Dear Members,
I would like to take this opportunity to introduce all members to Bil Ioannidis Financial Insights Weekly! My goal is to provide financial tips or articles on a weekly basis that will help all members make sound financial decisions for yourself personally and for your business. If you have any questions or concerns about any of the articles or tips please feel free to contact me anytime! I look forward in the up coming months in getting to know all of you! Please enjoy my first article.
Regards,
Bil Ioannidis
Succession strategy: ways to maximize the after-tax value of your small business
You’ve built a profitable, closely-held business – and you want it to continue that way after your days at the helm are done. That’s where succession planning comes in and one of the key elements in every succession plan should be reducing the tax burden on your successors by maximizing the after-tax value of the business you’ve so painstakingly nurtured.
Like most business owners, you may be thinking of ‘succession’ as occurring when you decide to retire and hand over either ownership or the leadership of your business – but any number of events can trigger succession, including such unpreventable circumstances as physical or mental incapacity and death. That’s why your succession plan should encompass a ‘normal’ transition – when and how you intend to exit the business – and a ‘forced’ transition in the event you suddenly become incapable of carrying on. In either case, tax planning is a critical element, otherwise your successors may be faced with an unexpected – and unaffordable – tax bill. Here are some strategies to consider:
Identify your ‘successors’
Know who you want to replace you – for example, family members – and their personal tax and financial situations.
Identify your assets and liabilities
Include both family and business-related assets and any other investments that can affect your overall tax situation and liquidity. Unless you take the proper planning steps, lack of liquidity at succession time can lead to business failure because tax bills can’t be paid. Insurance can be a good option here.
Identify tax reduction alternatives
You have a wide range of strategies to choose from:
- Capital gains exemptions: In 2007, the lifetime capital gains exemption was increased from $500,000 to $750,000 on qualified small business shares – that may help you and other stakeholders.
- Spousal trusts: These can help to minimize the amount of tax a surviving spouse will pay, while also deferring the capital gains tax on the asset held by the trust until the death of the surviving spouse.
- Freezing company value: This will limit tax implications come transfer time.
- Transferring ownership over time: Selling the business to family members (or other buyers) over time may help to spread the tax bill out over a longer period and ease the transition.
Be sure all your paperwork is in order – wills, contracts and so on – and available. Revisit your plan – and tax strategies -- as frequently as necessary to account for changing business and family/stakeholder circumstances. And be aware you do not have to do all this on your own: your professional advisor can help you avoid an excessive tax crunch at succession time – or any time, for that matter.
This column, written and published by Investors Group Financial Services Inc. (in Quebec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
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