You spend all your life building estate, be it property, a brand, or a company. But the truth be told, your property will outlive you, and if you don’t plan its transition, most of it could go to the Canada Revenue Agency’s tax vault. Unfortunately, many people confuse estate planning with succession planning when it comes to the transfer of assets. Even though estate and succession plans are inter-connected, they are different in their objectives and execution. 

This article will discuss how estate planning and succession planning differ.

The Objective: Estate Planning Vs. Succession Planning

In layperson’s terms, estate planning is all about who will cry when you die. The estate plan lays out the distribution of all assets to the immediate family or the next two generations (grandchildren). Assets include property, family heirlooms, gold, antiques, cash, investments, car, and company or companies run by the family. 

The end objective of an estate plan is to tax-effectively transfer ownership of assets to the family after the owner dies. You may also transfer some assets while still alive in certain situations. Your financial advisor will guide you on this aspect.   

A succession plan, on the other hand, is a retirement plan or an exit strategy for small business owners. It charts out a plan for what happens to your operating business when you retire or die. 

While estate planning has a broader scope in terms of assets, a succession plan has a deeper scope in the transition of an operating business that has employees, suppliers, and customers and is a source of income for many. The objective of a succession plan is to lay down details of who becomes the owner, the leader (CEO), and the management of the company. Moreover, it looks beyond the family and includes employees who can run the business successfully after you.

If your wealth is above $1 million and includes assets other than an operating company, you need estate planning. But if your wealth has business and other assets, you need estate and succession planning. 

The Execution: Estate Planning Vs. Succession Planning

As the objective is different, so is the execution. The implementation of estate planning involves legal documentation such as a Will, Power of Attorney, or disposition of assets. But if your estate is in the millions, a trust is a more tax-efficient vehicle to execute the transfer of your estate. As it is up to the owner to determine who gets what, estate plans are often made in a vacuum. 

But business succession plans are made in the open as successors are trained for years before the transfer of ownership or leadership position. The implementation of succession planning involves a business plan that answers some pressing questions: 

• Who will own the business after the exit of the small business owner?
• Who will lead and manage the business?
• How to carry out future business operations?
• How does the exit of the owner impact the company’s finances?

If there is no appropriate candidate in the family to run the business, the succession plan could appoint a CEO, and the legal heir could retain ownership rights. If there is no heir, the business owner could sell the company and become a non-voting preference shareholder to earn dividends throughout their retirement. A succession plan could include many permutations and combinations, depending on the situation.

The business owner can alter the estate and succession plan anytime before the trigger event (death or retirement).      

Inter-Connect Between Estate and Succession Plan

While estate and succession planning are different, they are also inter-connected, which creates confusion. A good estate plan outlines a succession plan, which means the two plans should be developed in sync.  

Another important link between the two plans is the life insurance policy of the small business owner. In the event of the owner’s death, the amount received from the life insurance policy could go to the surviving spouse or children or towards financing the business operations. Proper estate and succession plans could help resolve the issue and make life easier for survivors. 

Why the Confusion?  

The two plans are used interchangeably as they were somewhat similar two decades ago when small business owners ran the business until their last breath. So it was a given that the next generation would take up the company. 

But times have changed. Small business owners want to generate wealth, retire early, and live their retired life while leaving their businesses to their heirs or trusted employees. 

Another trend gaining momentum is selling or dissolving the small business after the owner retires or dies instead of handing it over to an heir. According to recent surveys in Canada, only around 30% of small business owners plan to keep the business in the family following their retirement. 

These points highlight the significance of estate and succession planning in the life of a small business owner. If you are a small business owner in Canada, you should seek expert and legal help to make estate and succession plans that align with your business goals. In addition, you should document, review, and update both programs at regular intervals to ensure they are legally compliant. 

Contact Glenn Graydon Wright LLP in Oakville to Help You Making Your Estate and Succession Plans

You can always contact a professional business consultant for estate and succession planning. At Glenn Graydon Wright LLP, our consultants can guide and help you through the entire process of making a tax-efficient estate plan and a detailed succession plan which is in concert with your estate plan. To learn more about how Glenn Graydon Wright LLP can provide you with estate planning, connect with us online or by telephone at 905-845-6633.