Estate planning ensures that an individual’s or family’s assets are distributed according to their wishes after death. Life insurance is often used as a solution to problems and needs identified in the estate planning process.
By Mike Jaczko, BSc. Phm, RPh, CIM®
This article outlines three estate planning strategies pharmacy business owners should consider that include life insurance: estate preservation; estate equalization; and business succession planning.
Part of your estate planning process should include determining the liabilities of your estate upon death. Income taxes, estate administration taxes (commonly known as probate fees), and capital gains taxes can all eat away at an otherwise sizeable estate.
The Income Tax Act deems that every capital asset a person owns – an investment portfolio, real property, the family pharmacy – is deemed to be sold at fair market value the day before the person dies. By failing to plan in advance, there are situations where it becomes necessary for estate executors to sell cherished family assets like the family cottage or even the family business to settle income taxes triggered as a result of death.
Life insurance can be used to cover the anticipated estate liabilities and ensure that assets the family wants to keep do not have to be sold. The proceeds of a life insurance policy are paid out tax-free, and probate fees can also be avoided if a named beneficiary is used.
This strategy can be quite effective when one of your children finishes pharmacy school and decides to take over the family pharmacy while other children choose alternative career paths. Whenever a family business is being left to one heir to the exclusion of others, life insurance can be used to make the estate equal or fair for everyone.
Business Succession Planning
If the business is owned by more than one individual or family, it is common to have a “buy/sell” agreement between the business owners. A buy/sell agreement would stipulate that if one partner dies the other partner will buy the other partner’s shares, and vice versa. There are several different ways to structure these arrangements. Look for an article on this topic in a future edition of Pharmacy Business and PharmacyU.ca.
One of the most important planning points is securing the source of the funds for the buyout. Putting a formal agreement in place does not mean much if you cannot be sure that you or your business partner will have the funds available for the buyout when the time comes. Life insurance is the most certain and effective way to ensure that the funds will be available when they are needed.
The proceeds of a life insurance policy are paid to a corporation tax-free. Be aware that the proceeds of the policy can also flow out of the corporation to shareholders tax-free (or very close to it) through the Capital Dividend Account. This affords opportunities for tax planning. A very common strategy (whether in the context of a buy/sell agreement or not) is to use the Capital Dividend Account to redeem the shares of a shareholder upon death. This can lead to a significant reduction, and sometimes a complete elimination, of taxes that would otherwise be payable.
As always, check with your accountant or trusted financial advisor and investigate the opportunities life insurance makes possible for business planning.
Mike Jaczko, a pharmacist by background, is a portfolio manager and partner of KJ Harrison, a Toronto-based private investment management firm serving individuals and families across Canada. For more information on this topic, email firstname.lastname@example.org.