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Posted on March 1st 2009 in Commercial Law

Part 2: The Handoff

Earlier this year, we asked the question “Is your family’s business ready for the hand off?” If it is not, you are not alone. Although more than 70 percent of small business owners have plans to retire within the next 10 years, almost two thirds have no concrete plan for the future of their business.

If it is your hope that your business will continue to thrive when you are no longer involved, a succession plan is crucial. A well-thought out plan will detail how the business should be managed by the next generation following your retirement. The plan will also outline strategies for reducing the future tax burden.

In our first article (Legal Issues, Spring 2007) we provided an overview of the key steps that are involved in a successful succession plan. Those steps are:

1. Gathering necessary information and deciding on the viability of keeping the business in the family.
2. Developing a plan for succession, which includes a timeline.
3. Implementing the plan.

Creating an effective succession plan is a complex process. But the experienced help of professionals can smooth the way. One of the main areas that you will want advice on is the area of tax planning.

When an individual dies, the tax laws deem that all the individual’s assets are disposed of at fair market value. If the individual’s business has been successful, the amount of taxes that will be owing at the time of death are likely to be significant. However, there are a number of tools that can be used to reduce and/or defer the amount of taxes that will be owing.

The Estate Freeze
An estate freeze allows you today, to freeze or lock-in your tax liability at the time of your death. Any future gains will accrue to shares held by your children and these gains will not be taxable until they sell the shares.

There are a number of ways to effect an estate freeze, including transferring the assets you wish to freeze to a holding company or to a trust. In addition, you can choose to do one or more partial freezes.

A lawyer who specializes in business law can advise you as to the best option for your particular situation. He or she can help you decide on the timing of a freeze, what to freeze and how much to freeze. Your lawyer can also advise you on such things as a shareholder agreement and a will, documents that will round out your succession planning.

Life Insurance
Life insurance is probably the most logical option for dealing with the taxes that will be payable at the time of the business owner’s death. Life insurance can also be used in situations where one or more children are not or cannot be involved in the business.

Life insurance will often be used in conjunction with an estate freeze.

Before proceeding with an estate freeze, a business owner must project his or her future financial needs, particularly on retirement. There are a number of ways to create retirement income, including RRSP contributions, a retiring allowance and a redemption of freeze shares.

A discussion about your retirement fund should be dealt with as part of the overall succession planing exercise.

Deciding how your business will continue once you are gone can be a daunting prospect. But with proper advice it does not have to be.

Howard Steinberg has worked with family-owned businesses for many years and Stanley Landau has many years of experience with estate planning. Both Howard and Stanley would be pleased to answer your questions and to assist you in this process. 1