented by up to 80% of his or her company’s worth.  It is important that the founder develop a retirement plan independent of the business so that his or retirement is not unduly affected by any business setback.

Protecting the Company’s Share Value

Risk management should be employed to provide for any unforeseen circumstances that would have the effect of reducing share value.  As previously mentioned, if the bulk of a family’s wealth is represented by the shares the family holds in the business, a significant reduction in that share value could prove catastrophic to the family.  These unforeseen circumstances include the death, disability or serious health issues of those vital to the success of the business, especially the founder.  Proper risk management will help to ensure that the business will survive for the benefit of future generations and continue to provide for the security of the founder and/or his or her spouse.

Act

Since the dynamics of family businesses differ between non-family firms, particular attention is required in the planning for the management and succession of these enterprises.  This planning should not be left until it is too late – it is never too soon to begin.

Please feel free to use the social sharing buttons below to forward this article to someone that you think might find it of interest. 

Don’t Let Your Family Destroy Your Business . . .

For decades, the Irving family’s sprawling New Brunswick empire operated without the internal turmoil that has afflicted, divided or destroyed other family firms. K. C. Irving’s three sons—John, James and Arthur—each ran distinct but complementary parts of the multibillion-dollar enterprise, which has interests in everything from energy to logging, shipping, agriculture and even retail.

But as the next generation of Irvings became active in various parts of the conglomerate, the vaunted unity of K.C.’s three sons began to fragment. According to the Wall Street Journal, cousins running different divisions refused to abide by the unwritten rule that Irving subsidiaries buy from one another. Simmering fights over money and control boiled over. Finally, in 2010, Arthur Irving moved to formally oust his son, Kenneth, over a legal dispute about a family trust. In the years since that castle coup, other fissures have appeared in the tightly controlled Irving universe.

READ: Despite Challenges, Majority of Family Businesses are Faring Well »

“The whole Irving story has exploded,” observes business author Gordon Pitts, who has written extensively about family-owned empires and how they crumble. “As cousins entered, it [got] much more difficult.”

Some of Canada’s bloodiest corporate battles have involved family members duking it out in epic rifts that enriched lawyers and filled the business pages with juicy corporate gossip. The eccentric Billes family offspring scrapped for years over the fate of the Canadian Tire chain before one emerged triumphant. Developers such as Vancouver’s Bentall clan and Ellis-Don, the London, Ont.-based construction giant founded by Don Smith, underwent wrenching fights as control either passed from one generation to the next. Perhaps most famously, the McCain family’s schism—pitting brothers Wallace and Harrison against one another—permanently severed Canada’s pre-eminent food processer.

READ: Don’t Let Family Ties Bind Your Exit Strategy »

Not all powerful business families implode: When Paul Desmarais died last year, his sons, Paul Jr. and André, succeeded in dividing responsibilities over the vast financial services firm with little evidence of acrimony. But even among less visible business families, the succession process often creates enormous friction. What should be an orderly handover instead produces lingering schisms, costly litigation and even the demise of the company that generated all that contested wealth in the first place.

New research identifies one reason the generational transition becomes so fraught: A huge number of family firms have no plans in place to handle it. A survey conducted this year by Canadian Business and Deloitte shows that only 17% of family-owned businesses in Canada have succession plans. Given the lack of preparation, it’s not surprising that only one-quarter of family businesses succeed in transferring ownership and control to the second generation, and only 11% make it to the third, says Michelle Osry, Canadian leader of Deloitte’s family enterprise consulting group. “It’s a sobering and stark statistic and should serve as a cautionary tale that doing nothing is a disaster.”

READ: Too Many Family Businesses Have No Succession Plan »

Osry and other succession experts point out that families are often sandbagged because they’ve failed to plan well in advance for a generational transition by creating an orderly, formal and, most importantly, consensual process to see it through. “We say formality is your friend,” she notes.

On paper, it’s crucial to begin planning for a succession years in advance of an exit or liquidity event, and while the founder is still healthy. But in closely controlled private firms with an autocratic leader, it’s not always clear how those conversations begin if the founder doesn’t want to engage with other family members. “A lot of owners are the smartest person in the room,” says Jacoline Loewen, an investment advisor at UBS Canada. “They find it very difficult to let experts help them.”

READ: Most Canadian SMEs Don’t Have Succession Plan »

David C. Bentall antes up his personal story to illustrate the point. His father, Clark, and two uncles, Howard and Robert, owned the powerful B.C. builder The Bentall Group, which built much of Vancouver’s Class A office space in the 1960s and 1970s.

“It was a very happy and successful collaboration between three brothers for almost four decades,” David says. “[But] it didn’t end well. They never thought about what the endgame was.”

Clark wanted to pass the company’s leadership on to David, his son, but the other brothers disagreed with that plan. The core point of friction: whether the firm should pass to family or professional managers. Clark and his family lost out in a 1996 battle, which saw the company sell a 57% stake to Quebec’s Caisse de dépôt. “That was a pretty sad ending,” says David, who now runs a Vancouver-based succession-planning firm.

Osry advises clients to hold quarterly family meetings to hash out what she describes as a “family constitution”—a kind of mission statement that lays out high-level values and principles, but also articulates protocols governing the distribution of dividends among shareholders and employment rules for family members.

She cites the example of a recent client, a private B.C. firm with $400 to $500 million in annual revenues, and which is controlled by the third generation. As a result of a decade-long succession planning process, the 17-member family established a retirement fund for the founder, and then undertook a gap analysis to determine which skills were lacking among the members of the next generation. As a result, Osry says, the firm ended up going outside the company to hire a CFO. The clan also developed eligibility criteria for family members who want to join the company. “They strongly believe [the children] have to earn their way into the business.”

READ: Family Businesses at Risk »

Proper governance is also a “huge issue” for private firms, and plays an increasingly critical role in creating a framework for a smooth transition, observes Eileen Fischer of York University’s Schulich School of Business. As with boards for public companies, she says firms are well advised to adopt best practice governance principles, including a board with independent, qualified and properly remunerated directors who bring a range of specializations to the task of oversight.

Well-governed boards have an enterprise risk committee with responsibility for building a succession plan that enjoys broad buy-in. Those directors, Fischer says, should be creating contingency plans if the founder dies before a family successor is ready to assume a leadership position. Most importantly, an independent board can also deliver difficult news to the founders—for example, that an entitled heir apparent may lack the necessary skills to run the company.

READ: How to Tell If Your Kids are Ready to Take Over »

Besides figuring out whether a family member can take over the company’s operations, succession advisors say clans must also come up with a consensus about a transfer of ownership, as well as implement a plan that allows the founder to extract their equity from the firm. If a founder won’t relinquish their majority ownership position to the next leader, Fischer says, “There’s always going to be that power imbalance. You can’t have two generations running the company for any length of time. It just doesn’t work.”

Perhaps, but in an era when people are living and working into their 70s, family business may have to rethink more traditional notions of a crisp handoff. In some cases, family firms should be thinking about “intergenerational partnerships,” which see parents and adult children sharing managerial authority for an extended period—perhaps as long as 10 or 15 years. It’s the sort of arrangement that appears to have worked well for a number of The Rich 100 families, including the Saputo, Weston and Desmarais families, all of whom brought children into the business well before the founders stepped back. Bentall cites one client—a family firm run by a father and two daughters—that didn’t want a succession plan but rather a partnership strategy. “That’s a big shift in thinking.”

READ: A Second-Generation Success Story: Linda Hasenfratz at Linamar »

But increasingly, those kinds of lengthy timelines may not be realistic, Pitts says. As the business and technology cycles accelerate, fewer family businesses are surviving over the long haul. “The issue isn’t the future of the family business, but rather how the business family proceeds into the future.”

That’s a top-of-mind question for Larry Rosen, who in 2005 assumed managerial control over the upscale menswear retailer his father Harry founded in 1954. Now the managerial shoe is on the other foot as Larry ponders his own retirement and the potential role that his own sons—all in their 20s—might play in the business. Reflecting on his own entry into his father’s business, Larry feels the process should have been more formal. Not everyone has an entrepreneurial mindset or management skills, he says. “You can have a son or daughter who is as smart as a whip but is not suited to be in management.

READ: How to Revitalize the Family Business »

“When I step down, I want to make sure that the successor has been objectively assessed,” he says. “I have to do what’s right by the business.”

This article is from the Winter 2014/2015 issue of Canadian Business.