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holistic planning
ISTOCK.COM / MEDIAPHOTOS
capital gains exemption when you sell the business. If Wil- son is the only owner right now, he only gets one exemp- tion. It may be possible to do an estate freeze and get her in as a shareholder so she can participate in future value increases and get the capital gains exemption as well.
Assuming he owns the entire company, he can take his shares and transfer them. Essentially, he converts his ownership, which is presumably common shares, into
a combination of common shares and preferred shares, which have a fixed value. Natalia can buy the company’s common shares at a nominal price because he’s essen- tially locked up all the value in the preferred shares. Then, she participates in future growth, and there’s a chance of getting a second capital gains exemption.
Retire now or wait?
SL: Given the uncertain value of Wilson’s business and the steadiness of Natalia’s pension, Natalia may look to delay retiring. She’s 60 now, and waiting five more years adds another 25% to her pension. Over a lifetime, that could cover a potential decline in value of Wilson’s business.
FR: But she’s expressed she wants to retire. It really comes down to a financial decision: number-crunching, running projections and best-case/worst-case scenarios. Does she want to leave a lot of money behind? Do they have a big tax bill? If they don’t have a large liquidity need in their estate, then maybe they have enough to retire.
If Natalia does retire, it would be prudent to consider the asset mix of her and Wilson’s investments. Is she going to be drawing from those funds through retire- ment? If yes, she may want to reduce the volatility of her portfolio by reducing her equity exposure and increasing the weighting to fixed income or cash-like investments.
Now is the time to dissect his business and determine where the value is
I always say to consider the amount of return that’s needed to meet your investment objectives, and then compare that to the risk you’re taking. So if a 3% rate of return is needed to meet her objectives, then does a high-risk portfolio targetting 8% make sense?
SL: With the onset of Covid, we have seen a pretty sig- nificant drop in interest rates, which has penalized savers. So when they look at their projections, they may have to reduce the rate of return expectations for the foresee- able future. It may force them to take more risk and go into equities because they’re not going to get much in fixed-income returns. It could put them behind from a cost-of-living perspective because, when you factor in inflation and cash, they’ll have less purchasing power. BB: They’re still young. At 60, I’m not sure there’s enough if she retires now. So I agree: do the cash flow calculation, but 25 to 30 years is a long time for that amount to last.
SL: They can do a sensitivity analysis projection. If Natalia retired today, if Wilson sold his business today, these are the assets they would have, and they can run a sensitivity analysis based on rate of return on this capital. Pick your number: 3%, 5% or 7%. That tells them the amount of income after tax they would generate to sup- port [their] lifestyle.
At the same time, do some planning around the type of lifestyle they want to lead and can lead based on the capital today. With that information, it may help them make a decision. Does it make sense to postpone retir- ing? Does Wilson sell today or look to enhance value? BB: The key things for Natalia and Wilson are to figure out how much they’re going to need, how much they think they’ll be spending, and also any planning they can do to improve the ownership structure of the business. AE
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