The business you built is thriving but you’re ready to retire and you want it to continue to thrive without your hands on the controls.
That makes effective succession planning a must – and one of the most important components of your plan should be reducing the tax burden on your successor(s) by maximizing the after-tax value of your business.
Deciding to hand over your business and retire is a ‘normal’ transition. Other unexpected events – from a physical or mental incapacity to death – could require a ‘forced’ transition. Your exit plan should encompass tax planning for both eventualities or your successors could be faced with an unexpected, potentially unaffordable tax bill. Consider these strategies:
Identify your replacement(s) Will your successor be a family member or someone else? Either way, you’ll need to know their personal tax and financial situation.
Identify your assets and liabilities Include both family and business-related assets and all other investments that affect your overall tax situation and liquidity. Lack of liquidity during succession can lead to business failure because tax bills can’t be paid. Insurance can be a good way to bridge any gap.
Identify your tax reduction options Choose from these strategies:
Capital gains exemption You and your stakeholders may be able to benefit from the $750,000 lifetime capital gains exemption on qualified small business shares.
Spousal trust This type of trust can ensure the beneficiaries are protected, while also deferring the capital gains tax on the asset held in trust until the death of the surviving spouse.
Freeze company value Provides income splitting and tax minimization opportunities.
Transfer ownership over time Sell the business to family members or other buyers over an extended period to spread the tax bill over a longer period and ease the transition.
Determine your succession ‘readiness’ Get your wills, contracts and other paper work in order and be sure it’s all readily available. Revisit your succession plan frequently to account for changing business and family/stakeholder circumstance and revise your tax strategies accordingly.
Identify your succession support You built your business but you don’t have to – and probably shouldn’t – plan its succession all by yourself. Your professional adviser can help you avoid a succession tax crunch and help you plan all the other aspects of your financial life, both business and personal.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.