Getting the Facts: It's All in how Well you Listen

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I was introduced to a client about a year ago who both amazed me and frustrated me. As I have gotten to know him I have found him to be an amazingly brilliant yet very humble individual. He is a successful inventor and entrepreneur whose mind is constantly working overtime. But he frustrates me though, because of some of the hearsay beliefs he holds about insurance companies, taxation and investments. Allow me to explain.


Bill is married to Sheila and they have 4 adult children and 5 young grandchildren. He is a high school dropout who has built up 3 successful companies that do research, manufacturing and sales and services for many of the products he has invented. He has a separate bookkeeper and accountant for each of the companies and he files their personal tax returns. He is 59 years of age and started his companies about 30 years ago. He currently values them at between $8 and 9 million. He owns 80% of the shares and his wife owns the balance of the common shares. He also owns his patents personally and has no idea of what they would be worth. Sheila stayed at home to raise the children and is now looking forward to more grandchildren. She also helps out in the office when the administration staff get backed up. Their home, valued a $3.6 million is paid for as is their cottage ($1.3 million) and a condominium in Mexico ($375,000). He invests the retained earnings of the corporations in mutual funds totalling about $4.65 million, which is managed by 5 separate investment brokers as he believes that is the best way to diversify in case one of them went bankrupt or tried to do a Bernie Madoff type of scam. There were no RRSP's or TFSA's. There was a 10 year term life insurance policy for $2.8 million which he owns personally and was about to renew at a much higher rate.  His insurability could be a problem due to a recent diagnosis for Diabetes and high blood pressure. Sheila, who is in excellent health does not have any life insurance. I asked him if he had any plans around retirement and succession and he said that he and Sheila would like to travel more but he still wants to remain actively involved in the business. Other than that, he hadn't really given it much thought until recently when one of their sons, who graduated as an engineer and has recently competed his MBA, started working in one of the companies a couple of months prior. He is thinking this might become part of his succession plan.


With this information as background, I told him that through the insurance company, I work with some of the brightest accountants on tax and estate planning and that I would like him to meet with one of them, making certain that Bill understood that there would be no cost to him for that (did I say that he was a typical Scotsman). Bill agreed to the suggestion and as a result of the meetings we've had over the last eighteen months, the facts have been gathered and some of the recommendations that were presented have been put into place.


Bill was shocked to learn about the amount of taxation on the corporate investments he has been paying, to say nothing of the investment management fees and what his capital gains taxation on death looked like. In addition, Bill has come to realized that his son is proving to be an excellent choice to step up and take more on, and his son has said he would like to eventually take over the family business when the time is right.


In the end, we laid out several ideas that included an estate freeze, setting up a holding company as well as a family trust. Bill took this plan to his new accountant who now handles the accounting for all three of the companies as well as Bill’s and Joan’s personal needs. We’ve set up and funded their TFSA’s, converted Bill’s personal term life insurance policy to a corporate owned Universal Life policy and were able to get an additional $5 million dollar Joint-Last-To-Die insurance policy issued on a standard basis. These policies are being funded to the maximum allowable so that some of the investments in the corporation can gradually be moved into them, thus sheltering the growth from taxation and building up value in order to form a future income stream for Bill and Sheila in their retirement. In addition, we are in the process of setting up an IPP (Individual Pension Plan) for Bill and Sheila to provide significant tax deductibility for the corporation and further tax sheltering of the investments. All of this has given them a real sense of security and path by which to equalize their estate between all of their children.