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  • Lawson, Clark & Oldman

Passing on the Family Business? Consider these Estate and Tax Planning Strategies

A family owned business would typically involve the parent or parents owning and operating the business, as well as the children or other family members possibly offering a helping hand. The parents may want the next generation to continue the business after the parents’ deaths. There are many estate and tax planning strategies to consider when contemplating and executing the succession of a private, family-held business.

Estate Freeze: “Freezing” the older generation’s interest in the business at the current market value, while still keeping control in their hands is referred to as an “estate freeze”. The next generation is introduced into the corporate structure on a tax-free basis directly or through a discretionary trust, such that future growth from the date of the estate freeze would then accrue to this next generation. Some benefits of this corporate reorganization include limiting the death tax exposure to the “frozen” value, deferring capital gains tax on the future growth of the business, allowing for income-splitting opportunities for other family members, and providing for a more tax-efficient manner to access funds from the business. The estate freeze could also be structured in a manner to protect married children at the time of the estate freeze. The shares of the business would be gifted to such children (or to a discretionary family trust) and would thus be considered exempt from the net family property rules.

Protection from Creditors: When structuring the estate freeze, it may also be worthwhile to transfer the shares of the business to a holding company and then conduct an estate freeze at this level. This arrangement would provide security to the family business against potential creditors through what is known as a “dividend loan back strategy”. Essentially, the family business company would pay a dividend to the holding company (tax-free), and then the holding company would loan that dividend back to the family business company, but take security for this loan via registering a general security agreement over the assets of the family business. The result is the protection of these assets from any future unsecured creditors of the business, as the secured holding company would rank ahead of these other creditors.

Shareholders’ Agreement: An important tool to have in place when passing on the family business to the next generation is a shareholders’ agreement, which would act as a blueprint for how this next generation is to run the business. Such an agreement would address issues like what happens upon the death/disability of a shareholder, restrictions on transferring/redeeming shares, voting rights, dividend policies and buy-sell rights.

Corporate Owned Life Insurance: Such insurance would provide funds to cover the tax owing on death, and premiums would be paid with low after-tax dollars, since corporate tax rates are lower than personal tax rates. This kind of insurance policy could also reduce the ultimate tax payable on death of a shareholder in respect of his/her corporate interest, and would allow for the tax-free distribution of the insurance proceeds out of the company.

Multiple Wills: Using multiple wills (i.e., having one will for property that would be subject to probate taxes and another for property not subject to such tax) is recommended to avoid paying large probate taxes on corporate shareholdings (i.e., shares of the family business) and other high-value assets.

If you plan on eventually passing on your family business to the next generation, it would be prudent to seek out a lawyer with expertise in both corporate law and estate planning to assist you in structuring such a transition in the most appropriate and advantageous manner.


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