How an interdisciplinary team help your business clients

'It's better to do the upfront planning than untangle the back-end mess', lawyer says

How an interdisciplinary team help your business clients

Everyone on business clients’ teams – advisors, lawyers, accounts, and other professionals – should work together up-front to establish financial and estate plans and ensure everything unfolds smoothly when they must execute those in a sale, generational transfer, or divorce, says one advisor

“About half of the businesses have no planning done whatsoever,” Nick Fabiano, Canada Life’s director of tax and estate planning told a recent Canada Life webinar on estate planning.

“When you look at business succession planning, there’s a lot of considerations that you have to look at, like: Do they keep the business? Do they sell it? That’s a big one as a lot of parents just want to leave the business to their kids. But, there are times that it makes sense both for the family and the business to sell it to a third party.

“When we look at the survey results, the majority of business owners will tell you that they want to pass it on. But, the stats are also showing that a very, very small percentage of these businesses pass the third generation. So, there’s a bit of a disconnect, and I think a lack of planning is part of that,” said Fabiano. “Whether it’s the accountant, lawyer, or financial advisor, we all have a role to play in getting these business owners thinking about these kinds of questions.

Fabiano attributes the lack of planning to people’ fears about handling the softer issues, such as when they want to transition the business, and which child, or children, they want to take over the business.  If there’s more than one child, there’s also the question of who is going to do what role and take on which responsibilities and how that will impact the family’s dynamics.

He noted that the business’s value is also tied to the estate plan as it may represent most of the owner’s wealth, so the way the owner exits matters. That’s particularly true for managing the tax bill and planning for retirement, and advisors can suggest a variety of options.

Heather Hansen, a lawyer and partner at McCarthy Hansen & Company LLP, agreed, noting that having all of that spelled out at the front end of the process is helpful at the back end of a divorce, business sale, or intergenerational transfer.

“Unfortunately, the reality is that far too often, when I meet people in my office, I’m meeting them on the wrong end, when they wish they had done that planning at the front end,” she said. “I know, as Nick was saying, these soft issues are hard conversations for clients. But, the reality is, for many Canadian families who are operating a business, we really do need to start injecting that idea of what happens if there’s a marriage breakdown into those conversation or a new generation of children is coming into the business.”  

Hansen said the inter-disciplinary advisory team could consider a variety of options that also the Family Law Act into account. One idea is an estate freeze, which can aid intergenerational transfers.  

“Depending on how you construct your structure, you may intend to give the gift to the next generation, but not give it in a way that protects it for family law purposes. So, the children then are not only saddled with their status as a beneficiary, but also perhaps with unintended consequences in the event of their separation,” she said.

Many children also don’t know that they’re holding an interest in a trust when they get married. “So, partnering with financial advisors and accountants early on and having these advisors broach these difficult topics from a family law perspective can make the world of difference on the other end,” she said.

Consulting up-front with a business owner’s team would allow it to create a pre-nuptial agreement to be used in a separation or divorce or a domestic contract for the intergenerational wealth or business transfer. But, she noted it would also reduce the owners’ tendency to do “funny business”, when they cook up ideas, like hiding assets in others’ names, that they think will help, but don’t. 

Steven Albiani, managing partner at Stratum Advisory Group Inc., said it’s also important to ensure clients’ plans are up-to-date since they may structure them while they’re accumulating wealth, but not considered how to transition their wealth. Advisors can then ensure the owners’ plans, wills, and insurance are all up-to-date.  

“It is multi-disciplinary, so you have to have the advisors at the table working at it,” he said. “We can say, ‘what you’ve done in the past was probably for a good reason, but things have changed. It’s an ever-evolving process. So, let’s keep the good things and see what value we can provide for you and your family since every family is different.

“Information is power. So, if you can put yourself in a trusted role as an advisor, they can share some information and we can liaise with other advisors. If we can gather information, then we can try to bring some good value ideas to them because often, we see people have lots of good things done, but there’s something else they can be doing.”