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Setting up for success: Three key estate planning considerations for business owners


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 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 key ingredients:

●  A power of attorney to deal with your finances in the event of your mental incapacity or physical inability.

●  An advanced health-care directive to deal with your health-care decisions in the event of your mental incapacity or physical inability.

●  A will to deal with the distribution of your estate after your death.Business owners, however, have additional estate planning considerations to take into account. Here are three key ones:

1. Transfer or sell the business? A key decision is how to deal with the business following the owner’s death. Often the plan is to either transfer it to family members or sell it on the open market. Before deciding which, speak with family and business partners to ensure their interests are covered. For example, a plan to transfer the business to a child lacking 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 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 owner’s will should indicate that any amount outstanding pursuant to the promissory note is forgiven on the owner’s death.

2. Capital gains tax liability? All business owners must pay capital gains tax on the disposition of their shares in their business. Disposition 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 to meet the tax obligation.

3. Contractual succession obligations or rights? A shareholders’ agreement might set out terms relevant to business succession planning (or if there isn’t already a shareholders’ agreement, one could be negotiated to do so) including:

●  Death – If (or when) a shareholder dies, will the remaining shareholders of the business be obligated to buy out their interest? Will there be life insurance available to fund a buy out? Who will get to remain as shareholders?

●  Disability – If a shareholder becomes disabled, will the other shareholders be obligated to buy out their interest if their disability is long term? Is there sufficient insurance available to fund a buy out?

●  Former Life Partners – If a shareholder separates or divorces, will their former life partner be entitled to any shares? If so, will the other shareholders have the option of buying out that former life partner?

●  Disagreement – What happens if the shareholders no longer agree about the future of the business? Which shareholders will have the option of buying the others out? Is this a plausible solution or should the business be sold on the open market?

Sheri Wicks, Contributed
Sheri Wicks, Contributed

Sheri Wicks is an Estates and Trusts and Commercial Lawyer in McInnes Cooper’s St. John’s office.

This article is for information only; it is not legal advice. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2019.   All rights reserved.

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