Smart Estate Planning: Key Strategies for Business Owners
Incorporating a business provides distinct advantages, particularly in estate planning and business succession. These strategies may be less relevant in large corporations with multiple shareholders. However, they can be highly effective for owners of closely held corporations. Proper planning can facilitate a seamless transition, mitigate financial risks, and ensure the long-term stability of the business.
A 2022 report by the Canadian Federation of Independent Business found that less than half of small businesses have a formal succession plan. Specifically, only 9% have a written plan, while 45% have an informal plan. Many business owners focus on daily operations without considering contingencies such as sudden incapacitation or unexpected death. In such scenarios, questions arise: Who will manage the business? How will leadership authority be transferred? How can business continuity be ensured in an efficient manner?
Failure to plan for these situations can create significant challenges in three key areas:
- Leadership Continuity – Whether transitioning ownership to family members, employees, or external buyers, the business must continue operating smoothly when the owner exits, either gradually or unexpectedly.
- Tax Implications – Business owners who have grown their companies into valuable enterprises may face substantial tax liabilities upon succession or sale, particularly in relation to capital gains.
- Probate Delays and Costs – In British Columbia, when a business owner passes away, their estate (including business assets) may be subject to probate, a process that typically takes 18 months or longer. During this period, ambiguity regarding leadership and business management can jeopardize operations. Furthermore, probate fees can amount to around 1.4% of the estate’s value, which can represent a significant financial burden.
Key Estate Planning Strategies for Business Owners
Owners of closely held corporations can address these challenges with certain beneficial estate planning strategies. Two commonly used approaches include the multiple will strategy and the estate freeze.
1. Multiple Will Strategy
A multiple will strategy allows business owners to separate assets that require probate from those that do not. For example, real estate holdings generally require probate, whereas shares in a closely held corporation do not. By creating one will for assets subject to probate and another will for business assets, owners can achieve two key benefits:
- Cost Savings – Assets governed by the secondary will bypass probate, avoiding unnecessary probate fees. For example, if a business is valued at $1 million, the 1.4% probate fee would amount to $14,000. A multiple will strategy can eliminate this cost for business assets.
- Expedited Transition – The probate process can take months or years, delaying business operations. By excluding corporate shares from probate, ownership can be transferred immediately, ensuring business continuity.
2. Estate Freeze Strategy
An estate freeze is particularly useful for business owners who expect their company’s value to continue increasing over time. This strategy allows an owner to “freeze” the value of their shares at the current level while enabling future growth to accrue to successors, such as family members or key employees. The key benefits of an estate freeze include:
- Tax Efficiency – By capping the owner’s taxable capital gains, an estate freeze can reduce future tax liabilities. Additionally, Canada’s lifetime capital gains exemption (set at $1.25 million per person as of 2023) can be leveraged if shares are transferred to a spouse or children.
- Business Continuity – Successors begin to take an ownership stake in the company while the original owner retains control, ensuring a smoother leadership transition.
- Probate Reduction – The business value subject to probate is limited to the “frozen” amount, minimizing probate fees upon the owner’s passing.
For closely held business owners, proactive estate planning is essential to ensure a seamless transition, minimize tax exposure, and protect the company’s long-term viability. Strategies such as multiple wills and estate freezes can provide significant financial and operational benefits. By implementing these strategies, business owners can safeguard their legacy and ensure the continued success of their enterprise.
Multiple wills and estate freezes are just examples of some of the effective tools that can be used in estate planning to save you and your estate time and money.
For a personal review to discuss the particulars of your business, reach out to us and we’d be happy to see you for a consultation. Marigold Law Group provides comprehensive legal support to small business owners. We will ensure that your legal documents align with your wishes to provide you with peace of mind for the future.
Secure your legacy with confidence—contact Marigold Law Group today.