Long-Term Goals: Succession Planning

Sooner or later, every entrepreneur must consider long term business goals: this includes the question of transferring business ownership. Should the business be sold? Or should it be passed on in the family? How should this transfer take place? Succession planning, that is, arranging for the transfer of your business, is an essential part of considering your long-term goals and determining how you might best achieve them.

One way to maintain control of your business while reducing the tax hit of succession is to freeze the value of your interest in the company while you transfer ownership to your children.

A properly executed freeze can help you to accomplish the following:

• Retain control
• Avoid immediate tax consequences
• Gain flexibility
• Ensure retirement income
• Time the transfer to your liking.

When an individual dies, there is a deemed disposition of assets for tax purposes. As a result, capital gains accrued to the date of death will be taxed, unless a specific exemption is available. This deemed disposition can be postponed by leaving assets to a surviving spouse.

If you want your children to inherit the family business, minimizing this tax liability will be a key concern. Other key issues you will need to address in order to transfer a family business successfully include:

• Timing of the transfer and the related income tax liability
• Control of the business
• Provision of sufficient retirement income for you and your spouse
• Preservation of family harmony by treating all your children equitably.

For many business owners a corporate freeze plays a key role in the transfer process. "Freezing" your corporation allows you to pass all future capital appreciation, as well as the income tax liability on that future appreciation, to your children while you retain control, and access to the current value of the business.

How to achieve a freeze

In general terms, a simple freeze may be accomplished by a corporate re-organization in which your common shares in the business are exchanged for preferred shares with a fixed value equal to the common-share value. If your business is not incorporated, you may transfer the business assets to a corporation in exchange for shares.

Preferred shares may have a stated dividend rate that ensures adequate retirement income for you and your spouse. At the same time, you may acquire voting preferred shares: these shares will allow you to control the business. With this arrangement, children who are to receive an interest in the business will acquire new common shares. Future growth in the value of the business will accrue to these shares.

A discretionary family trust may also acquire the new common shares. This enables you to postpone your decision about who will inherit the business, while still freezing the current value of the business.

In some circumstances, an estate freeze of investment property can also be appropriate to limit capital gains on death.

Corporate freezes are complex. You will need to investigate all regulatory compliance requirements to execute a freeze and so competent professional advice is essential.