The Story
Donald Davies was proud of the business he grew into an empire. Donald started out as a salesperson in his uncle’s car dealership in Winnipeg in the 1980s, when he was in his 20s. Soon Donald became an owner, and he would habitually leverage up to buy new dealerships. Donald’s instincts and timing were good. By 2023, he had ownership in 15 dealerships across Western Canada, valued at more than $250 million.
Now in his 60s, Donald wanted to enjoy the fruits of his labour. He planned to hand the business over to his two sons – Oliver and Seth. Donald knew he still had to address estate planning issues because he trusted the advice of his tax lawyers and accountants. For years, Donald had been able to defer taxes to enable more business growth, but now his estate tax liability was nearly $70 million. Recently, he had put in place an estate freeze to defer the tax on future growth to his sons.
Donald’s accounting team recommended life insurance as the next piece of his estate tax planning. It had worked well for some of their other clients. But Donald was skeptical. For years, he avoided using life insurance, because he felt he had the assets in his business to look after his family if something were to happen.
Donald’s estate plan was simple. At the time of his death, Oliver and Seth would inherit full ownership of the business. The sons could sell a few dealerships and mortgage some others. The proceeds from the dealership sales and the loans would be enough to cover any tax owed at Donald’s death.
Donald’s estate plan would cover the tax liabilities, but Oliver and Seth wondered whether there was another way. Unlike Donald, who scaling down his role in the business, Oliver and Seth were looking ahead at their future in the family business. They had visions of growth and wanted to ensure they left themselves maximum flexibility.
At a glance
THE POSITIVES
- Successful businesses owe estate taxes; Stagnant ones do not
- Tax deferral has helped business growth
THE CHALLENGES
- How to pay deferred estate taxes without disrupting the business Estate tax timing is the ultimate uncertainty
The challenges
1. TIMING Donald’s plan left it to chance that Oliver and Seth could access financing at a moment’s notice, and on good terms. Could they sell multiple dealerships for a fair price? Market demand is fickle, and if Donald died at the wrong time, a timely sale was not assured. It left a lot to chance 2. IMPACY ON THE BUSINESS Would selling some of the best performing dealerships put Oliver and Seth on a path to growth and success? Donald had worked hard to create a seamless transition to his sons, yet his plan to liquidate assets for estate tax undermined Oliver and Seth’s plans for growth. 3. COST Many of the business assets are illiquid – either tied up in business partnerships, or already mortgaged. Creating liquidity quickly and on unfavourable terms could be much more costly than what Donald had envisioned. Oliver and Seth disliked the uncertainty of what the true costs would be to resolve the estate taxes.The insurance alternative
Oliver and Seth followed the accounting team’s advice and met with Unity Insurance to explore life insurancebased planning options.
The insurance concept Unity recommended complemented the tax deferral strategy put in place by Donald’s advisors years ago. It was a supplemental plan to build affordable liquidity for when an estate tax liability arose. By using insurance, it removed the timing risks – estate liquidity would be created precisely when needed, irrespective of market conditions. Plus, Oliver and Seth liked the cash flow predictability of insurance and that they could avoid selling off their most prized dealerships.
Within a few months, the plan was set into motion and Donald couldn’t believe the result. His estate plan better aligned with his sons’ vision for the business – Oliver and Seth could continue to grow the footprint of dealerships. And the planning could yield millions of dollars in savings to address Donald’s estate tax liability.
Key takeaway
Many of Canada’s most successful families can defer tax but must eventually address estate taxes in their planning. Life insurance-based strategies can be the least disruptive and most cost-effective way to set up the next generation of owners for success.