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Estate Tax Minimization Concepts

For most business owners, estate planning happens sometime just before retirement ! The old saying of "No Planning = No Results" really holds true here. Most importantly it can divide families forever if their is any perception of "unfair treatment" in the process. The following are some basic concepts a business owner can initiate to minimize the financial & emotional issues revolving around the succession of the business and distribution of estate assets.

Estate Freezes & Section 85 Rollovers

Estate freezing is a term used to describe steps taken to fix the value of your estate (or some particular asset) at its present value, so that future growth will accrue to your successors (family or business affiliates) and not be taxed on your death. The freeze is accomplished by the exchange of common shares for preferred’s with voting rights. This structure allows you to retain control of the corporation.

This concept is often structured with a holding company and a family trust as part of the freeze, rather than having your children subscribe directly for the shares in the operating company. You can also continue to receive income from the corporation, either by declaring dividends on the preferred shares, or by drawing a salary if you continue to work in the business. If you use a trust to acquire the common shares, you can retain flexibility with respect to allocating the shares of the business among your children later.

At the same time you set up the freeze, you can trigger part or all of the accrued capital gain on your shares to date. This may allow you to use your $750,000. capital gains exemption available to small business corporations.

Section 85 rollover is the process of transferring the assets of business which you carry on personally into a corporation on a tax free basis by taking advantage of the $750,000. exemption. There are exemptions to be considered under this process (crystallizing) and you should review these with a tax accountant and lawyer.

Whether an estate freeze/Section 85 rollover is useful to you will depend very much on your business, financial position, your future plans and your goals. Qualified professional advice should be obtain before this type of planning is undertaken.

Beneficiaries - Spouse/dependent children

First and foremost, the needs of the surviving spouse must be dealt with. In the past the small business sector was male dominated. In those days, females looked after the daily accounting and administrative issues. The tide has changed and there are more females starting their small businesses.

As a result, insuring income for the survivors is a key part of any estate plan. A planned estate will allow them to maintain the lifestyle they have been accustomed to. It is a "Small Business" ? Remember, your company is not a large public conglomerate under the direction of a Board of Directors. For many small businesses, when the owner leaves, the business closes and sells at a discount ? Ouch ! No assets = No Income ! Yes it is that simple and the statistics presently support these numbers. My guess is in the past "No Planning = No Succession".

It is quite conceivable the owner has built-up a good business only to find out none of the children are interested or capable of taking over at some time in the future. A big part of the succession planning process is to grow the financial & management skills of your family and key personnel. Naming beneficiaries is easy, it is more important to help them understand what they are the beneficiaries of ?

RRIF Insurance

Most people are unaware of the tax liability associated with the RRSP/RRIF’s in the year of death. Your RRSP/RRIF can be rolled to your surviving spouse with no tax liability other than the income paid to him/her from the respective plan. For example, let’s assume you have $100,000. in a RRSP/RRIF and there is no surviving spouse. Unless you have children which are financially dependent on you, the $100,000. is reported on your final return and taxed as income. Considering the graduated tax rates (i.e. 27%, 42% & 50%) the tax liability on the RRSP/RRIF alone is approximately $41575. Net to the estate = $58425.

RRIF insurance is a concept which provides sufficient capital to pay the tax liability. The benefit of this concept is the opportunity to pay the liability in a more cost effective way.

Testamentary Trusts

These are the true hidden gems in the estate planning process. Nobody talks about this simple concept which can on a $100,000. estate reduce the tax liability up to $12,000.

You don’t have to be a Rocket Scientist to figure this one out. Contact us to get your free copy of the article.

Estate Bonds

The estate liability is comprised of many different types of assets. Some of the more common are; At the present your principal residence is exempt from taxation. The problem with assets is their liquidity and their values at certain times under varying conditions. We have all witnessed the hi’s & low’s of the real estate and stock markets. Imagine for a second, if you owned a very successful business and unfortunately had a stroke & died. Your survivors may be forced to sell the business at fire sale prices since there was no estate plan in place ! All the dreams and aspirations for a happy, healthy and worry free retirement have now changed quite dramatically.

Lets do the math on the sale. As an operating business, your accountant has placed a business value of $1,000,000. for argument sakes. The business is generating an annual net income of $100,000. before taxes and we will assume there is "Zero" debt. The ACB (adjusted cost base) is $500,000. and there is no surviving spouse. So far so good and everything seems reasonable, right ?

Your survivors have basically four (4) choices to deal with the tax liability under these circumstances;
  1. Use Cash
  2. Sell the Assets
  3. Borrow the money from a bank
  4. Set-up Estate Bond Plan