How to pass the torch without dropping it
 Entrepreneurs typically want their children or other close relatives to carry on the family name through their business.
 But there are countless stories of families that have fumbled the succession torch. It's clear that passing a business on to a second or third generation is a very touchy process.
 Here are some things to consider:
 Start with a plan. All successful intergenerational succession requires planning. As the principal owner of the business, begin by determining what you and your spouse - if you have one - think is fair distribution of the family assets.
  This will include a consideration of your RRSP's, your investments, your company, and your real estate such as the cottage and main residence.
 Once you have a general idea of how you want to divide the assets, discuss it with each of your children - but not their spouses - to get their views. Amend your plan as you see fit. Then bring in your accountant, who can help with the proper structure to minimize tax and maximize benefits to recipients.
  Your accountant will suggest bringing in a lawyer, investment adviser or insurance agent at appropriate times in the process. Once you have what you believe is a final plan, convene a meeting of the immediate family to describe your decisions
 Your accountant and lawyer should be present to answer questions. Be clear about your wishes and reasons.
  Identify major assumptions. Succession planning takes time and it must be well thought out. One reason plans fail is they make certain assumptions that are incorrect or turn out to be invalid. Clearly identify all your major assumptions early on.
 These assumptions might include: · "I love all my children equally." Most parents feel this way and they try to divide their assets equally among their offspring. This is very difficult to do fairly. In one family, the parents decided to leave their sons the two businesses and their daughters the real estate. The allocations were roughly equal in value at the time of succession.
  One of the sons used his business assets to expand into other areas and he was quite successful. The other son went bankrupt. The real estate received by the daughters did well initially, but in the roller coaster of property values, the assets are now running at significant discount to the succession value.
 This kind of situation raises the potential for bitter animosity. · "I want to leave my significant other financially independent." For many estates, there is enough money available to take care of both a spouse and children.
  But even if you and your spouse agree to a plan, it could be contested after your death. Let's say you agree to leave your spouse less than 50 per cent of your assets upon death. That allocation is contestable when you pass away - whether or not your spouse has formerly agreed to it.
  Also, your accountant and lawyer can assist in structuring a legal trust, which can help with the distribution of wealth, even after you're gone.
  · "A family member would like to run the business she is capable of running it, and she has earned the respect of customers, suppliers, bankers and other team members." Most succession plans fail because one or all of these assumptions prove false. Be realistic in assessing successors.
 Recognize the emotional side. In putting a plan together, it is important to realize there are two elements - the plan itself, which deals with financial, tax, investment and insurance matters prepared with the help of experts; and the emotional level of family members and their spouses.
 Do the immediate family members - as well as their spouses - view the plan as fair? This is often the most emotional part of putting a plan in place. Children's spouses often cause the most anxiety. They want to protect the rights of their partners (and themselves), and they often want their opinions heard.
 Payments to parents. The assumption that parents can continue to draw funds from a business is often mistaken. Once the ownership is transferred, the monthly stipend usually stops. This income can often be provided through a regular directors' fee, a dividend or interest on loans to the business. But if the company does poorly, payments to parents can be a source of contention.
 Protect your assets. A lot depends on the structure of financial assets. Don't forget to buy insurance to protect them when you pass on. While term insurance is expensive as you get older, it is still a great way to make sure your family will not have to pay a lot of tax on your death.
Change your will. Make sure it reflects your planning decisions. Entrepreneurs gain piece of mind knowing that the fruits of their labour will be distributed the way they want.
 Published May 18, 1998
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