Succession Planning Best Practices
Business Succession Plan
– It guarantees an agreeable price for a partner’s share of the business and removes the requirement for assessment upon death due to the fact that the insured consented to the rate ahead of time.
– The policy benefits will be right away readily available to pay for the deceased’s share of the business, with no liquidity or time restraints. This successfully prevents the possibility of an external takeover due to cash flow problems or the requirement to offer business or other assets to cover the cost of the deceased’s interest.
– A succession plan can considerably assist in developing a prompt settlement of the deceased’s estate.
Insurance Carriers
- Manulife Financial
- Canada Life
- Sun Life
- RBC Insurance
- BMO Insurance
- Canada Protection Plan (CPP)
- Industrial Alliance
- Ivari
- Equitable Life
- Empire Life
Life Insurance is the transfer vehicle
There are two standard plans used for this. They are called entity-purchase agreements and cross-purchase agreements. While both ultimately serve the same function, they are used in various situations.
How much Is My Business Worth?
Cross-Purchase Agreements
As an example, imagine that there are 3 partners who each own equivalent shares of a business worth $3 million, so each partner’s share is valued at $1 million. The partners desire to guarantee that business is handed down smoothly if among them passes away, so they participate in a cross-purchase agreement. The agreement needs that each partner secures a $500,000 policy on each of the other two partners. In this manner, when one of the partners dies, the other two partners will each be paid $500,000, which they need to use to purchase out the deceased partner’s share of the business.
Entity-Purchase Agreements
When there are only two partners, there can even be issues. Let’s state one partner is 35 years of age, and the other is 60 years of age– there will be a big variation between the particular costs of the policies. In this instance, an entity-purchase agreement is often used instead.
Upon the death of any partner or owner, the business will use the policy proceeds to acquire the departed individual’s share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also “eats” all expenses and underwrites the equity between partners.
Tax Implications of a Business Succession Plan
– Will you need a loan to fund the succession plan?
– What are the tax implications if you are the sole proprietor, in a collaboration, or corporation?
– Can you take advantage of the capital gains exemption?
– What can you do to decrease the tax bill?
– What about an estate freeze?
Our Advisors
Tax professionals can provide understanding and expertise in locations that you might not have a great deal of experience.
Not simply any tax professional will do. When searching for aid with succession planning, ensure you select tax professionals that have decades of experience working particularly with small companies, farm operators, entrepreneurs, and independent contractors.