Succession and Estate Planning Considerations

Succession and Estate Planning ConsiderationsPrivate Company Webcast Series: Part 3 of 4

July 30, 2013

Succession and Estate Planning Considerations

Meet our presenter

David Steinberg, CPA, CATax Partner & Co-Leader, Private Mid-Market Practice

Contact Information:[email protected]


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

30 July 2013


Succession and Estate Planning - Other

► Requires flexibility

► Things change

► Rules change

► Family law considerations

30 July 2013


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

30 July 2013


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”

30 July 2013


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)

30 July 2013


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)

30 July 2013


Estate Planning - Things to Consider

► Shareholders agreements

► Family & spousal trusts

► Wills ► Primary► Secondary

► Insurance

► Share ownership

30 July 2013


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)

30 July 2013



► 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

30 July 2013


Typical Example

Before

Mr. A

Opco

100%

FMV of business = $20 million

Succession and Estate Planning Considerations 30 July 2013


Typical Estate Freeze

AfterS86 Type Freeze

Mr. A

Opco

100% common“future growth”

Family Trust

• Fixed value “frozen shares” $20 million• Voting control


Beneficiaries = Children



AfterUsing Holdco

Mr. A

Opco

100%


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


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


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”



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

30 July 2013


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”

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



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

30 July 2013

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


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


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


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


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


Estate Planning - Use of Investment Companies

Before

Mr. A

Opco

100%

HoldcoPortfolio

100%


Estate Planning - Use of Investment Companies

After

Mr. A

Opco

100%

Holdco

• Portfolio

Tax free transfer of portfolio


Presentation title

Questions?

Succession and Estate Planning Considerations

Documents

Transcript of Succession and Estate Planning Considerations