Business Estate Planning$-$Case Study: Dana and Sandy

Approaching their tenth anniversary together, Dana and Sandy, have scheduled a meeting with their advisor to review and realign, if necessary, their current financial affairs.

The Family

The couple, both age $45,$ met in university in their early twenties. They went their separate ways after university but remained friends. They reconnected twelve years ago when business ventures brought them together. They began living together $10$ years ago and married five years later.

The couple have two children, Sivy age $10$ and three$-$year$-$old Sam. Sivy is Sandy$$s child conceived through IV and now also adopted by Dana. Sam is the couple$$s second child. They hope to have a third child in the not$-$too$-$distant future.

Sandy$$s younger half$-$brother, $22-$year$-$old Kashu, also lives with the couple. Sandy$$s mother died when she was young, and her father, Bernard, remarried years later. Kashu is Bernard$$s son from his second marriage. Bernard and his second wife died $8$ years ago in a car accident on the way to Bernard$$s cottage$.$ Sandy immediately assumed guardianship for Kashu as she was his only living family.

Kashu has a physical disability that limits his ability to live independently, making him completely reliant on Sandy and Dana. He is fully integrated into Dana and Sandy$$s family and the couple view him as one of their dependents who will always require their support, physically and financially.

Kashu is the recipient of ongoing daily support from the Ability Unlimited, a charitable organization that assists families with individuals in need of physical assistance to care for themselves. Sandy and Dana are truly appreciative of the support Kashu receives from Ability Unlimited.

The family lives in Sometown, Yourprovince, Canada.

Business Activities

Dana is a very skilled designer of internet apps while Sandy has outstanding online marketing skills. It is these skills that brought the couple back together $12$ years ago. Using their combined expertise, the couple launched nearly a dozen apps that are now sought$-$after on the Apple and Google app store websites. The couple are equal shareholders of DSK Inc the business entity through which they conduct all development and sales activities.

DSK was founded in $2012$ with Dana and Sandy each contributing $$10,000.$ The shares of DSK are currently qualified small business corporation shares.

The couple have been approached on two occasions by private equity firms interested in purchasing DSK$.$ While the offers have been attractive, Dana and Sandy have held firm that they are not yet ready to sell. They believe they can multiply DSK$$s fair market value by five to seven times its current value of $$12,000$k within the next four to five years.

Sandy and Dana each earn net income of $$250$k

DSK owns and is the named beneficiary of two $$1000$k permanent life insurance policies on each of Dana and Sandy$$s life. For each policy, the cash surrender value is $$300$k fair market value is $$350$k and the adjusted cost basis is $$100$k$.$

Family Financials

The following is a summary of assets currently owned by Sandy and Dana.

Current Asset Summary

Chequing account$-$Joint $$10$k

RRSPs$-$Dana $$400$k & Sandy $$800$k

Non$-$registered portfolio$-$ Sandy $$300$k$,$ cost $$200$k

TFSAs$-$Dana $$60$k$,$ Sandy $$65$k

DSK common shares$-$Dana & Sandy each $$6000$k and cost $$10$k each

Parcel of land$-$Dana & Sandy each $$400$k$,$ cost $$100$k each

Home$-$Jointly owned $$1000$k$,$ cost $$600$k

Mortgage on home$-$Jointly $$(300$k$)$

Cottage$-$Sandy $$1000$k$,$ cost $$900$k

Facts & Assumptions

Please assume the following:

Lifetime capital gains exemption is $$900$k

Marginal tax rate for individuals is $50\%$ for everything except ineligible dividends

Marginal tax rate for ineligible dividends $45\%$

Assume all individuals listed have never utilized any capital gains exemption

Assume all reference to tax is in respect of Canadian income tax only

For all questions, please show all calculations. Where numbers are available, please use them when preparing your response Question #$3(8$ marks$)$

The following is a series of short$-$answer questions focused on estate planning strategies that could be helpful for Sandy$$s personal testamentary planning in respect of providing for Kashu.

a$)$ Describe two testamentary planning opportunities in respect of Sandy$$s RRSP as it relates to Kashu. $(4$ marks$)$

b$)$ Briefly discuss the financial implication to Sandy$$s estate if she bequeaths a block of DSK shares to a testamentary trust for the benefit of Kashu as income beneficiary versus leaving the shares directly to her spouse Dana? The plan is to name Kashu as the income beneficiary and the couple$$s children as the capital beneficiaries upon Kashu$$s passing. $(2$ marks$)$

c$)$ Dana and Sandy are thinking of having Dana$$ mother settle an inter vivos trust for the benefit of Sivy and Sam. The trust would subscribe to shares of DSK$.$ Identify one benefit and one risk that the couple should be aware of with respect to this strategy.