1. Banff School – August 19, 2007 Mary-Ellen Gaskin, CA, CFP, TEP London Life/Great West Life Private Wealth and Estate Services Business Succession Planning Case Study

2. Client Information Rob (65) and Marie (63) McKee Have three children: Cathy (40), Eileen (36) and Mark (30) Rob started McKee Manufacturing (MM) in 1967 with $10,000. Rob and Marie each own 50% of McKee Mfg Currently the company employs 150 people and annual sales are around $30 million

3. Client Information Company expanded into the exporting business, ‘Jones Exporting’ in 1985 with friend, John. A real estate company was incorporated in 1995 to hold the buildings in which they operate The companies remain very successful and their values of the continue to grow

4. Meet The McKee Family Cathy 40 Todd 24 Rob 65 Mari e 63 Eileen 36 Mark 30 Don 44 Charles 36 Janelle 14 Laura 5 Chris 1

5. Meet the McKee Family Cathy (40) is married to Don who is a litigation lawyer –Todd is Don’s son from his first marriage. –Janelle is Cathy and Don‘s daughter –Cathy is VP of Sales and Marketing at McKee Mfg –Don works at a law firm (not with family business) Eileen (36) is married to Charles (36), CA –Have two young children (Laura – 5 and Chris – 1) –Charles is the controller at McKee and Jones –Eileen is a teacher Mark (30) – not married –not interested in businesses – interested in Music

6. Current Ownership Structure McKee Mfg Realco Marie Jones Exporting RobJohn 50% 25% 50% 60%10% 75% Mark Cathy Eileen 10%

7. Companies Value Owned By …. Rob and Marie via Holdco -Common shares of McKee Mfg -Common shares of Jones -Common shares of Realco Mark10% of Realco commons Eileen10% of Realco commons Cathy10% of Realco commons Total $ 12,500,000 2,500,000 1,750,000 250,000 $17,500,000

8. Where do we start? Process: What DON’T we know? What do Rob and Marie want? What do they need? What do they fear? What have they got?

9. Start with Rob and Marie Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal FinancialSecurity Lifestyle & Opportunity

10. Financial Independence – What do Rob and Marie Own? Cash ** RRSPs ** Holdco shares Total financial assets House Other personal assets Net worth $ 400,000 800,000 16,750,000 17,950,000 1,500,000 500,000 $19,950,000 ** 60% equity and 40% fixed

11. Retirement Goals How much do they want? $240,000 of pre-tax income indexed at 2% For how long? To age 90 Let’s calculate what they have versus what they want…

12. RRSP and Investment balance with Income Goal Income received = $200,000 indexed at 2% each year

13. Income attainable from RRSPs and Investments Income received = $133,000 indexed at 2% each year

14. Actual vs Desired Income

15. Financial Independence Are They There? RRSPs and Investmentswill provide $133,000** a year from ages 70-90 if they earn 6% These assets alone are Not sufficient for their lifestyle Therefore, access funds from company. Need approx. $74,000 (indexed) per year or approx. $2,000,000 over 20 years. ** indexed at 2%

16. Income attainable from RRSPs Regular RRSP contributions in next five years will increase retirement income to $149,000. Still insufficient !!! **Assuming Rob and Marie receive salaries from the business and can contribute the maximum amounts to their RRSPs With additional RRSP contributions

17. Financial Independence - Asset Allocation Fixed income (40% of RRSP/Non-Reg) $ 480,000 2.7% Equities including business 17,470,00097.3% Total financial assets$17,950,000100% 93% of financial assets in two ‘micro-cap’ businesses Build personal financial capital outside business Ratchet down the risk profile of these investments Ratchet up liquid component of these investments

18. Financial Independence Are They There? Real issue is –diversifying away from the business (equity investment) –monetizing their financial interest (say $2- $4M invested outside business) to facilitate exit strategy/financial independence

19. Financial Independence How to Diversify Make it a priority Dividends from businesses (or redemptions) of $76,700 a year indexed at 2% Could borrow to fund dividends if cash flow is an issue Could pay higher dividend to reduce income commitment period. Invest net dividend in: Portfolio investments Mostly fixed Insurance CSV can be part of the ‘fixed income’ component

20. Financial Independence - Business risk President & CEO Rob Mc Kee VP Sales & Marketing Cathy Operations Manager Joel OM Controller Charles J Controller Non-Family CT Operations Manager Non-Family OM McKee MfgJones Exporting

21. Financial Independence – Key person Candidates for risk protection: –Rob, Joel, Jones Ops Mgr., Charles Cathy, others? Current business debt: –McKee Mfg - $1,600,000 bank debt - $2,500,000 capital lease obligation? –Realco - $3,150,000 –Jones-$625,000 to buy out John

22. Financial Priorities Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal Family legacy How much? To whom? Estate equity? Taxes and final expenses

23. Net Worth – What do they Have? Cash RRSPs and non-registered ** Holdco shares Total financial assets House Other personal assets Net worth $ 400,000 800,000 16,750,000 17,950,000 1,500,000 500,000 $19,950,000 ** 60% equity and 40% fixed

24. Companies Value Owned By …. Rob and Marie via Holdco -Common shares of McKee Mfg -Common shares of Jones -Common shares of Realco Mark10% of Realco commons Eileen10% of Realco commons Cathy10% of Realco commons Total $ 12,500,000 2,500,000 1,750,000 250,000 $17,500,000

25. Estate Equalization If two are active and one is inactive, IS THIS FAIR? And in future, the inequity grows.

26. The Success Chart Identifying the Opportunities Year Business Started 1967 $10,000 1997 $ 7.5 mill $30 mill 20172027 $60 mill 2007 $17.5 mill Tells us to look at : Business Transfer Growing estate insurance need Time for estate freeze? Total business interest value = $17,500,000

27. Projected Capital Gains Tax We always project future capital gains tax to highlight the “do nothing” scenario Current Capital Gains Tax **$ 3,500,000 Capital Gains tax in yr 20**$13,000,000 (** assuming each of Rob and Marie claim their CGE)

28. Projected Capital Gains Taxes What can we do about this????

29. Cost to Fund Options to Pay Taxes

30. Reduce cost to Fund Options to fund can be based on a –$13,000,000 need or –$3,500,000 need. Could freeze the taxes…..

31. Who do we insure?

32. Creating a New Ownership Structure McKee Mfg $12,500,000 Realco $2,500,000 Jones Exporting $2,500,000 Rob 10% 25% 60% Mark Cathy Eileen 10% MarieJohn 75% 50% Family Trust Move future growth to Family Trust Freeze to Holdco & Insure

33. 100% 70% 100% Family Trust 10% MarkCathyEileen Jones Exporting McKee Mfg Realco Rob $1,750,000 prefs Marie $2,500,000 prefs New Holdco $12,500,000 prefs Creating a New Ownership Structure

34. Now Values Owned By…. Rob and Marie via Holdco -Frozen shares of McKee Mfg -Frozen shares of Jones -Frozen shares of Realco Mark10% of Realco commons Eileen10% of Realco commons Cathy10% of Realco commons Trust – Commons shares of-McKee Mfg/ Jones/Realco (could do thru Holdco) Total $ 12,500,000 2,500,000 1,750,000 250,000 0 $17,500,000

35. Benefits of Holdco Dividend net profits to Holdco for –Future Income to Rob and Marie –Creditor protect the excess cash –Good place to own the insurance NOTE: Freeze and Holdco can provide future additional cash flow (dividends or redeem the frozen shares over time) but won’t create asset diversification

36. Benefits of the Freeze Rob can retain voting control over company Fixes Rob and Marie’s tax liability Passes future appreciation of the company value to children and/or grandchildren Rob and Marie have opportunity to crystallize their enhance capital gains deduction (now at $750,000 each) Potential to creditor protect assets Potential to reduce probate taxes

37. The Trust Fully discretionary –Capital and income can be distributed in any proportion to any or all of the beneficiaries Trustee(s) –Rob, Marie, trusted business advisors or children Beneficiaries (some or all of) –Rob, Marie, Mark, Eileen, Cathy, spouses, children, grandchildren, Holdco, key employees

38. Benefits of Trust in Structure Control of shares – trustees may control distribution of shares and/or dividend income paid to trust –Rob may be one of the trustees and continue to influence decisions related to share ownership. –If desired, shares are distributed only to beneficiaries whom are involved in business Shares may be transferred in the future to the desired trust beneficiaries on a tax deferred basis –Beware 21 year deemed disposition rules. Offer some creditor protection Income splitting with “major” children. Dividends may be distributed to low income trust beneficiaries. May avoid probate taxes (if applicable)

39. Family Legacy – Shareholders Rob and Marie wills –Executor to redeem shares and distribute –To the extent insurance funded Shareholder agreement –Death, disability, marital, bankruptcy, disagreement –Opportunity for kids to buy each other out in the event of their death (avoid shares in hands of spouses)

40. Family Legacy – Will Planning Wills leave everything to each other and then to children in equal shares Consider: –Spousal trust –Separate testamentary trusts for each child to control use of assets after death and save up to $17,000 in annual tax per trust created –Will and Shareholders Agreement must work together –If no Shareholders Agreement, Will can give active child right of first refusal to acquire shares as part of their inheritance

41. Family Legacy – How much and what? Net worth less Less: estimated income tax Less: estimated probate tax ** Less: final expenses Net estate Comprised of: Cash shortfall Shares of Holdco Home and other personal assets $19,950,000 (3,900,000) (200,000) (100,000) $15,750,000 $(3,000,000) 16,750,000 2,000,000 $15,750,000 Question: Is there an upper limit on the bequest they wish to leave?

42. Family legacy - Other Estate freeze Grandchildren –RESPs –Inter-vivos trusts for grandchildren age 18+ –Life insurance Others?

43. Financial Priorities Financial Independence Goal Family Legacy Goal SocialCapital Legacy Goal Social capital legacy Philanthropic interest? Excess family legacy? Desire to redirect tax to charity?

44. Social Capital Legacy Philanthropic interest? They do have millions of ‘planning capital’ to work with but it’s tied up in business Notwithstanding philanthropic interest, equation is: A $1.00 to tax OR B $2.22 to charity and eliminate tax

45. Social capital reallocation Current Situation With $8,600,000 Donation With $8,600,000 Donation and $8,600,000 Insurance Family legacy15,750,00011,050,00019,950,000 Social capital legacy–income taxes3,900,00000 Social capital legacy–charity or foundation 08,600,000 Estate administration tax/final expenses300,000 Gross estate19,950,000 28,850,000 Bequest per child5,250,0003,683,0006, 650,000 Distribution controlled by the McKees15,750,00019,650,00028,550,000

46. In Conclusion: What has our Process Accomplished? We uncovered that: –Rob wanted to work another 5 years part time –Rob and Marie wanted $240,000 pretax for retirement and their current assets cannot provide this. –Rob and Marie are financially dependant on the business. –It is Rob’s desire to keep the business in the family. –Assuming not all children become owners of the business, they cannot equalize their estate between the children without additional funding. –Their tax liability wrt the shares will grow significantly without planning. Made Rob and Marie more aware of business and family relationship issues We provided suggestions/plans/solutions to aid in their succession

47. Next Steps Introduce them to someone who can help them in their business plan and, if necessary, family issues. Keep in contact with Rob and Marie as their management plan evolves. May be more need for risk protection

48. Insurance planning Opportunities Marie and Rob –Family legacy (taxes) –Social capital legacy (estate donation) –Health risk management (critical illness, long term care) Business risk management –Business succession (buy-sell) –Key person (life and health) The children –Income replacement –Family legacy –Health risk management

49. Summary – Prioritize First generation issues Then: financial security for future generation

50. Banff School – August 19, 2007 Mary-Ellen Gaskin, CA, CFP, TEP London Life/Great West Life Private Wealth and Estate Services