Benefits of succession planning: Plans for ownership transition

Bruce Roher • May 30, 2017

Retirement is on the minds of many baby-boomer business owners, and along with it, comes the dilemma of how best to preserve and ultimately transfer family assets. One of the key objectives of an estate and succession plan is to minimize the tax consequences of that eventual transfer. It also outlines your wishes regarding how shares of your business are to be transferred in the case of your death, and sets out a strategy to ensure that your business continues to thrive after the transition of ownership, whether through retirement, death, or the sale of the business.

Benefits of a Succession Plan

The Estate Freeze

An estate freeze can be an effective tool for minimizing taxes on death. It is a process used to cap the owner’s income tax liability of his or her shares that are to be passed on in the event of death. In such cases, a business valuation is conducted by a Chartered Business Valuator to establish the fair market value of the owner’s shares in the business.

The owner then exchanges his or her common stock for ‘preference shares’ of the same value. These shares are of fixed value, meaning the value of the shares does not grow. This guarantees that the owner’s tax liability remains capped.

The owner can continue to receive dividends on the preference shares, even after his/her retirement. New shareholders (for example, the shareholder’s heirs) are issued common shares which grow in value.

A succession plan also plots out a leadership transition strategy with the objective of causing minimal disruption to business operations.  Having a well-thought out and carefully formulated plan in place assures potential buyers that the business is capable of running efficiently in your absence.

Additional Considerations for Succession, in Case of Death or Retirement

Perhaps the most important consideration in your estate and succession plan is determining which of your heirs has the knowledge, leadership abilities, and temperament to succeed at the helm of your company.

You may also want to consider allowing key employees to acquire shares in the business. Key employees may be more interested and qualified than certain family members who aren’t currently active in your business. Shares also give your key employees a tangible stake in your company, increasing the likelihood of retaining key talent when you are no longer there.

Is Your Company’s Future Secure?

Failing to prepare an effective estate and succession plan can have a major impact on your legacy. To find out more, contact one of our business advisors, today.


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