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There is More to Estate Planning Than a Will for Small Business Owners

An image of a family estate in Burlington

As an entrepreneur, you want your business to outlive you and provide for your future generations. But this is only possible with effective estate planning. Statistics show that few families have successful intergenerational wealth transfers as many avoid or overlook estate planning. They realize the importance of estate planning very late in life. Don’t let the same happen to you.

Add them to your estate planning as you progress through various life events, like marriage, children, grandchildren, and buying a property. If you don’t plan your estate and incorporate your life events, the provincial laws will do so after your death, which won’t be tax efficient.

The first thing that comes to mind when you hear estate planning is a will. But there are estate planning options like trusts, joint tenancy, beneficiary designations, life insurance, and shareholder agreement. Each option has its usage. This article will discuss these options and guide you on estate planning.

The role of a will in estate planning

Drafting the will is a fundamental step in estate planning as it determines which asset goes to whom, including money, business, and property. When drafting a will, ensure that you review it periodically and incorporate your life events and any new assets. Also, ensure you keep your executor in the loop with the changes in the will.

A will saves you legal fees and ensure a smooth asset transition in case of an unexpected event. But it includes probate fees, and the beneficiaries might face a substantial capital gains tax. For instance, you transfer property to your daughter in the will. Upon inheritance, she will face a capital gain tax on 50% of the appreciation in property price. So while a will works best for some assets, there are other tax-efficient options for some assets.

Joint ownership of assets – Instead of passing on the asset ownership via a will, you can register assets in Joint Tenancy With the Right of Survivorship. This states that joint tenants are co-owners. In the event of the death of one owner, the asset ownership automatically transfers to the surviving owner without any probate fees as it doesn’t become a part of the estate.

Adding a beneficiary – Similarly, you can add your loved ones as the beneficiary in the nominee details for your registered savings plans and pension plans. After you, they will become the owners of that asset without going through the hassle of probate or legal fees.

A business-owned life insurance policy

But joint ownership and beneficiary options might not work in all cases. When common ownership is not possible, the asset becomes a part of the estate, and the heir bears the transfer cost and tax. However, if the asset is significant, the beneficiary may not be able to pay the tax expense and opt to forego the inheritance or sell the business. In such a case, a business-owned life insurance policy can give the company enough liquidity to bear the cost.

For instance, John is working in the family business and inherits his parents’ shares after they pass away in an unexpected accident. The family business is breakeven, and he doesn’t have enough funds to pay taxes related to shares of the deceased. Moreover, the business needs time to function without the primary owners and become profitable. Therefore, life insurance money can come in handy. The business can own this policy, or owners can mention how to use this money in the will.

Estate planning while you are living – gifts and inheritances

All your estate planning does not relate to the transfer of wealth after you pass away. You can pass on some assets to your beneficiary to save on taxes while alive. For instance, your son is dependent and has no debt and a low tax bracket. You can transfer some assets to him and save on taxes. But this involves risk. As the asset is in the child’s name, he will be the rightful owner of any income earned from that asset. He could even sell the asset. If your heirs have a huge debt or are spendthrifts, the inherited assets could be exposed to their credit.

You could opt for joint ownership of the asset to prevent your heir from selling off the asset while enjoying partial income. But you will also be subject to partial tax. Talk to your financial consultant, and check if you have sufficient money for retirement and healthcare before transferring property to heirs.

Trusts – an effective method of estate planning

Most millionaires opt to open a trust for effective estate planning. In this, you transfer your assets like investments, shares, and properties to a trustee. The trust has the legal title to the asset and administers them on behalf of beneficiaries. The beneficiaries gain as per the trust guidelines. So you can distribute the benefits as per individual preferences. As the trust has the legal title, assets remain protected from an individual’s credit situation and spending habits.

But maintaining a trust involves costs. Hence, trust is a viable option only when your assets are significant.

There is more to estate planning than just naming the beneficiaries of who gets what. It would be best if you looked at the tax and retirement angle while ensuring your business outlives you successfully. While you can sketch a rough plan around wealth transfer, take the help of a tax consultant and legal consultant to ensure you leave assets and not tax liabilities to your heirs.

Contact ESS CPAs LLP in Burlington for Experienced Guidance on Estate Planning

Handling the finances of an estate is especially complicated, as those who are left to deal with these issues are often suffering a personal loss. Managing estate finances and tax obligations can be a painstaking process and ESS CPAs LLP in Burlington will take on all the stress and pressure for you. In addition, we provide our clients with exceptional estate planning advice so that they can get on with their lives, secure in the knowledge that their families and businesses have been adequately taken care of. To speak with one of our knowledgeable Chartered Professional Accountants, please contact us online or by telephone at 905-517-2297.