As an entrepreneur, passing on your assets to the next generation may not be as simple as it sounds.
Successful entrepreneurs are known for building their businesses with a combination of passion and hard work.
Naturally, there will come a point when you start to think about planning for the future, stepping back from your businesses and passing wealth to loved ones. A robust wealth transfer plan can help you achieve all three.
An entrepreneur’s assets are likely to be illiquid because they’re tied up in the business, which can pose a challenge. Wealth transfer planning is therefore important for business owners because they have the extra dimension of thinking about an exit strategy from their company.
Planning for a wealth transfer as early as possible will provide you with the time and breathing space to make sure you have the right structures in place when you decide to step back from the business. The broader preparations are likely to span tax and estate planning, as well as retirement, inheritance and succession planning. Although it may feel like there’s a lot to think about, try not to lose sight of the benefits a plan can bring.
First, make sure you have the right advisors on hand to formulate a plan and guide you through the process. Even if you have advisors in place, Adam Wereszczynski, a relationship manager at RBC Wealth Management in the British Isles, says it could be beneficial to get a second opinion from an external advisor. This will clarify whether your existing arrangements are appropriate for your circumstances.
“It is never a bad idea to get a second or third pair of eyes on your existing arrangements,” he says.
Once your advisors are in place, think about how much money will be required to achieve your objectives. This doesn’t need to be as daunting as it sounds, as your wealth manager will be a resource in providing a cost-benefit analysis.
“The first stage of the process is to establish how much of your wealth you need to look after yourself for the rest of your life. This involves cash-flow modelling to establish what your income needs are likely to be,” says Kevin O’Shea, director – Wealth Planning at RBC Wealth Management in the British Isles.
Given that your assets are likely to be tied up in the business, this may bring another question to the fore: are you planning to pass your business on to the next generation? If so, how can you do this tax efficiently?
If the business is family-owned, you may be looking for another family member to buy you out. Whichever route you take, planning ahead can help ensure the best possible outcome.
At this point, it’s worth thinking about how much you wish to gift to any children and grandchildren – as well as the most appropriate route to do this.
One option is to provide direct gifts. Each person has a £3,000 annual tax exemption for gifts, which is removed from your estate immediately when used. You can also gift money or assets above this threshold that will be exempt from inheritance tax, providing you live for at least seven years afterwards and you have no interest or link to the transferred assets.
“This route depends on the age of the children and what they are like. For some parents, giving their children too much money too young can cause problems, in terms of them squandering it or lacking motivation to pursue a career,” O’Shea says.
If you wish to exert some control over how and when the money is allocated, gifting via a trust will allow you to do this. You can draft letters of wishes for beneficiaries (including charities), executed by trustees.
Bare trusts provide a neat solution for those who wish to pass on assets to minors. As a beneficiary, they will gain the right to capital and income within the trust from the age of 18.
Family investment companies represent another option to transfer assets to the next generation (via a limited liability company structure), while life insurance policies and offshore bonds can also be considered. Each option comes with its own tax implications, which need to be evaluated.
In order for your wealth transfer plan to take effect, it must be underpinned by an up-to-date will that accounts for assets held across different jurisdictions.
“I think everybody should have a will – regardless of what their wealth is,” O’Shea says.
“For every report I write, the first question I ask is, ‘Have you got a will?’ If you do, I then ask if it is up to date. If you don’t have a will, it will be a key priority to set one up. There is no point doing any clever financial planning if you haven’t got a will,” he says.
This article was updated in Dec. 2024.
RBC is not a tax specialist and this does not constitute tax, legal or financial advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist.
We want to talk about your financial future.
This publication has been issued by Royal Bank of Canada on behalf of certain RBC® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. Deposits made with Royal Bank of Canada (Channel Islands) Limited in Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website www.gov.je/dcs or on request.