Estate planning for business owners can ensure a smooth transfer of assets, and the preservation of wealth, for future generations. For business owners in Ontario, proper estate planning can not only safeguard the fruits of a lifetime of hard work, but can also facilitate the seamless continuation of business operations.
This blog will explore the key considerations and strategies that business owners in Ontario should bear in mind when undertaking estate planning.
1. Succession Planning: What will happen to my business when I pass away?
The main consideration in estate planning for small businesses owners is, generally, “what will happen to my business after my death?”.
The answer to this question typically emerges when business owners turn their minds to succession planning. At the heart of a succession plan is deciding who will take over the business after the owner’s passing. For example, an owner may wish to pass the business to family members, key employees, sell it to a third party, or wind-up operations entirely. The successor, where one is chosen, should ideally possess the necessary skills and knowledge to lead the business effectively.
Consulting and confirming wishes with loved ones, or potential successor(s), in advance, is an important part of this process. While a business owner may, for example, wish for their children to take over the business, such an objective will be difficult to implement where the owner’s children have no interest in doing so.
2. Tax Considerations
Tax considerations play a pivotal role in estate planning for business owners in Ontario. A failure to consider tax as part of a business owner’s estate plan can result in significant tax liability for that individual in the year of their death. One such tax liability arises when capital property held by the testator is not properly accounted for in the estate plan. As we know, one is not able to take anything with them in death, and, as a result, there is a deemed disposition of capital property, held by the testator, at its fair market value, on the date of death. This deemed disposition rule attributes to additional (and usually unforeseen) income in that year upon which tax is usually paid by the estate.
Proper estate planning will consider and account for capital gains tax, income tax, estate administration tax (more commonly referred to as “probate fees”) and other levies in order to maximize the legacy left to one’s beneficiaries.
For example, and as further elaborated on below, a common strategy used by business owners, to offset these potential liabilities, is to create multiple-wills. Another example would be making charitable donations in your Will(s). The estate could then obtain and take advantage of the donation tax credit issued by the applicable charity.
The use of trusts and gifting strategies can also help reduce the tax burden on both personal and business assets in the event of a business owner’s passing.
Business owners should also consider the potential for double taxation on death, meaning a tax burden against both the deceased and any corporation in which the deceased held shares. Business owners should work closely with tax professionals to devise strategies that optimize tax efficiency. Many of the strategies that are available to reduce the potential for double taxation must be completed within the first taxation year of the estate, and so we recommend representatives of the estate to act promptly in their estate administration.
3. Business Structure and Legal Documentation
The legal structure of the business can also influence estate planning decisions. For example, estate planning for a sole proprietorship will have different considerations as compared to a business run through a corporation.
Consultation with estate planning and business counsel can ensure the right decisions are being made for your circumstances.
For example, business owners should ensure that any legal documentation which may be in existence, such as a shareholders’ or partnership agreement, align with their estate planning goals. These documents often contain provisions for the transfer of ownership in the event of the owner’s passing which may be at odds with your estate planning objectives. A review of these agreements during the estate planning process can ensure your wishes are implementable.
Shareholders’ and Partnership agreements, where they are not already in place, can also be an excellent tool to for enforcement of estate planning objective. A Shareholders agreement, in particular, can generally address important business transition issues such as share ownership, the transfer or sale of shares, what happens on the death of a shareholder, and how to deal with disputes among shareholders. Beyond a shareholders’ agreement, family contracts such as prenuptial or matrimonial agreements can help protect your estate and minimize potential issues or claims as well.
Our business law group routinely walks business owners through the process of drafting shareholders’ agreements to codify and reenforce estate plans.
4. Wills and Powers of Attorney
As previously mentioned, multiple Wills can be used to minimize the exposure to probate fees on death. For further clarity, probate fees are payable to the Minister of Finance and are based on the value of the estate of a deceased person. The fee is calculated at the rate of $15 per thousand dollars on the value of your estate in excess of $50,000.
Business owners can reduce the amount of probate fees payable by creating two or more Wills, commonly known as Primary and Secondary Wills. Assets that require probate are placed into the Primary Will, and assets that do not require probate are placed into the Secondary Will. Only the Primary Will would need to be probated, and the assets that flow through the Secondary Will would, therefore, not be subject to probate fees. One example of assets that do not currently require probate are shares held in private corporations. The Multiple Wills strategy is therefore a primary, and useful, planning mechanism for business owners.
Powers of Attorney are also an excellent mechanism to ensure a smooth transition of decision-making authority where a business owner loses capacity for decision-making. Our estates counsel are happy to provide further guidance about when and how to prepare for incapacity through Powers of Attorney.
Estate planning is an ongoing process that needs to be reviewed and adapted over time. As business dynamics change, so too should the estate plan. An effective estate plan requires careful consideration of personal and business assets, tax implications, succession planning, legal documentation, and family dynamics.
Katlynn Mills can provide professional and forward-thinking estate law counsel to ensure your estate plan aligns with your individual goals, and Tanya Kuzman can provide strategic and effective business and corporate law advice on how to ensure your business structure and succession planning is properly integrated into, and aligns with, your estate plan. Accountants, and financial planners can and should also be consulted as part of this important process.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 130 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
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