Estate planning if you own a business

Get expert help for estate planning when a business is involved, as the issues can be complex.

If you are a business owner, your estateEstate The total sum of money and property you leave behind when you die.+ read full definition plan should cover both your personal and business assets. Estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals may include leaving the most money possible to your loved ones, with the least amount of taxes. Other goals may include caring for children, paying off debt or passing on a business.+ read full definition for business owners is more complicated because it needs to address issues, such as:

  • larger and more complex estates,
  • business succession, and
  • complicated taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition issues.

7 estate questions for business owners

  1. Do you have a buy-sell agreement with any co-owners of your business?
  2. Is the buy-sell agreement funded by life insurance?
  3. Do you have an emergency plan if you are incapacitated or die before transferring your ownership interest?
  4. Have you appointed a successor or established a process for selecting a successor for your business?
  5. If you are leaving the business to one family member, have you made arrangements to leave other family members assets of equal value?
  6. If your business is a qualified small business corporation, have you taken steps to take advantage of the lifetime capital gains exemption of $800,000 in 2014, rising to $813,600 in 2015, on your shares of the business?
  7. Have you taken other steps to minimize the potential tax liability related to your business that your heirs or estate may face upon your death?

If you answered “no” to any of these questions, you may need to address a potential estate planning issue.

Professional advice is essential

There are many ways to address estate and succession planSuccession plan The plan outlining what will happen if a key person within a company leaves, retires or can no longer do their job.+ read full definition issues involving a business – and the strategies are complex. Get professional advice from your lawyer, accountant or other business adviser before taking any action.

Planning example: estate freeze

Your estate may be saddled with a large capital gains taxCapital gains tax A tax you may pay on the profit (money) that you make investing.+ read full definition bill if your business has grown in value over the years. This could leave your family and estate with a potentially large financial burden.

An estate freeze – where the value of your business interests is frozen as of a certain date – is a common strategy to address this issue. There are many ways to do an estate freeze, but it often work as follows:

  1. Business shares are restructured so that the shares with future growth potential are transferred to someone else, typically your children. This means that the future growth is taxed in their hands, usually far in the future.
  2. You receive a new class of shares that allows you to maintain control of the business. However, the shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition value is frozen so that your estate is only responsible for capital gains accrued to the transfer date – and not any future gains.
  3. By freezing the tax liability now, your estate won’t face a potentially much higher tax liability in the future after your death. Any subsequent growth becomes part of the estate of the new owners.

Key point

Business owners often have:

  • Larger and more complex estates
  • Issues relating to business succession
  • Complicated tax issues
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