October 21, 2020
For business owners, estate planning is directed at protecting the business’s legacy as well as the financial security of both family members and key business stakeholders in the event of their incapacity and, ultimately, death. Without proper planning, your wishes may go unfulfilled, your estate will likely pay more, and ultimately, your beneficiaries get less. Talk openly with your family and beneficiaries, and with an estate and trust lawyer, to get a plan going.
All estate plans share three fundamental ingredients:
Business owners, however, have additional planning considerations. Here are three key ones.
1. Transfer or sell?
A crucial decision is how to deal with the business on the owner’s death. Often, the plan is to transfer it to a family member(s) or sell it on the open market. Before deciding, however, speak with family and business partners to ensure their interests are covered. For example, a plan to transfer the business to a child lacking the interest or skills to take over might not be ideal. Instead, it might be better to sell it to a different family member before the business owner’s death. This is sometimes done at fair market value in return for a promissory note payable to the owner over time. But it’s critical that the owner obtain a security interest (an enforceable claim to secure the payment of the promissory note) against the business assets to protect them in case that family member experiences financial difficulties or a marital breakdown. If the business is a “gift”, the business owner’s Will should indicate that any amount outstanding pursuant to the promissory note is forgiven on the owner’s death.
2. Taxes?
All business owners must pay capital gains tax on the disposition of their shares in their business, which happens either on the sale of the owner’s shares to a third party or on the owner’s death. One option to reduce the amount of capital gains tax is an estate freeze. An estate freeze “freezes” the amount of taxable capital gains in a business owner’s estate, usually allowing the owner to utilize the lifetime capital gains exemption, and attributes future growth to the owner’s successors. A business owner should calculate the anticipated capital gains tax that will be payable at the time of the owner’s death and determine whether the estate can pay the tax; if not, the estate might have to liquidate the business or seek other solutions.
3. Contractual succession?
A shareholders’ agreement might set out terms relevant to business succession planning, including:
Please contact your McInnes Cooper lawyer or any member of the Estates & Trusts Law Team @ McInnes Cooper to discuss how we can help you with your estate plan.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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