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Insurance and
the business owner
Use these tips to help ensure
your clients have effective coverage BY MICHELLE SCHRIVER
Your business-owner client has many planning needs, from estate-building to managing passive income lev-
els to covering capital gains upon death. Insurance can be part of the solution.
If a business owner owns real estate that will have huge capital gains, they have a liquidity problem that insurance can solve
retirement and estate planning services at Kingston, Ont.-based Empire Life Insur- ance Co. in Toronto. The shareholders’ agreement should explicitly state whether a policy’s proceeds are to go toward buying the deceased’s shares, whether the capital dividend account (CDA) can be used to buy
“We have a tremendous opportunity
to use life insurance to preserve a client’s
wealth, and [for] tax planning and risk management,” says Garry Zlotnik, chair and CEO at ZLC Financial in Vancouver.
Buy/sell agreements, liabilities
Funding a buy/sell agreement using insurance allows the business owner to redeem the shares of a deceased, disabled or retiring third- party shareholder.
“Life insurance does a great job of providing that injection of cash when that event happens,” says Joël Campagna, assistant vice president of regional tax and estate planning, individual insurance, at Toronto-based Manulife Financial Corp. in Waterloo, Ont.
Problems can arise when a shareholders’ agreement is incomplete. “A lot of companies have unsigned buy/sell agreements,” says Cindy David, president and estate planning advisor at Cindy David Finan- cial Group in Vancouver.
Other agreements aren’t explicit about using capital dividends, which are tax-free, to buy the deceased’s shares. If a taxable dividend is issued for the shares instead, the deceased’s estate will be on the hook for the associated taxes.
“Make sure there’s clear documentation on the use of corporately owned life insurance proceeds,” says Peter Wouters, director of tax,
those shares and to what extent, he says.
When you discuss buy/sell details with a client, you open the door
to connecting with the client’s accountant and lawyer, Wouters says, thus helping to prevent drafting errors and omissions. Financial advisors can help ensure that the terms and objectives of the share- holders’ agreement co-ordinate with the client’s will, he says.
Making sure that a shareholder’s liabilities, such as lines of credit, are repaid upon death may also be a concern. Creditors may want
to recall or restructure loans when a shareholder dies, Wouters says. Shareholders’ agreements should include which liabilities will be covered by a policy’s proceeds, he says, and note the order in which the liabilities should be paid.
For a legacy business that will pass on to the next generation, a buy/sell agreement may best be funded with permanent insurance, Zlotnik says. Otherwise, term insurance can cover liabilities such as debt. “They’re often short-term needs,” David says.
Wouters suggests that advisors periodically stress-test the liability funding amounts, shareholders’ agreements and the firm’s corporate structure to ensure they continue to serve the company’s objectives. The Income Tax Act could change, for example, or the capital gains rate could increase, rendering existing planning ineffective.
20 Investment Executive’s Insurance Guide 2020
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