Episode 28 - Essential Estate Planning for Business Owners with Steve Parr

Apr 3

This week, Nicole and Greg welcome Steve Parr, a lawyer and founder of Parr Business Law, to discuss estate planning for business owners. Steve emphasizes the importance of addressing succession planning, incapacity, and death to ensure business longevity. He outlines key components of a succession plan, including identifying successors, training, business valuation, and essential legal documentation. The conversation also covers various exit strategies and tax planning tools like estate freezes and life insurance. Steve encourages early planning and collaboration with knowledgeable advisors to protect assets and ensure a smooth business transition.

Transcript:

Nicole 00:00:02 Hello and welcome to your Estate Matters with your hosts, my colleague Greg Brennand and myself, Nicole Garton of Heritage Trust.

Greg 00:00:09 Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy.

Nicole 00:00:16 If it's estate related, we'll be talking about it. We're having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow.

Greg 00:00:34 With us today on Your Estate Matters is Steve Parr lawyer and founder of Parr Business Law. Steve Parr is an estate planning corporate lawyer who founded Parr Business Law in 2017. She focuses on supporting business owners with their estate planning needs. An entrepreneur at heart, Steve founded and sold a vacation rental company before launching his law firm. Steve earned his law degree from the University of Victoria in 2014 and holds a BA in Women's Studies. Steve is a member for the Society of Trust and Estate Professionals. STEP, a certified executor adviser and help support and mentor other lawyers through Boutique Counsel Network. Steve, thanks for being with us here today to talk about estate planning for business owners.

Greg 00:01:22 Tell us about yourself and your journey to your current role as a lawyer and founder of Parr Business Law.

Steve 00:01:27 Sure thing. Thanks so much for having me. So I'm a lawyer and I started eight years ago. My journey into law was a little bit unorthodox. I started a property management company after graduating from law school and getting called to the bar, and I ran that for a few years. And so by that point, I was surrounded by a lot of entrepreneurs, and I realized I wanted to start a business law practice. So I started Parr Business Law eight years ago and then grew it into an estate planning practice as well in the years to follow.

Nicole 00:01:53 So talking about business owners, many business owners delay talking about succession and what will happen if they become incapable or passed away. So how do you help business owners get started talking about these issues?

Steve 00:02:07 I try to confront the business owners with reality as best I can and as gently as I can. Because of course, the reason that people don't talk about these things is because they're uncomfortable.

Steve 00:02:17 Nobody wants to consider the fact that they might get hit by a bus, or that they don't know what's coming from them around the corner the next day. But unfortunately, it's the reality that all these things will inevitably occur in our lifetimes. And so the best thing to do is to start thinking about them as quickly as you can so that it just becomes normalized. When I'm talking about incapacity and planning for death. I think it's important to start with incapacity first, because of course, that's something that you can kind of get your head around a little bit more quickly, and it begins to acclimate the client to the notion that they need to plan.

Greg 00:02:52 Right. So many business owners really considering what will happen to their businesses if they did become incapable or passed away. But what are the main things to consider for creating a business succession plan in the event of passing away or incapacity?

Steve 00:03:06 So there are so many things to consider. Really, you just need to get started on it. But some of the main components are taking stock of your business.

Steve 00:03:15 Taking stock of what the plan is for the next five years, ten years for your business. What do you think is likely to happen in the marketplace? And then considering who might be a suitable successor? It obviously depends on the size and the complexity of the business. If it's a small owner operated business, and that is one thing that might not be able to be effectively transitioned to the next generation. So in that case, there should be a plan in place to cleanly and neatly wind it up and be able to distribute any kind of proceeds and retained earnings from the business to the estate. Because many businesses, of course, depend upon the face of the owner. But if it's a more complex business, a business that has ongoing business concern and has multiple employees and key accounts. Then you need to consider, well, who might take this over? Does somebody in the family want to take this over? Do they have any interest in that? Start having those conversations as quickly as you can. And if there's nobody suitable within the family, then employees you can consider a management buyout or of course, a sale to a third party.

Greg 00:04:16 Do you ever have to do shock therapy with them and actually show them that if you passed away leaving my office, this is what this would look like tomorrow?

Steve 00:04:24 Absolutely. That is a really good way of confronting them with reality, as we were talking about at the beginning. And again, that's why I start the conversation with incapacity planning, with the conversation of what happens if you get hit by a bus as soon as you walk out of the office? What does it look like today? And even just turning their minds to simple, very practical things like who has access to your email? Is anybody going to be able to log in? Do you know how complex it is to actually get access to. You can't just hack into Google. These are not simple things that it would be an absolute nightmare for somebody to have to navigate that. So then you just start the conversation there and then turn your mind to. Okay. Signing an authority on bank accounts. Who has access to that? Is there an appropriate shareholders resolution that your lawyer holds and is going to be able to present that to the bank so that they can actually pass over signing authority to the next representative, and then thinking about contacts with key clients, with customers, with employees, all of them really should be sensitized to the fact that, okay, if X happens, here's the plan.

Steve 00:05:21 You know, their introduction to that plan shouldn't be at the moment that the unfortunate event happens. Ideally they're sensitized to it beforehand.

Nicole 00:05:30 So let's summarize what some of the exit strategies are I think you referenced them earlier.

Steve 00:05:36 Yeah. So I mean it's summary it's wind it up close down the business. It's sell it to a third party whether it's that's during your lifetime or if it's upon you passing away, it's passing it over to a family member or having doing a management buyout. So having employees purchase it, if employees are purchasing it, generally it's going to be done by way of a vendor take back. So the vendor is going to be yourself that you're going to be responsible for some of the financing. There could be interest attached to that so that it's economically advantageous to you. This can also be a good way of receiving the money over time, so that you're not hit all at once with a huge capital gain. And it can also incentivize the employees to work at it assiduously and diligently, to ensure that they have the funds that are necessary to be able to effectively take over the business.

Steve 00:06:25 An employee management buyout, of course, can be a great way to incentivize loyalty and performance from your employees, of course, to.

Greg 00:06:32 As part of this process, you must bring in like business evaluators or such as that done right at the beginning just to let them know what does this look like? Obviously you would need it for the selling.

Steve 00:06:42 Yeah. I mean, of course you're going to need it when you sell. And valuation, particularly for larger companies, is going to be a point of contention or it can be a point of contention. So oftentimes the various parties will have their own independent validators, and there's going to be some sort of agreement about what the actual valuation would be. A valuation is often done as well, even if there's not a imminent sale or a planned sale in the works. And I'm thinking in particular when you're doing an estate freeze. So for your listeners, an estate freeze is a technical term that gets tossed around a lot, but it's essentially a way of when the owners are in a position that they have said, we're ready to start thinking about the transition of this business to the next generation, and we want to have a clear sense of what our eventual tax liability is going to be, because, of course, private company shares, when somebody passes away, who holds private company shares, that's going to trigger a tax gain.

Steve 00:07:36 There's going to be a capital gain that's going to be due on the value of those shares. And if a company today is worth $10 million, but has the trajectory to be worth $20 million in the next ten years, the business owners may want to lock in the tax liability at the $10 million mark today and trade their existing common shares for preferred shares. And then what happens to the common shares after that is that they can be subscribed for by other parties. So typically the people who are going to be taking over the business. So whether that's the employees or the family members, so that the future tax liability is rolling over them.

Greg 00:08:12 So that's a key tax strategy. Is there any other tax strategies other than that particular one.

Steve 00:08:18 Sure. Yeah. So I mean that's an important tax strategy. And just to sort of elaborate on that a little bit after that estate freeze is done, there may be subsequent freezes that are done as well, because perhaps you have taken some additional common shares, some smaller portion of the business and continue to remain involved.

Steve 00:08:36 Those may need to be refrozen again after that's done, then there's going to be oftentimes what you're going to do is think about wasting that freeze. So you've got that $10 million. And forgive me if I'm getting too deep into the weeds, but you've got that $10 million of common shares that you've exchanged for preferred shares. You're going to whittle down that liability over your lifetime. So if you've got that $10 million of preferred shares at age 65, then you might think about redeeming some of those shares each year so that the eventual tax liability on the disposition of the preferred shares is going to be significantly less at the date of death. That's one thing to consider. Other ways, of course, of reducing the tax liability at death is to make gifts during your lifetime. So what we call inter vivos gifts, other methods are to think about life insurance, of course. So life insurance, of course, is a key strategy for dealing with an anticipated tax burden at death, right?

Greg 00:09:32 That one seems to be missed a lot.

Steve 00:09:34 Yeah, it does get missed a lot. Yeah. Oftentimes people think too late about life insurance. Much more expensive. If you have pre-existing health conditions, you may not be able to get it at all. If you are over a certain age, it may not be financially practical to obtain. I'm sure you will have guests or have already had guests on your podcast who can speak in much greater detail about the various types of life insurance. It's a fairly complex topic, but there's term insurance and then there's whole life insurance. And both of these routes should be explored with your life insurance advisor. But the short of it, and this is something that I try to convey to my clients all the time, is that life insurance is really dollar for dollar, the most cost-effective way to deal with that liability. If you have a $5 million tax liability facing you down, you know, if you don't deal with it through life insurance, then you're going to be dealing with it through the sale of your company, the sale of other assets that you own that you may not want to have to liquidate.

Steve 00:10:25 So real estate whatnot. Yeah.

Nicole 00:10:28 So you've talked about some strategies like estate freezes and life insurance. Do you want to chat about multiple wills?

Steve 00:10:34 Yeah of course. so multiple wills are also referred to as corporate wills or restricted wills. For some reason. There are many different terms to refer to the strategy, but it's an idea that came out of Ontario and got adopted and into British Columbia. And the concept is, is that you have your primary will And then you have a secondary or a corporate will. So this is to avoid probate tax on the assets that can be conveyed through the secondary will. So if you have a secondary will then that will allow you to avoid the 1.4% probate fee or probate tax, which is really advantageous when the value of those shares starts to really get up there. If they're worth $10 million, and that's a savings of $140,000. And the nice thing about corporate wills is that it's much more administratively straightforward to put that in place. The work with your legal professional, with your lawyer, and with your accountant is not that complex to make it work.

Steve 00:11:29 There are a couple of nuances. You need to have different executors for your primary will and your restricted or your corporate will. But beyond that, it's fairly straightforward. And you don't have to do any sort of annual filings to, to maintain the registrations. That's a really common approach. The other benefit of that is continuity. So when you have a corporate will in place, then the private company shares are going to be transferred to the next generation immediately, so there's no need to obtain probate. It can be a much more streamlined process. Yeah.

Nicole 00:11:57 So we've talked about a number of sophisticated strategies. So someone's just getting started. What basic documents should business owners have in place.

Steve 00:12:06 The will of course. So absolutely everybody needs to have a will the will the power of attorney and the representation agreement are sort of the three basic building blocks of any estate plan. A power of attorney is, of course, especially important for a business owner, because there's going to be an immediate need to deal with business and legal and financial matters.

Steve 00:12:25 Should and incapacity event occur for business owners. They may wish to consider creating two different power of attorney documents. So you might have what's called a, you know, a general power of attorney, you know, to deal with things like your own personal financial matters. So things like dealing with your financial advisor, managing your real estate, your personal life. And then you may wish to have a separate business power of attorney, where you would appoint that responsibility to somebody other than your spouse. Typically, most individuals are going to appoint their spouse or a sibling or a close loved one as their attorney. If they don't have somebody like that, then of course they would consider appointing a trust company such as Heritage Trust. But on the business side, it may not be appropriate to give that responsibility to your spouse. You have business partners that you want to consider, the practicalities of undertaking that and just how much work that would require. So again, that's something that you might want to refer to a corporate power of attorney.

Nicole 00:13:18 So speaking of business partners, do you want to talk to our listeners about shareholder agreements?

Steve 00:13:22 Yeah, absolutely. So shareholder agreements sometimes people refer to shareholder agreements as buy sell agreements too. They're not exactly synonymous. It's more like buy sell agreements or part of a shareholders agreement, but a shareholder agreement. I try to explain it to my clients as a type of will for your company. So it does cover a lot of different areas. But the part that we're focused on today is what happens if you pass away, or what happens if you become incapable or disabled and unable to participate in the business any longer. So if you have multiple business partners or even just one, it's really essential to have a shareholders agreement in place. Because absent that, if you and I were to be in business together and I were to pass away, then you would effectively be in business with my state so I could be my spouse. Or it could be, you know, whomever is in my state and is my what's called my personal representative would effectively be your business partner for, well, until you buy me out.

Steve 00:14:17 And if you don't have the funds to buy me out, then the business could be at a real standstill. And this could well mean and often does mean the end of the business. So to avoid that and to preserve the value that has accrued inside of the business, then it's really important to have that shareholder agreement in place and then be to have insurance in place. So again, they're generally these are going to be what are called corporately held life insurance policies. And these life insurance policies are going to pay out Payout to the company, so the company would actually have the funds to be able to purchase out the shares held by the estate of the deceased. So that would enable the company to proceed and provides money liquidity to the estate. So it's the best outcome of a bad situation.

Greg 00:15:04 And when we were talking about the wills just before that, many of your clients may be operating in different provincial jurisdictions or even cross-border. That's right. Yeah. And should they have documents for those particular jurisdictions?

Steve 00:15:17 Absolutely.

Steve 00:15:17 Yeah. Unfortunately, the world is complex and operating across multiple jurisdictions and owning property. There's a different set of laws to govern all of these complexities. So yeah, generally the wills that we draft are going to govern assets that are only in British Columbia. Because to provide one simple example, in Canada, there's no inheritance tax. There is a deemed disposition of death which has a similar function. Whereas in the US there is an estate tax. So the whole taxation regime is completely different in the US than it is in Canada, and there are mechanisms for dealing with estate planning that are completely different in the US as well. There's trusts and there's types of trusts that we don't have here. For example, if you are doing business or owning property across multiple jurisdictions, whether it's provincially or across international borders, then absolutely, you need to have counsel that is either able to work cross-border or have counsel in multiple jurisdictions who are familiar with working with other advisors.

Nicole 00:16:17 So speaking of advisors, you're obviously a very knowledgeable business lawyer.

Nicole 00:16:20 What other professionals should business owners think about working with.

Steve 00:16:24 Ones that they really enjoy working with would be a great start. So I'll come back to my first point, which is that you got to feel comfortable talking with your advisor about this stuff. If you feel like you're watching paint dry when they're speaking about this stuff, then that's a problem because these are complex things that require your engagement. So work with an advisor that of course, you trust and absolutely must be knowledgeable about the area that you are looking for advice in, but somebody that you have some rapport with and that you feel is going to be able to work effectively with you and possibly with the next generation for decades to come. But to answer your question more directly and in terms of the types of advisors that you want. Obviously you need a lawyer. Whether it's a corporate lawyer or an estate planning lawyer. You'll need both, really, or somebody who can function in both of those roles. You'll need an accountant who is familiar with this type of area as well.

Steve 00:17:13 So somebody who does work with estate planning and then of course, comfortable on the other side of things with dealing with the state administration and the kinds of special tax strategies that come into play, because there is particularly with private company shares, there is some complexities there. There's things like lost carry back planning. Anyways, I'm not going to get into the weeds with the tax specifics, but there are real complexities that, if they're not properly attended to, can result in double taxation for the estate. So a knowledgeable accountant, a life insurance advisor, a financial advisor, sometimes financial advisers will both deal with insurance and will also manage your wealth. I.e. the money managers. So those are all important components. And then of course somebody who is going to be evaluator as well for valuing your shares of your business. And then beyond all that, somebody with business savvy. So that may well be one of those foregoing advisors. But oftentimes it's going to be somebody who's a specialist with business succession, because it really is a very specialized area.

Steve 00:18:15 And especially if you're considering selling, doing a management buyout, if you're considering selling to a third party, you're going to want to engage a broker, you're going to want to engage somebody who can help you maximize the value of your business and advise you on the changes that you might want to make to maximize it. You know, business owners, people who are purchasing businesses are going to want to have a turnkey experience as much as possible. That's going to help you maximize the value of your business. So there are a lot of things that you would want to do as a business owner to make sure that happens.

Greg 00:18:44 Any final tips for our listeners?

Steve 00:18:46 Yeah, absolutely. Don't delay. Get started it. Don't be daunted by the amount that we've talked about today or the complexity of it. Just get started and find people that you are comfortable working with. If you're not comfortable working with them, if you're not comfortable picking up the phone and chatting your ear off about any kind of concerns that you have, then they're not the right people.

Steve 00:19:07 It's kind of like, you know, if you're looking for a good therapist to work with, therapy is hard. You're never going to do it if you don't enjoy working with a person and feel a sense of rapport. It's not really that different when you're thinking about your business. This is a very intimate subject, and you've got to be working with people that you like and you trust.

Nicole 00:19:22 Well, this is very apropos because we were just speaking to a financial therapist. Oh, really? Yes. Thank you so much for all your valuable insights. And how can our listeners find you?

Steve 00:19:34 I am online at Parr Business Law. If you just search for business law, you'll come across me. There's a lot of different ways to get in touch. My business, of course, is www.parrbusinesslaw.com and, Yeah. And I would encourage your listeners to check me out on YouTube. I share a lot of tips on my YouTube channel.

Nicole 00:19:51 Thank you so much.

Steve 00:19:52 Thank you so much for having me.

Greg 00:19:52 Bye bye.

Nicole 00:19:53 This podcast is for informational purposes only and should not be considered individual, legal, financial, or tax advice. Make sure to consult the advisor of your choice to advise you on your own circumstances. Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice.

Greg 00:20:16 Whether you are planning your own estate or you're acting as executor for somebody else's. Heritage trust can help partner with Heritage Trust to protect your family, your assets, and your legacy.

Nicole 00:20:27 If you would like more information about Heritage Trust, please visit our website at Heritage Trust Company.

Greg 00:20:40 This podcast is produced by Pod Father Creative.