Family Succession Planning for Insurance Brokerages

For many family-owned brokerages, the ideal succession planning option is to pass ownership to the next generation instead of selling or merging with another firm. This is especially true if you have family members in the next generation who are active in the business and have effective leadership skills or demonstrate potential as a brokerage owner. 

The biggest advantage with this option is that it can keep the business you invested so much effort into within the family and can ensure that it continues to operate according to your vision and values. On the other hand, these transitions can often be more complex than a straightforward merger or sale, as the next generation of your family likely does not have equity to invest into the brokerage. As a result, the family has to be more thoughtful about how to finance such a transition. Secondly, there are many tax implications associated with transitioning ownership of a brokerage to a family member. 

In general, the cash you will receive as the exiting shareholder will be a combination of these two forms: 

  1. Initial payment based on the amount that the next generation can finance 
  2. Future payments based on cash flow that be taken out of future earnings. Many lenders have programs to finance the buyout of brokerages; however, given current valuations, the amount that can be financed is usually less than half of the total brokerage value. Even if you are willing to provide a family discount, it is likely that you won’t receive the full amount of your proceeds on closing. In the majority of family transfers, the remainder of the proceeds are paid out over a number of years based on the excess cash flow from the business. 

Once you determine the amount to be paid, there are various ways that these payments can be structured. Tax planning is usually the most significant consideration when determining the preferred payment structure. Here are some general tax factors you will want to consider when planning for the transfer of your brokerage to the next generation: 

  • selling assets versus shares (or a hybrid of both) 
  • attribution rules 
  • deemed disposition rules 
  • differences between business income, capital gain, and dividend tax rates 
  • tax deferral opportunities 
  • loss planning 
  • the lifetime capital gains exemption 

In our experience dealing with family transfers of brokerages, we have observed that utilizing a family trust or estate freeze can be an effective way to transfer ownership to the next generation while still retaining control that can be passed on at any time. 

Historically, this has been the most common structure for the transition of a family-owned brokerage. Such a plan generally minimizes tax liabilities and preserves wealth while also handing over the business. Establishing a family trust involves freezing the current value of the brokerage and introducing a discretionary family trust that will own the growth shares of the business. The current owner(s) of the family brokerage would be trustee(s) and would control the business as they had before, while the trust would have beneficiaries that may or may not be involved in the brokerage. 

Going down this path has a number of benefits whether you decide to transition ownership to the next generation or sell to an arms-length party, such as multiplying the lifetime capital gains exemption among family members; distributing shares held by the trust among family members that are part of the brokerage succession and beginning estate planning for the current owner(s). This structure can be put into place several years in advance of the intended transition date. 

The introduction of Bill C-208 in 2021 added an additional option for brokerage owners looking to pass their business to the next generation. Initially proposed as an easier way to facilitate intergenerational transfers of small businesses, Bill C-208 was an important change hailed by many as it equalized the income tax treatment between an arm’s-length party sale and a sale to the next generation. The 2023 federal budget added additional criteria for which transactions would qualify for capital gains treatment. The revisions to the bill allow for the immediate or gradual intergenerational transfers of Qualified Small Business Corporation shares to qualify if certain criteria are met. 

A successful transfer of ownership within the family requires careful analysis of brokerage valuation, financing and tax issues. You can reach out to an expert at Smythe below for assistance in any of these areas.