Transferring shares directly
Rossignoli says your first step if you’re mulling an estate freeze would be to have your lawyer and accountant analyze the situation and confirm it’s the right move for both you and your business.
“If you have a child or someone who is entering the business and you’ve built the business up to a sufficient point where you think you have enough value to live off of for the rest of your life … then that would be a perfect time to complete this process,” says Rossignoli.
In situations where there’s a clear line of succession, a business owner may decide to transfer the shares directly to their successor.
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Caroline Rhéaume, a Montreal-based tax lawyer and trust and estate practitioner (TEP), adds that this process should also launch another arrangement: preparing a shareholders agreement.
“Let's say I do an estate freeze with my children and one of them gets divorced or goes bankrupt or decides to sell their shares to the neighbour ... then I may end up with a shareholder that I don't want to have to deal with,” says Rhéaume.
Putting the details of succession in writing will ensure everyone involved is clear on both their rights and their obligations going forward.
Or, as Rhéaume puts it, it gives you the chance to have some control over who’ll get your shares — especially when you’re not using a trust.
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Transferring shares to a trust
In Rossignoli’s experience, moving the shares into a trust was more common prior to 2018. Then the government passed legislation that reduced the tax benefits of the trust method.
However, there are still some solid reasons to go this route, especially if you have a minor beneficiary or you don’t know yet who will take up the business. Rhéaume adds that trusts are far more common in her practice.
When moving shares into a trust, it offers the opportunity to multiply the capital gains (profit) exemption. In 2021, the lifetime exception of gains on a small business was $892,218 per person.
That means you can name multiple members of your family as beneficiaries and they’ll each be able to claim their lifetime exception one day to lower their tax liability.
Another advantage to using a trust is that if your intended successor changes their mind or predeceases you, there are no real implications.
“However,” Rhéaume explains, “if the person has the shares in his or her hands … usually there will be a provision saying that in that case, the other shareholders would have to basically buy back those shares from their estate.”
That being said, the rules around a trust mean that this isn’t an option to go forward with if you simply don’t have a clear plan for the future.
With trusts, there will be a deemed disposition within 21 years. That means the assets in that trust will be treated as if they’ve been sold and the trustee will owe taxes on any capital gains earned since the shares were frozen.
But they require everyone on the same page
Rhéaume says because everything needs to be reviewed carefully, carrying out an estate freeze can be a helpful exercise for business owners.
Launching the process spurs business owners to assess their business’s fair market value, think about their role within the company and create a more precise succession plan.
But it’s important, when going through this type of estate planning process, to make sure everyone’s on the same page to start off with. Some parents may have an idea in mind about how things will go that is based entirely on assumptions.
“Parents, they may have a vision … but they won't necessarily express it to their children,” says Rhéaume.
To avoid crossed wires, it’s important for you to be direct and honest with your heirs — and initiate these conversations well before they’re necessary. That way, you won’t be wasting any time or money on solutions that don’t actually meet your family’s specific needs.
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