Here is another story of a change in business ownership, this time with family members involved. It all sounds a bit technical, but the results are worth wading through the details.
"Phil," 66, owns and operates a successful construction business that has been valued at approximately $10 million. Over the next few years, Phil wants to scale back his hours and retire.
Phil has one son and one daughter involved in the business, and he wants to pass the company to them. His second daughter is a doctor and has no interest in the business.
Phil's goals are:
To ensure the company is positioned for continued success to support both his retirement and the ongoing needs of the next generation
To minimize the tax payable when the business is ultimately transferred to his children
To ensure all three children are treated fairly
Phil consults with his long-time accountant, lawyer and financial advisor. Based on their recommendations, he does the following:
After sitting down with his children, Phil confirms that both his son and his daughter want to continue their careers with the business for the long term.
He completes an estate freeze for his business. On a tax-deferred rollover basis he exchanges his common shares for preferred shares that pay regular dividends while preserving his voting control over his business.
New common shares with a nominal value are issued directly to a newly created discretionary family trust in which Phil, his wife and their three children are named as beneficiaries. The trustees named are Phil, his wife and his accountant. This will ensure Phil receives an income stream from the preferred share ownership and potentially income distributions from the trust.
Having the growth shares in the discretionary family trust allows for flexibility in the future for the trustees to make decisions on both capital and income distributions.
The family trust means that each beneficiary may be able to use the personal lifetime capital gains exemption of $750,000 on the sale of qualified shares to the extent they haven't previously used it.
The children who work in the business will gradually be able to receive distributions of company shares from the trust and over time have outright ownership of the common shares of the company.
Phil buys a life insurance policy naming his daughter who is a doctor as the beneficiary, ensuring that his estate treats all his children fairly. While the other two children receive shares in the business, she will receive the proceeds of the policy.
Phil buys corporate life insurance to cover a portion of the capital gains taxes payable on the preferred shares upon his death.
Phil will continue to be a consultant to the company and draw a reasonable salary.
By working through these details, Phil has ensured he can live the retirement lifestyle he wants, while arranging an orderly transfer of his business to his children. All are treated fairly, and a significant amount of tax is saved.
