Estate and succession planning

Estate and succession planning
Kevin Keith - 8, 2007

Estate and succession planning are topics that are receiving significant attention. Many organizations have done studies and have published materials on the importance of succession planning, but also on the lack of it being done properly, if at all.

With a transfer of business assets or at the time of your passing there are a number of events happening, and with proper planning, large problems can likely be avoided. Estate planning usually refers to how you plan for the distribution of your estate assets and liabilities. The first step in successful estate planning is to have a will. Your will designates the person that will be the executor of your estate. This person is responsible to file your final tax return(s), ensure that all debts are paid for, ensure that all remaining assets are distributed to the rightful beneficiaries, and take care of the funeral arrangements, among a long list of much more. It could be beneficial to name more than one executor in case your first choice is unable to assume the responsibility or passes before you do. It may make sense to ask the individual that you would like to name, to ensure that they will accept the job, as acting as an executor can be a large responsibility.

Your will also lists who the beneficiaries are of your remaining assets, and who is to receive what after your passing. I suggest that you use a lawyer when drawing up your will. No exception. Should you not have a will or your will not be completed properly, the government will decide how your assets are distributed and your last wishes will go unheard.

Succession planning usually refers to the process that you go through to decide who will be carrying on farming operations or other businesses. The decision as to who is going to take over can be (likely should be) discussed prior to your passing. Hopefully this will reduce any friction between children as the issues will be discussed prior to your passing. They will have the ability to voice their opinions to you, and you will be able to take their opinions into account when drawing up your will stating the succession plan you want to have in place.

There are a number of ways to distribute your assets. In the case of passing on a family farm to children a number of issues can arise. Such issues could be that one or more children want to operate the farm while others may not. These are standard issues that will need to be addressed. Options such as insurance policies, use of non farm investments, and rollovers of the farm property can help with carrying out your plans. For example, you have two children. One child is interested in taking on the operations of the farm, and your other child would rather have their share in other investments. You could leave the farm to the child that wants to continue the operations, and then have this child take out a loan to pay the second child their share (not necessarily an equal share) of the value of the farm. There are borrowing costs associated with this, and there could be the issue of the child inheriting the farm property not being able to obtain a loan of that size.

Another option is to take out an insurance policy or build up non-farm investments now, in the value that you want left to the non-farming child. At the time of your passing the child that wishes to continue the farm operations will receive the farm, and the other child will receive the non-farm assets. Yes, this costs money now to set up the insurance policy or save funds, however the cost of borrowing in the future is eliminated for the child inheriting the farm property. Fortunately, the income tax rules provide good flexibility for transferring farming assets to children. One option is to rollover the farm property to the children while you are still alive. The transfer can be made as a gift, or for consideration of cash or a note. You can transfer the farm property to your children at any value between the original cost and its fair market value. Depending on transfer structuring, this can trigger a capital gain in your hands. If the property is considered to be qualified farm property, you can use your $750,000 lifetime capital gains exemption to exempt yourself from paying taxes on any taxable capital gain. This will likely lower the tax burden for your children in the future. Another option for distributing your assets is the use of a trust. There are two kinds of trusts. An inter vivos trust is set up while you are still alive and a testamentary trust is set up upon your passing according to the wishes of your will. With the use of a trust you can stipulate who manages the income within the trust and withdrawals from the trust. If you are leaving assets to children, you can stipulate an age at which the children can withdraw funds from the trust.

Spousal trusts can be set up which involves a transfer of assets into trust for your spouse. In order to set this up without income taxes applying, only your spouse will be able to withdrawal income or capital from the trust. When your spouse passes, the trust and all the assets in the trust can then be transferred to your children.

This is a brief description of some of the issues to consider when planning for your passing. It is advisable to discuss your estate and succession planning with your lawyer, your accountant and other advisors, as they will be able to guide you in the best direction.

KPMG Lethbridge kkeith@kpmg.ca