The Art and Science of the Family Business Succession

Transitioning a family business to the next generation is not easy. The first, and most obvious, step in developing your succession plan is identifying the successor for the business. But often, failure to win acceptance from other family members for the transition and neglecting important planning steps can leave the family business under attack and make life more difficult for the successor.

Who gets control of the business?

One key issue that needs to be considered in the beginning is to determine how the business will be operated to benefit all family members. In a well-thought-out succession plan, the ownership of the family business may be controlled through a shareholders’ agreement so that all family members have a clearly defined roll. The goal of such an agreement is to limit a fight for control of the family business interests. To avoid conflicts, those children not involved in the operation of the family business may be offered a bigger share of the family’s passive investment assets.

Update your will

The family business transition will often start with updating mom’s and dad’s personal wills. When was the last time you looked at your will? The will drafting process is an important step as it helps identify the family’s assets available for distribution and the list of potential beneficiaries. For that reason it is a good starting point for planning the business’ transition to the next generation.

When drafting or updating your will, keep in mind that there are a wide variety of assets with significantly different tax treatments on death. Beneficiary designations must be accounted for under life insurance plans, RRSPs, RRIFs and other similar plans. The new graduated rate estate rules must also be taken into account. Don’t ignore these rules and their tax implications when redoing your will.

Alternatives to a personal will to limit family squabbles

In a family transition, consider using an alter ego trust (AET) or joint partner trust (JPT) if you are 65 or older so as to avoid family challenges to your will. The use of an AET or a JPT limits the ability of family members to launch a Wills Variation application as these trusts effectively implement your will while you are still alive, thus avoiding testamentary dispositions. An additional benefit of a JPT or AET is that it will allow family members to step in and take voting control if mom and dad are facing dementia issues – a role that cannot be fulfilled under a power of attorney.

You should also consider the use of a corporate will to devolve assets that do not require government registration of their transfer, such as shares of a private company. Not only does the corporate will avoid the 1.4% estate duties in B.C., importantly it also avoids public disclosure of family assets.

The role of an estate freeze and family trust

The succession planning process not only should involve a review or the devolution of the family’s personal assets, but importantly it also should lead to a discussion of the shareholdings of the family’s business entities. As part of this process, you should consider implementing an estate freeze to minimize the deemed capital gains that will arise on the death of the survivor of mom and dad. Typically, this will involve the creation of a family trust to hold the newly issued growth or common shares. The focus of such a trust is not income splitting but the shifting of capital value growth and the related taxes to the next generation.

Part of the estate freeze process should also be to consider the availability of the capital gains exemption (CGE). It should be noted that most successful mature businesses do not qualify for the CGE because of their very success. Unless appropriate tax planning steps involving a holding company and a family trust are undertaken well in advance, that annually indexed exemption of some $800,000 of capital gains per individual will not be available.

Get an early start and save on fees and taxes

Business owners should start the succession planning no later than in their early 60s by initiating the discussion with family members. Keep in mind that the views of your children’s spouses may skew the family planning and in many cases the family patriarch and matriarch may simply have to lay down the law.

While a succession plan may be difficult to achieve, a well-thought-out plan with family buy-in can save a lot of family grief down the road, and that means savings in legal and accounting bills as well as income taxes.


Tags: Article; Business; Tax; Wills, Trusts and Estates; Succession Plan; Bill Cooper