A lot of our clients are successful in business, but marriage is another story. Many first-time unions have ended in divorce because of an overworked husband or wife, but now that they have a solid career, it’s often time to find a special someone again. Life isn’t as simple for your client as it was when he or she was 20, though; money and kids can complicate a second marriage. So how do you make sure everyone is protected when your client passes away? One word: insurance.
Let’s consider Gary, a successful 64-year-old business owner, who spent more time at the office than at home. He did what he could to be a devoted father to his three children, and is very proud that his eldest daughter and youngest son have chosen to enter the family manufacturing business. After his marriage broke down 10 years ago, he did some soul searching and, at long last, has found the woman he plans to spend the autumn of his years with — 48-year-old Elaine. They met at a charity event two years ago and plan to wed this July at the Chateau Lake Louise.
Gary’s business partner and his three children are skeptical about Elaine. Western Canada’s energy sector has fuelled the success of the family business, so Gary’s wealth is no secret. Those close to the successful entrepreneur are worried about his fiancée’s intentions and assure him that they are simply trying to protect his interests.
His business partners insist he consider a prenuptial agreement to ensure that the company doesn’t end up, in the event of a marital breakdown or an untimely death, with an inexperienced business partner. They prefer that his two business-savvy children become his successors. Reluctantly, Gary agrees that this is the most prudent thing to do for his children and for the 350 employees of his now mid-sized company, especially since he plans on reducing his hours and semi-retiring when he hits 70.
Gary updates his will to gift his shares to the children active in the business in the event of his passing, and implements a partial estate freeze. By using a partial estate freeze, Gary quantifies some of his estate tax liability, while giving Gail and Stephen shares with future growth potential. Gary receives growth shares as well, and can participate in the anticipated success in his last few active years. Key person insurance for Gail and Stephen is put in place on both life and critical illness insurance policies. They are also added to the shareholder agreement so that both the will and shareholder agreement are in line with each other.
So where does this leave Elaine? Almost as young as his eldest, she understands the children’s concerns and does not want to cause strain between Gary and his children. In consultation with their financial advisor, accountant and lawyer, they decide to implement a strategy involving a testamentary spousal trust, which would be created upon Gary’s death. By using this option, Gary can transfer assets that he ultimately wants to end up in his children’s hands at their original adjusted cost base, with no tax, into a trust in order to provide income for Elaine. At her death, the trust will be wound up and assets will pass to the children.
At this time, the assets would be deemed to be disposed of for tax purposes, and any taxes would be owed. While the assets can take any form, oftentimes tax motivation drives clients to consider holding assets that have large estate liabilities, such as shares in the business, and that still drive decent income. This will help support Elaine. Gary’s advisor and accountant both recommended that the couple purchases joint and survivor life insurance for the tax liability on his shares. As a result, the kids still have the comfort of knowing that the remainder of their dad’s shares will come to them, while Elaine receives dividend income from the shares in the trust.
However, many couples aren’t comfortable generating income solely from a trust. In our example, Gary takes a second policy out on his life that will be paid directly to Elaine to ensure she has a pool of capital within her control. Down the road, if Elaine has a medical emergency, this can help pay costs without enlisting lawyers to get further capital out of the trust.
As well, many advisors put living benefits coverage on spouses in Elaine’s position. By having proper critical illness, long-term care and health insurance coverage in place, all of her health care needs can be met without her having to increase the draw on assets as cash-flow needs increase.
Figuring out how this works for your client is fairly simple; most companies have concept software or sales sheets that discuss the ways different products protect assets. While death and business are never pleasant topics to bring up, it’s important that the company, the children and the new spouse are protected. And after that happens, your soon-to-be wed boomers can just focus on the joy of their pending nuptials.
Chris Paterson is vice-president of sales for Manulife Financial.