I don’t know whether it is because I am 72 or simply because of circumstance, but recently a number of friends and colleagues have passed away unexpectedly.
I have seen firsthand how sudden, dramatic change can send families into a tailspin that lasts for decades. Over the years, I have written about the importance of planning and reviewing wills. But when circumstances hit closer to home, they magnify the need for proper planning and, unfortunately, expose the cost of procrastination.
The fact is, nobody thinks they are going to die unexpectedly. People sincerely believe they will carry on without concern and that there is no urgency to complete comprehensive planning. There is always more time.
That belief is foolish and irresponsible.
For most people who do not own a business, planning may appear relatively simple. Employer-sponsored insurance programs are intended to replace lost future income. However, in today’s world of rising costs, those plans rarely provide enough coverage.
It is not solely about replacing income. It is also about covering the future costs of housing, childcare, education, indexed living expenses, transportation and lifestyle needs. It includes the loss of future opportunities that might otherwise have benefited the family.
Then there is the emotional impact on family members and the care they may require — costs and consequences that cannot be easily quantified.
For self-employed individuals, the same considerations apply, but the impact can be even greater. In the early years of building a business, families often give up considerable security without fully considering the potential effects of disability or death.
The true costs are rarely taken into account. The stark reality is that inconsistent income during those early years may also make it difficult to afford the coverage that is actually needed.
There is normally no backstop to replace lost income, let alone cover future expenses. There may also be unfunded liabilities. Is there someone who can step in, run the business and keep family income flowing? If the business is saleable, are there buyers willing to pay a fair price?
For business owners such as auto dealers, the implications are particularly serious. Dealers generally live well, and their dealerships can generate substantial cash flow to support that lifestyle.
Auto dealerships, however, are franchises. The franchisor retains considerable influence over who will own and operate the store in the future. When a dealer principal dies before a qualified successor is ready, selling the dealership may be the only practical option.
In the early years of building a business, families often give up considerable security without fully considering the potential effects of disability or death.
Even when potential successors exist — whether children, other relatives or experienced key employees — many dealer principals wait too long to begin the succession process. As a result, the transfer of ownership remains uncertain and is by no means guaranteed.
Properly structured wills may help defer deemed dispositions, but another frequently overlooked issue is joint ownership and the right of survivorship over property.
In provinces that charge probate fees, some of those costs may be avoided by ensuring that the desired joint ownership is formally registered rather than merely discussed. I cannot count the number of times I have heard, “We were thinking about it, but never got around to formalizing it.”
Death is not a popular topic. I understand that. But wealth management and family security should be. They go hand in hand.
Disability and life insurance can play critical roles. Whether it is corporate-owned life insurance, joint last-to-die personal coverage or another insurance product, insurance can mitigate some of the effects of incomplete planning. It usually cannot address all of them.
Coverage also needs to reflect how the dealer is compensated. Some employer or group policies calculate death benefits as a fixed multiple of annual salary. When dealers take much of their compensation outside regular payroll, the resulting benefit may be nominal. Care should be taken to ensure the appropriate salary is recorded and that coverage is based on the family’s actual financial requirements.
Personal liabilities, including loans and personal guarantees, can also be significant, particularly when assets are heavily leveraged. Following a death, these obligations may take priority over other commitments and quickly consume insurance proceeds the family expected to use for other purposes.
There is also the challenge of liquidating investments designed to produce long-term returns. Some cannot be sold quickly or without substantial consequences. Those investments may also be leveraged, requiring ongoing payments that continue to drain available cash.
Coming up short is not a good outcome, yet surprisingly few people believe it will happen to them. Without proper planning and regular updates, confidence that everything will work out is merely wishful thinking.
In my view, this review should be conducted annually. It is a classic case of not knowing what you do not know. Most people believe they have adequate coverage, but in many cases that belief is based on assumption rather than fact.
I know it sounds like a broken record, but planning can save your family enormous uncertainty, grief, aggravation and time.
The after-tax cash required to settle obligations following a death can be reasonably estimated. The process involves more than placing a value on the business. It must also account for loan guarantees, personal debts, probate fees, cross-border estate taxes where applicable, marriage-contract obligations, gifts to immediate family members and charities, and investment trusts for grandchildren or other dependants.
These non-business obligations can be substantial and must be included in the calculation.
This is an important subject that cannot be adequately covered in a 1,000-word column. Do not rely on the unfounded belief that everything will somehow be fine. Do not procrastinate.
The time for a reality check is now.
