A family-run business is built on value and trust. It becomes a strong foundation within a community. Family-run businesses usually pass the ownership to the next kin. If you run a business and you decide that it’s time to hand over the reins to your next of kin, you could be wondering what’s the best way to do that.
One of the options to transfer business ownership to next of kin, current management or even a friend is through an estate freeze. If you want to get estate freeze right, it is best to hire an accountant.
What is an Estate Freeze?
An estate freeze is quite possibly the most tax efficient manner to transfer the ownership. You transfer ownership without making a sale. After transferring ownership, you continue to receive shares worth the current value of your business and defer the income taxes on the capital gain to the time of the actual disposition.
In a usual estate freeze, you exchange your business shares for preferred shares. Preferred shares have a permanent or frozen value, which is equal to common shares’ fair market value at the time of the estate freeze. Basically, preferred shares ensure that you receive a fix dividend with a high priority than common share dividends.
Furthermore, the new owner can subscribe new common shares and sell them to raise capital for the business. Upon your death, the preferred shares will go back to the business.
If you have an incorporated business worth $3,000,000 that undergoes an estate freeze, you will be issued preferred shares worth $3,000,000.
A key facet of an estate freeze is that the reduced tax liability is fixed in respect with your company’s shares.
Preferred shares serve as a source of retirement income
You have the option of creating a family trust to hold common shares. The family trust allocates dividends to family members with lower marginal tax rates.
An estate freeze may turn into a difficult option if children create a dispute to control the business
Divorce and separation can impact your estate freeze
How much control you maintain after an estate freeze depends on how much control you decide to relinquish to your successor. You can remain on and have voting rights or be present on an advisory capacity. It is entirely up to you.
Before you settle down for an estate freeze, it is crucial to discuss it with all the stakeholders. Resolve any succession disputes before you start the estate freeze process. Once your family is in agreement, you should hire an accountant to ensure that the estate freeze is implemented correctly. You will find ATS Accounting is quite adept at fulfilling yours and your business’s needs.