Why is estate planning important for business owners (Part I)?
While estate planning may seem like a personal matter, many business owners overlook the impact that failing to have an estate plan can have on your business.
For owners of privately held corporations, the corporation is a separate legal entity that will continue to exist after its owner dies. Accordingly, having an estate plan is essential to protect both the business owner’s loved ones as well as the company itself.
Will
Every business owner in Ontario should have a Will in place to outline your wishes about the succession of the business. Along with a shareholders’ agreement, discussed in more detail below, your Will acts as the blueprint for how your business is to transition on your death.
A key consideration is the appointment of your estate trustee(s). A number of factors have to be considered when appointing the individual(s) in charge of carrying out your wishes, including:
- Should you name all your children or only the one who is continuing on with the business?
- Should you avoid family members and appoint a trusted business advisor such as your corporate lawyer?
- Would a professional trustee or a trust officer be better suited to manage your complicated business affairs?
It is important to consider the implications of appointing a trustee who is also a business owner as there may be unintended income tax consequences if both corporations intend to take advantage of the small business deduction.
Importance of an efficient structure
Many owners of privately held corporations have multiple Wills: one for their personally held assets (often called a “Primary” or “General” Will) and a second for their shares in a privately held corporation (often called a “Secondary” or “Limited” Will).
The value of your personally held assets under your Primary Will are included in the calculation of the estate administration tax (probate tax) payable by your estate, which is currently calculated at approximately 1.5 per cent of the total value. Whereas the value of the assets under the Secondary Will are not included in the calculation for probate tax. Depending on the value of an individual’s shares in privately held corporation(s), the savings could be significant.
Shareholders’ agreement
If you have business partners, having a shareholders’ agreement is also an important estate planning tool to ensure all shareholders (i.e., owners) of the corporation have agreed on various management and operational matters and processes for when a shareholder dies.
For example, with respect to ownership, this type of agreement can contemplate whether a shareholder’s estate is required to sell the deceased’s ownership interest in the company to the remaining business partners (and if so, at what cost) or if such interest can be transferred to the deceased’s loved ones.
In light of this, it is also important to ensure there is synergy between both a Will and shareholders’ agreement as estate planning tools, such that the documents do not contradict each other or result in unintended consequences from a business or estates perspective.
It is crucial to determine if the beneficiaries you intend to receive your shares or the proceeds of your shares as outlined in your Will(s) align with how the shares are to be dealt with on your death pursuant to the shareholders’ agreement.
If your Will(s) state your children to receive your shares and become owners of the corporation but your shareholders’ agreement only permits existing shareholders to hold shares in the corporation, there is a conflict between your intentions and the legal options.
If you require assistance with creating an estate plan, reviewing your estate plan or with navigating the passing of a loved one who owned a business, please feel free to reach out.
This article was originally published by The Hamilton Spectator.
