One topic that I’ve been thinking more about lately is estate planning. It’s a pretty morbid topic and most would rather avoid the topic altogether. However, poor estate planning can lead to a much higher tax bill than neccessary. While I’ve written about preparing a will, testamentary trusts and even living trusts, I’ve never really touched on the topic on the sucession and tax planning of transferring a family business upon death.
For business owners, the succession of their business is something that can keep them up at night. Besides the obvious challenge of finding a buyer and/or successor, there are tax implications for the immediate family such as capital gains tax. The good news is that if you are a business owner and you have a spouse or common law partner, the shares that your own can “rollover” to your spouse on a tax free basis.
In this provision that is triggered in an established will, when you leave your appreciating assets to your suriving spouse, no capital gains tax will result at the time of death. However, this is tax deferral where capital gains tax would be owed when the surviving spouse either disposes of the assets or passes away. As a refresher, capital gains tax is triggered when an appreciating asset is sold (outside of registered accounts). Once sold, 50% of the capital gain or profit is added to your income for the year and taxed accordingly. The other half is tax free, so in total, the maximum capital gains tax payable is 25% of the capital gain.
There are a number of rules to be followed to ensure that the spousal rollover is available to the estate. You will need to consult a professional to set this up, but the rules basically state that the assets must be transferred, in its entirety, to the spouse. If transferred to a trust, the spouse must control the trust and entitled to receive all income from the trust during their lifetime. Another caveat is that the property must be transferred to the spouse within 36 months of death.
Now that your spouse has your company shares tax free, now what? What about the situation where your spouse remarries but passes away prior to his/her new spouse? If your spouse did not update his/her will, then the estate would go into intestate where the government decides where to allocate assets.
This also means that there is a possibility that your company shares can be transferred to someone you don’t know! This is where a spousal trust can help. A spousal trust acts as a separate entity with a beneficiary, in this case, your spouse. The upside of using a spousal trust is that your assets, or company in this case, stays in the family and not at risk if your spouse remarries. Your spouse would receive all income generated from the trust but does not technically own the assets.
Estate planning where significant assets are involved can get quite complicated and consulting a professional is highly recommended. If you have any added tips, please add them to the comments.If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).