Help a difficult, elderly client

Wire and cable magnate Morris Lewis* has a plethora of business succession and estate planning issues. We spoke with three experts to determine the best solutions for his legacy.

The situation

Lewis sent all four of his children to Ivy League schools in the U.S. and doesn’t believe it did any good.

He’s 87 and was pre-deceased by his wife Ella three years ago. She died from complications following a stroke and, for two years after her passing, Lewis made four $125,000 donations to the Heart and Stroke foundation before becoming disenchanted with fundraising calls. He then had his number changed and unlisted, and has since made annual $100,000 anonymous donations to the hospital where she died. His lawyer is aware of the donations because he couriered the cash personally.

He still owns Pickering, Ont.-based Lewis Cable, but turned the firm over to professional management 10 years ago. He’s so far refused all buyout offers based on his personal valuation of the company at $45 million. Offers have ranged from $25 million to $31 million, and all offering memoranda have pointed to the distressed state of the factory and its equipment (the last major upgrade was the addition of two new production lines in 1979), as well as the presence of industrial contaminants, including lead, PCBs and various petrochemicals, on his plant site and adjoining real estate that the company owns.

The experts

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  Malcolm Burrows, head, Philanthropic Advisory Services, Scotia Private Client Group

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  David Shlagbaum, senior partner, Robins Appleby & Taub LLP

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  Stanley Tepner, first vice president, investment advisor, CIBC Wood Gundy

The most recent, and still active, offer is for $29 million and comes from current company managers. The offer pays out over five years and Lewis is considering it largely because it includes outlines for funding to upgrade the business and improve its competitive edge. While Lewis questions whether he’ll live long enough to take the total payout, he has begun to recognize the premises are distressed and likes the idea of ownership remaining in Canadian hands.

He lives in a 25-room mansion on which no meaningful maintenance has been performed since 1992. The home sits on eight acres in a once-posh section of town. Adjoining properties were sold and parceled for tract housing in the late 1960s and into the 1980s. The house is assessed at $6 million for tax purposes.

His eldest son, Irwin, is 60 and works as a corporate counsel for an automaker. His annual compensation nets him $350,000, but in the eyes of his entrepreneur father, he’s a failure. One year ago, after a particularly nasty argument about the idea of moving out of his tumble-down house and possibly setting up a family charitable foundation, Irwin requested a mental capacity assessment for his father. Morris passed with flying colours and still accuses his son of wanting to establish the foundation for the purposes of embezzling funds.

His eldest daughter, Emma, is 56 and married to a Toronto heart surgeon. She worked as a marketing professional before leaving the workforce when her first child was born in 1990. Her husband’s $600,000 annual salary is her sole source of income. She’s since had two other children in 1993 and 1996. These three, one daughter and two sons, are Lewis’s only grandchildren. She visits her father often and considers herself the most loyal. She views her two youngest brothers as failures and has said as much during family dinners that don’t end well.

His next son, Jason, is 52 and works as a stage manager at a theatre in southwestern Ontario. He lives alone in a rented apartment on a $90,000 annual salary. He attempted suicide after his mother’s death and has done volunteer work for hospitals and heart-health-related charities. He refers to his eldest brother as “that corrupt lawyer” behind his back.

The youngest child, Stephen, is 49. He spent 20 years trying to make his mark as an artist in Calgary after receiving an MA in Architecture but opting not to practice. He’s since returned home an acknowledged failure and set up an apartment and studio in an unused wing of his father’s house. He has no income, but managed to emerge from his failed art stint debt-free. He’s suggested to his father that he be the one to redevelop his residential property and shown him site and individual dwelling plans. Stephen always considered himself closest to his mother, though Jason disputes that. Aside from Stephen, Lewis is not providing financial support for any of his children.

Lewis has no equity investments outside his business. He has a $2-million UL policy that still names his late wife as beneficiary.

His most recent will is 25 years old and still names his wife as sole beneficiary, though an addendum names the kids as equal-share beneficiaries in the event of her passing. There is also a provision for creation of a trust for grandchildren.

His lawyer is listed as executor, and is aware that Ella was intent on equal treatment of the children. She told the lawyer she felt some were clearly better off than others.

Business succession

DS: There’s a huge disconnect between what he thinks the business is worth and the offers he’s receiving. So he must get an independent valuation done, which could cost from $10,000 to $25,000, depending on the level of detail he wants. He should also find out what it will cost to revamp the company to get a more realistic viewpoint on what he could expect from a potential purchaser.

Also, the only offer that’s on the table is from the management team—the same team that’s been operating this business for the last 10 years and has pushed this company to the state it’s currently in. It’s got antiquated equipment, the place is a mess, and they appear to have some potentially significant environmental issues to deal with.

So he’d be hooking his prospect of getting paid the balance of this purchase price to the competence of the same management team that has not done the greatest job. If he considers this offer, he should find out what the source of financing will be.

Still, he should entertain other offers once he knows what the true value of the business is. Given his age, his best prospect is to look for a cash transaction so he doesn’t have to deal with the complications of financing over time. If no one’s willing to pay cash, then ensure the potential buyer has deep pockets. He’ll want to employ a broker who can shop the business for him. This expert should have experience handling M&As, and be able to qualify potential buyers before bringing them to Morris.

MB: I agree. Everything so far has been done on a whim, and the result is the business has declined. He needs to consult experts, including a business valuator, broker, lawyer and accountant because, frankly, he’s running out of time.

DS: And if he was going to involve his children in the business and give them equity or voting shares, then he should have a shareholder’s agreement in place that continues to give him control of the company during his lifetime. He’d also have to be confident these children want to manage the business and are capable of doing so.

ST: None of them have shown any talent or experience to manage a business, and perhaps they’re already past the age where they’d be readily able to acquire the talent to do so.

MB: Also, he doesn’t have a legal obligation to consult his children. If he pitches the sale of his company to one of them, it could actually create further discord among the family.

DS: So selling the business is the best option. If he does want to keep it in the family, then he should have a meeting with all members, telling them his goals and asking who’s willing to manage it. He should create a board of directors, including the kids who want to be involved, as well as outside members. Finally, he should outline these details in the shareholder’s agreement.

Still, Morris doesn’t seem the type to go this length to bring his family together. At the most, he’ll probably talk to them about managing the funds that will come out the sale of the company, and even this could cause conflicts.

Property

DS: His property has development potential, so he should consider selling to a developer who’ll pay the price. At his age, selling is a smarter move instead of getting involved in a partnership or joint venture that would require administration or decision-making.

MB: But it depends if Morris is comfortable downsizing his home. If he doesn’t move he needs to consider the type of support he’ll need, including something as simple as lawn cutting, or as complex as long-term nursing care.

ST: Also, it seems like his only assets are the business and property. Yet I suspect there’s still some significant liquid chunk somewhere that would have come from the sale of the houses, and funded the insurance policies, donations and his lifestyle. Perhaps it’s in GICs, offshore investments or hidden somewhere. But he should empty out the tin cans and mattresses, and employ an advisor who can help him look at his current assets, how they should be deployed, what type of liquidity he’ll need and what the tax implications are.

Estate planning

DS: Morris must update his will, stating what he wants to do with his assets. If he dies right now everything goes to his children, and they have to go into a partnership without a shareholder’s agreement. It’s a disaster.

Since he lives in Ontario, he could probably save himself somewhere in the neighbourhood of $450,000 in probate fees if he used a primary and secondary will, and sheltered the value of the business in his secondary will. But if the Ontario government decides to outlaw dual wills, then he’ll have no choice but to pay the probate fees.

His outdated will names his lawyer as executor so he needs to decide if that’s working. There’s little hope of getting the children together to manage the estate, but if there was a cohesive group of siblings, then it wouldn’t be unusual for one or two of them to be added to the executor group.

He must immediately set up powers of attorney for his property and for personal care, so that if he has a stroke tomorrow, someone can manage his affairs. He’s got to decide whom he can trust to make decisions about his health if he’s completely incapacitated, and manage his property—likely legal and financial experts for the latter.

MB: The obvious choice for power of attorney for personal care would be Emma, who appears to have the strongest active relationship with her father.

And if Morris does want to repair relationships, he could set up a foundation in memory of his wife. I’ve found, over the long term, having a middle ground where everyone comes together can help a family dynamic. But Morris would have to decide how they could work together. Perhaps they share expenses, but don’t meet in person often.

DS: I agree, but he should’ve established the foundation earlier so it was already part of his estate plan. We’re at a very difficult point in Morris’s evolution. Given the attitudes towards family and his assessment of his children—that they’re all failures—it’s not a fertile ground for creating a foundation.

MB: But from a transition perspective, based on the assets he has and the potential capital gain that would be triggered if the company sold, then having a foundation could be very helpful to put funds into.

DS: He could also create a discretionary trust to maximize his capital gains exemption.

ST: But based on the financial acumen of Stephen, and mental health of Jason, Morris may want to consider staggering the ages of distribution of their inheritances.

DS: Yes, he could have the executor in a supervisory role for a period of time until he’s satisfied that the kids are capable of managing their affairs.

MB: Then again, given their ages, we shouldn’t assume they couldn’t manage their funds. You might stagger their distributions for three to five years.

ST: He could also give them annuities, so they get ongoing income every month or year instead of a lump sum they might blow at once.

And this is different than an annuitized-style distribution from a trust because it provides guaranteed income for life, while the latter only provides cash flow as long as there are assets that can be distributed.

And the taxation in annuity income is treated as fully taxable, straight income. Meanwhile, an annuitized-style distribution can be invested in for capital gains and eligible Canadian dividends at a much lower tax rate. Overall, a combination of both these strategies makes sense.

Final thoughts

DS: Morris needs to start with a reality check, so he has a clear handle on what the value of his assets are, as well as what the potential is.

Then he needs to decide what his intentions are for his children, and whether he wants to involve them in the estate planning process. Finally, he has to decide what the purpose is for his money.

ST: And he needs a good lawyer, financial advisor and accountant who possess the talents and sensitivities to handle the financial, legal, psychological and emotional aspects of his case. AER

*This is a hypothetical client. Any resemblance to real persons, living or dead, is purely coincidental.