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Succession and Estate Planning ConsiderationsPrivate Company Webcast Series: Part 3 of 4
July 30, 2013
Page 2 Succession and Estate Planning Considerations
Meet our presenter
David Steinberg, CPA, CATax Partner & Co-Leader, Private Mid-Market Practice
Contact Information:David.A.Steinberg@ca.ey.com416.932.6206
Page 3 Succession and Estate Planning Considerations
Succession and Estate Planning - What is it?
► Arrangement of Financial affairs to accomplish the following:
► Provide income for the individual throughout their lifetime
► Provide for tax efficient wealth transfer
► Provide for seamless transfer of business including management
► Asset protection
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Page 4 Succession and Estate Planning Considerations
Succession and Estate Planning - Other
► Requires flexibility
► Things change
► Rules change
► Family law considerations
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Page 5 Succession and Estate Planning Considerations
Estate Planning vs. Succession Planning
► Estate Planning► Usually involves a tax driven estate freeze
► Succession Planning► Involves internal reorganization and recognition of “who” will take
over business
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Page 6 Succession and Estate Planning Considerations
Succession and Estate Planning
► Important to be proactive and develop a plan early
► Common reasons for not starting the process
► “Business is nothing without me”
► “Without the business, I am nothing”
► “Tough to break the routine of going to the office everyday ”
► “The kids want to change the way the business is run”
► “Nobody can run the business as well as I can”
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Page 7 Succession and Estate Planning Considerations
Estate Planning - Tax Considerations
► Objective is to reduce tax by way of an estate freeze
► Defer tax as long as possible
► Provide certainty of tax to allow for funding (life insurance)
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Page 8 Succession and Estate Planning Considerations
Estate Planning - Taxes to Consider
► On death there is a “deemed disposition” of all assets, including shares of private businesses
► Tax rate is approximately 25% (Ontario) of gain
► Ontario probate is 1½% of fair market value of assets (including shares of private businesses)
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Page 9 Succession and Estate Planning Considerations
Estate Planning - Things to Consider
► Shareholders agreements
► Family & spousal trusts
► Wills ► Primary► Secondary
► Insurance
► Share ownership
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Page 10 Succession and Estate Planning Considerations
Estate Planning - Estate Freeze
► Allows for the current value of business to be “frozen” at today's value and passes future growth on to the children
► Effective for “crystallizing” tax liability today
► Allows for certainty of future tax liability and planning for funding (insurance)
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Page 11 Succession and Estate Planning Considerations
Estate Planning - Estate Freeze
► Voting control continues with original shareholder
► Allows for access to multiple capital gains exemptions for children ($800,000 (2014) tax free CGE)
► Allows for possible income splitting
► Can be structured to be “reversible”
► Allows for creditor proofing at same time
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Estate Planning - Estate Freeze
Typical Example
Before
Mr. A
Opco
100%
FMV of business = $20 million
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Estate Freeze
Typical Estate Freeze
AfterS86 Type Freeze
Mr. A
Opco
100% common“future growth”
Family Trust
• Fixed value “frozen shares” $20 million• Voting control
Succession and Estate Planning Considerations 30 July 2013
Beneficiaries = Children
FMV of business = $20 million
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Estate Planning - Estate Freeze
AfterUsing Holdco
Mr. A
Opco
100%
FMV of business = $20 million
Holdco
• Fixed value “frozen shares” $20 million• Voting control
Family Trust
Beneficiaries = Children
100% common “future growth”
Loan back $20 million securedTax Free Dividend $20 million
Typical Estate Freeze
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Estate FreezeTypical Estate Freeze
► “Future Growth” of Opco above $20 million to children (via Trust)
► Mr. A value at death “frozen” at $20 million
► Tax liability frozen at $5 million
► “Creditor proofed” $20 million
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Estate FreezeOther Issues
► The use of investments (of Mr. A) held by Holdco can help reduce the tax liability over time at no cost
► Tax liability can be deferred if shares “willed” to spouse
► Children, through trust, have access to enhanced capital gains deduction
► Valuation of business is needed to support “freeze value”
Succession and Estate Planning Considerations 30 July 2013
Page 17 Succession and Estate Planning Considerations
Estate Planning - Other Issues
► Family Trust can be discretionary to provide flexibility on distribution to children
► Family law considerations are important if children get married
► Control of company held through voting special shares
► Control of trust by Trustees
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Page 18 Succession and Estate Planning Considerations
Estate Planning - Other Issues (cont.)
► Liquidity to parent via redemption of preferred shares
► If intent is that business will be sold, consider no freeze
► Freeze can be structured to be “reversible”
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Estate Planning - Refreeze
► Shares have declined in value after original freeze
► Common shares held by children / trust have no value
► Reorganize shares and convert parent’s freeze shares into new freeze shares with a new lower value
Succession and Estate Planning Considerations 30 July 2013
Page 20 Succession and Estate Planning Considerations
Estate Planning - Wills
► Wills should always form part of the estate plan
► Use of spousal trust and testamentary trusts
► Use of primary & secondary wills to avoid Ontario probate (1.5%)
► Powers of Attorney
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Estate Planning - Succession Issues
► Identifying the “right” successor to run the business
► Should involve discussions with all children
► May require other assets used to equalize “non“ active children (i.e. real estate / cash)
► The time to start this planning is before retirement
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Succession Issues
► If no clear successor, consider exit strategy
► Possible sale or partial equity investment by others
► Take money “off the table”
► Tax planning on exit
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Other Planning
► Low interest (1%) loans should be currently used for income splitting with children/spouse with little or no income
► TFSA’s
► RRPS’s
► RESP’s
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Use of Investment Holdco’s
► Maximum personal tax rate on investment income in Ontario in 2013 is 49.53%
► Maximum corporate tax rate in Ontario on investment income is 46.2%
► Deferral opportunity of 3.3% by use of investment company
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning 2013 Personal/Corporate Investment Income Tax Rates
Personal Corporate
Dividends 33.85/36.47% 33.3%
Capital Gains 24.77% 23.1%
Interest 49.53% 46.2%
1. Going up to 38.6% in 2014
1
Succession and Estate Planning Considerations 30 July 2013
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Estate Planning - Use of Investment Companies
Before
Mr. A
Opco
100%
HoldcoPortfolio
100%
Succession and Estate Planning Considerations 30 July 2013
Page 27
Estate Planning - Use of Investment Companies
After
Mr. A
Opco
100%
Holdco
• Portfolio
Tax free transfer of portfolio
Succession and Estate Planning Considerations 30 July 2013
Page 28 Presentation title
Questions?