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Financial Advisors: You need to know these pitfalls before buying and selling a book of business!
Disclaimer: This article discusses buying and selling a book of business. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
When it comes to any transaction, several cliches apply. To be forewarned is to be forearmed. You don’t want to be penny-wise and pound-foolish. Haste makes waste, and you should look before you leap.
This is especially true when it comes to buying and selling a book of business.
We’ve worked with a number of clients who are thinking about succession planning. They may be considering retirement or want to transfer their practice for other reasons. We’ve also worked with newer advisors who wish to gain additional clients by buying a book of business from another advisor.
In both instances, we find many advisors do not fully realize how complex these transactions truly are. Over the course of handling these purchases and sales, we have noticed some common pitfalls. In this article, we will explore these challenges and share how you can avoid them.
Pitfall #1: Failing to Understand Asset vs. Share Deals
Choosing between a share or asset purchase is crucial when buying a book of business, as it impacts what you acquire, the liabilities you assume, and the tax implications for both parties.
Share Purchases involve buying the seller’s company, including all its assets and liabilities. While many believe purchasing shares automatically grants them rights to the book of business and its income stream, this is not always true. For tax reasons, sellers often prefer share deals, as they may benefit from capital gains tax treatment.
On the other hand, asset purchases involve acquiring specific business assets, such as client lists and contracts, while leaving liabilities with the seller. Buyers generally prefer asset deals because they can selectively acquire assets and often benefit from tax deductions like depreciation. This option provides more flexibility and a cleaner transfer for the buyer.
Under CIRO (the Canadian Investment Regulatory Organization) regulations, corporations cannot receive income from investment portfolios; it must go to the individual licensee who owns the revenue rights. With these resitrctions in mind, obtaining an income stream through a share purchase requires careful, long-term planning and specific strategies, which many sellers have not implemented.
You must understand these distinctions to align the transaction with your expectations.
Pitfall #2: Not doing your due diligence before buying a book of business
Thorough due diligence is essential when buying a book of business to avoid hidden risks and liabilities. After all, this is a large transaction that will impact your business for years to come.
Do you really understand the value of what you are purchasing? Are you paying top dollar for a book that is worth less?
Will the seller be involved in the transition process? How will you handle client communication?
Understanding the cultural and strategic fit is also vital to ensure smooth integration and retention. Without proper due diligence, buyers risk overpaying or facing unexpected challenges that could impact profitability.
To protect your investment, work with experienced advisors to navigate the complexities of the process.
Pitfall #3: Waiting to see what CIRO will do before your sell your book of business
While the CIRO has indicated that it is considering changes to its regulations, you do not want to hinge major business decisions on what they might do. Regulatory bodies can take years to implement changes, and waiting for approval could mean missing out on immediate opportunities. Instead, both buyers and sellers should focus on what they can control.
If you plan to sell your business book in the next few years, it’s time to start preparing now. This includes structuring your business to make future sales possible, consulting with legal and financial advisors, and understanding the tax implications.
Pitfall #4: Not Speaking with an Expert to Navigate Your Options
Navigating the sale or purchase of a book of business can be a complex and nuanced process that requires careful consideration of tax implications, deal structures, and potential regulatory changes. At Beeksma Law, we have experience helping financial advisors plan strategically for both buying and selling their businesses.
If you are thinking about selling your book of business or are interested in exploring your buying options, reach out to us today to discuss how we can assist you. Our team can help set up the necessary structures and provide guidance to ensure you’re well-prepared, regardless of what the regulatory landscape looks like in the future. We also partner with other professionals, such as valuators, to make sure that you’re making informed choices about your business.
Beeksma Law: Focused Services for Financial Advisors
At Beeksma Law, we have guided financial advisors through the complexities of buying or selling a book of business. THis includes navigating regulatory challenges, conducting thorough due diligence, and structuring deals to optimize tax and financial outcomes.
Whether you are preparing to sell, looking to expand through acquisition, or need to understand evolving regulations from CIRO or other regulatory bodies, our team provides tailored legal solutions to meet your specific needs. Reach out to us today to learn how we can help you protect your interests and achieve your business goals in the financial services industry.
The Canadian Investment Regulatory Organization (CIRO) may allow advisors to form professional corporations. What does that mean for you?
Disclaimer: This article discusses changes to buying and selling a book of business. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
When it comes to financial advisors buying and selling their book of business, you need to consider several regulatory challenges. One area of interest to many in the financial services industry is whether advisors will soon be allowed to operate through professional corporations in the same way that doctors, lawyers, and realtors can.
The rules are still in flux, but CIRO proposes changes that could be on the horizon. This article will explore these proposed changes and what they mean for you and other professionals in the financial services industry.
Current State of Financial Advisors Operating Through Corporations
Currently, financial advisors are not permitted to own their book of business through a corporation, as other professionals can. Selling your practice as a share sale rather than an asset sale is limited, creating challenges for those looking to exit or transfer ownership of their business. We spoke about these challenges at length in this article.
While CIRO (the Canadian Investment Regulatory Organization) has been contemplating allowing advisors to use professional corporations, those changes have not yet been finalized.
Understanding the Canadian Investment Regulatory Organization’s (CIRO) Role
Financial advisors in Canada are governed by the Canadian Investment Regulatory Organization, which was formed from the merger of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). Before the merger, IIROC regulated investments related to the stock market, while the MFDA oversaw mutual funds.
This regulatory division resulted in differing rules for how financial advisors and investment dealers could operate.
For instance, mutual fund advisors have historically been allowed to run their business through a registered corporation, giving them more flexibility in selling their book of business. In contrast, IIROC-regulated investments could not be operated in the same manner, restricting their ability to transfer revenue rights through a registered corporation.
What Changes Might CIRO Bring?
CIRO has proposed changes that could allow all financial advisors, including those handling IIROC-regulated investments, to operate through professional corporations. This would be similar to how lawyers, doctors and other professionals are able to form professional corporations.
If it approves this change, advisors could transfer the revenue rights of their book of business through a corporation. However, there is still no clear timeline for when CIRO might propose or approve these amendments.
If and when the rules are updated, it could significantly simplify the process for financial advisors looking to sell their business. They would then have the option to sell their book of business as a share sale, allowing for greater flexibility and potentially reducing the time and complexity involved in such transactions.
Implications for Financial Advisors
For financial advisors, the potential for CIRO to allow the use of professional corporations is significant. It could bring a number of benefits:
- Simplified Sales Process: Advisors could choose to sell their business as either a share sale or an asset sale, depending on their specific needs and circumstances, impacting the type of compensation received.
- Flexibility in Ownership Structure: With the ability to own their book of business through a personal corporation, advisors could have more options for tax planning, succession planning, and overall business management, including structuring their compensation in more advantageous ways.
- Reduced Need for Workarounds: Currently, some advisors must put complicated workarounds in place, but a change in CIRO’s regulations could eliminate the need for these strategies.
- Alignment with Other Professions: This change would align financial advisors with other professionals like doctors, lawyers, and realtors, who already have the ability to operate through professional corporations.
What Can I Do Until CIRO Makes Changes?
While the industry waits for CIRO to allow financial advisors to operate through professional corporations, you can act now to prepare to sell your book of business. Advisors looking to transition their practice in the future should consider laying the groundwork well in advance.
Understanding your options and developing a strategy that aligns with both your financial goals and regulatory constraints can make give you the freedom you need when you are ready to sell. The key takeaway is not to hinge your business decisions solely on what CIRO or any other securities regulatory body might do. By planning and working with experienced professionals, you can be prepared for any scenario and make the most of your opportunities.
At Beeksma Law, we help financial advisors understand and navigate both purchases and sales. If you’re thinking about selling your book of business or want to discuss your options for structuring your advisory practice, reach out to us today.
Our team takes the time to get to know you and your specific situation so that we can provide guidance tailored to you! Get in touch today to learn how you can plan for both the current environment and any potential future changes.
Should I add my name to the title of my elderly parent’s house? Are there risks when you add or remove names to the property title?
Disclaimer: This article discusses estate planning. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
We have spoken before to elderly parents about adding their adult children to their joint accounts and their investments. We know you want to avoid paying estate tax, avoid probate, or want to simplify the process for your loved ones.
However, should you put your adult child’s name on the title of your home? If you are the adult child, should you agree to be added to your parent’s property? On the surface, this seems like a straightforward solution, but the reality is far more complex. Significant legal and financial risks could turn this seemingly simple step into a costly mistake.
This article will talk about the risks involved. However, we encourage you to speak to our team of estate law lawyers to create an estate plan that works for you and your family.
Should I add my child’s name on title to my house?
In Ontario, transferring or adding someone to a land title is not as simple as it may seem. Below, we explore some of the key risks involved.
Changing a house title in Ontario – knowing the risks
In Ontario, a title change is not as simple as it may seem. Below, we explore some of the key risks involved in adding your child’s name to title.
How Your Child’s Life Changes Impact Title
One of the most significant risks arises from the fact that your child’s circumstances can change unexpectedly, and these changes can directly impact your home. Once your child’s name is on the title, they are legally recognized as a co-owner of the property. This means that their personal and financial situations—such as marital issues, debts, or legal troubles—can have serious implications for your home.
Imagine that you add your son to the title. A few years later, he faces a divorce, and his spouse claims that the home should be considered a matrimonial asset. Under Ontario’s Family Law Act, the property could be subject to division, meaning that your son’s ex-spouse could have a claim to a portion of your home.
Similarly, if your child incurs significant debt, their creditors may turn their attention to the property. Creditors could take action to recover what is owed.
Removing their name could be costly
What if your circumstances change, and you decide to remove your child’s name from the title? Unfortunately, removing a name from the title is not straightforward, and it can involve more than just a simple paperwork adjustment.
When a name is added to a title, the law recognizes the new owner’s legal rights to the property. This means that, once added, the co-owner typically must sign off and agree to these sorts of changes. If they refuse, you could find yourself in a difficult legal position.
Family disputes and broken promises
Adding one child to the your home’s title can create expectations and promises that may not be honored after your death. Even if your child agrees to divide the property fairly with their siblings, there is no legal obligation for them to do so once they become the sole owner through the right of survivorship.
A mother adds her eldest daughter to the title of her home, with the understanding that the daughter will sell the property after her death and divide the proceeds among her siblings. However, after the mother’s passing, the daughter decides to keep the property for herself, arguing that she is the rightful owner by law. The other siblings are left with no choice but to take legal action against their sister, resulting in a costly and emotionally draining legal battle that could have been avoided with clearer estate planning.
Before you add a name or do a title transfer, contact Beeksma Law!
The decision to add a child’s name to your house title should not be made lightly. While the goal is often to simplify estate processes and save on taxes, the potential risks are significant and can lead to far more complicated and costly situations than you might expect.
At Beeksma Law, we focus on estate law and can guide you through planning for your future. Before making any decisions, contact us for a consultation. Together, we can create a plan that avoids these pitfalls and secures your legacy for the next generation.
We also encourage you to consider our other blog articles. We care about the legacy you leave behind for your family, which is why we have covered many estate topics in our blog, such as choosing an executor or understanding what happens to your mortgage when you pass away.
The risks of joint investment accounts with your adult child
Disclaimer: This article discusses Estate Planning. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
Many Canadians want to try and avoid probate fees as much as possible and this can guide their estate planning. One area where we see this is when it comes to joint investment accounts.
However, like joint bank accounts, there are risks involved. What happens to these joint investments when you pass away? How are they treated within the estate?
In this article, we’ll review the legal presumptions surrounding joint ownership. Then we’ll discuss the potential risks to your estate. For personalized advice, we invite you to reach out to our team for a complimentary consultation.
Capital gains tax versus estate taxes and probate fees
The concerns over estate taxes and probate fees are often exaggerated. In reality, these costs are generally less significant than capital gains taxes. Probate fees, which cover the legal process of administering an estate, are typically a small percentage of the estate’s overall value and can be mitigated with effective planning. On the other hand, capital gains taxes can be significantly higher.
Let’s compare: Estate tax is 0.5% for the first $50,000 and 1.5% for anything over $50,000. Let’s compare that to capital gains tax. Your beneficiaries would be taxed on 50% of capital gains up to $250,000. Any gains exceeding $250,000 will be taxed at a higher rate of two-thirds, or about 66.67%.
When someone passes away, their investments are treated as if they’ve been sold at their current market value, which can lead to significant capital gains tax on any increase in value. This tax can often be much higher than probate or estate fees.
What does the law presume about joint investments with an elderly parent?
When a parent adds their child as a joint owner to an investment account, the law typically presumes that this arrangement is a resulting trust rather than a gift.
A resulting trust is a legal concept where the child, as a joint owner, is considered to hold the investment in trust for the benefit of the parent. This means that the child does not gain full ownership of the investment; instead, they are expected to manage it on behalf of the parent. Upon the parent’s death, the presumption is that the investments remain part of the parent’s estate unless there is clear evidence that the parent intended the investments as a gift.
What are the risks of joint ownership of investment accounts?
Joint ownership of investment accounts can pose significant risks, particularly when involving non-spouses such as adult children. Legally, joint accounts with non-spouses do not guarantee that the children will be recognized as beneficial owners. Without clear documentation, these assets might be included in the estate, which can lead to probate fees and legal disputes.
Control and security concerns are also notable with joint accounts. Co-owners can withdraw funds or change account terms without the consent of the other owners, which can diminish the original owner’s control. Furthermore, joint accounts are vulnerable to claims from creditors or complications arising from a co-owner’s divorce. If the court deems the investments as held in trust rather than as a gift, the adult child may lose access to these funds.
The assets would then be returned to the estate and distributed according to the parent’s will or probate laws, which could lead to unexpected financial challenges and disputes among family members.
How can you avoid these pitfalls?
To avoid complications, it is crucial to clearly document the parent’s intentions regarding the joint investments. If the investments are intended as a gift, you should create a gift acknowledgment. If not, have a lawyer draft a trust agreement. This agreement should explicitly state that the investments remain the parent’s property and are managed by the child on the parent’s behalf.
In either case, working with a lawyer to draft these documents is essential to ensure everything is clear. Proper documentation can save significant time, money, and emotional stress for all parties involved, helping to maintain family harmony during difficult times.
Build a strong estate plan with Beeksma Law
When navigating the complexities of joint ownership and estate planning, you need strong, strategic guidance. At Beeksma Law, we bring extensive experience and a deep understanding of the nuances involved. Our team not only excels in estate law but we also have strong connections with professionals in tax, finance, and other related fields.
By choosing Beeksma Law, you benefit from our proven track record to safeguard your financial and legal interests and help you leave behind the greatest gift of all – peace of mind.
What happens to your debt when you die in Canada?
Disclaimer: This article discusses Estate Planning. It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
When we think about what we leave behind for our loved ones, we often focus on assets and memories.
But what about debts?
For many, the thought of passing on financial burdens can be just as concerning as planning for the inheritance of wealth. Understanding how your debts will be handled when you’re no longer here is not just a practical matter—it’s an essential part of securing peace of mind for you and your family.
Let’s dive into how different types of debt are managed after death, so you can ensure your estate is settled with clarity and care. We will also talk about how you can build a strong estate plan that will help leave your beneficiaries with peace of mind.
What happens to your debt when you die? Will your beneficiaries inherit your debt?
In Ontario, when you die, your debts do not automatically pass on to your beneficiaries. Instead, your estate is responsible for settling any outstanding debts. Your beneficiaries will not inherit your debts personally, but the debts will be settled using the assets of your estate before any inheritance is distributed. If your estate does not have enough assets to cover your debts, creditors may not be able to claim the shortfall from your beneficiaries.
They would only be responsible for your debt obligations if they are a joint debtor or have co-signed or guaranteed the loan contract.
What happens if you die with more debt than assets?
In estate law, there is something called abatement. When an estate’s assets are insufficient to cover all debts, expenses, taxes, and the intended gifts outlined in the will, the beneficiaries will have their gifts reduced. If abatement is necessary, beneficiaries may receive less than what was originally intended in the will or, in some cases, nothing at all.
If the executor has sold the assets and those are used to pay any debt, and there is still money owing, then the estate would be insolvent or bankrupt and should be assigned to bankruptcy.
What happens to your mortgage when you die?
Secured debts, such as mortgages, are tied to specific assets. In the case of a mortgage, the lender holds a claim against the property. When you pass away, your mortgage debt must be settled, and this is typically done through the estate. The estate trustee will pay off your mortgage debt by either selling the property or transferring it to a beneficiary who will assume responsibility for the mortgage, subject to lender approval.
If there is a surviving co-borrower on the mortgage, they will continue to be responsible for paying the mortgage.
This is subject to what is in your lender agreement so be sure to look at that!
What happens to your credit card debt and other unsecured debt?
Unsecured debts, such as credit card balances, an unsecured line of credit or personal loans, are managed differently.
These debts are repaid from the assets of your estate. However, if the estate does not have sufficient assets to cover the unsecured debts, that outstanding balance may remain unpaid. Creditors generally cannot claim these unpaid debts from your beneficiaries.
Beeksma Law: Helping you leave behind peace of mind
Beeksma Law is committed to providing exceptional estate planning services that ensure your loved ones are protected from the burden of unresolved debts. Our team of experienced estate lawyers is not only skilled in navigating the complexities of debt management after death but also connected with a network of professionals, including valuation experts and insolvency and bankruptcy lawyers. This collaboration ensures that every aspect of your estate is handled with precision and care, from asset valuation to debt settlement.
At Beeksma Law, we understand that your estate plan is about more than just distributing assets—it’s about leaving behind peace of mind. With our comprehensive approach and professional connections, you can trust that your estate will be managed efficiently, preserving your legacy and safeguarding your family’s future.