There are a number of important considerations which arise where an estate planning client holds shares in a company including legal, tax and financial considerations. This article is intended as an overview of some of these matters and is by no means exhaustive. It is very important to get specific legal and tax advice to ensure that your wishes will be achieved and in the best possible way.
One tool available to a shareholder in the estate planning process is called an “estate freeze”. This tool is intended to limit the capital gains tax payable by the Estate on the death of the shareholder (“Shareholder A”). In many cases, this is beneficial where the value of the shares held by Shareholder A is likely to significantly increase prior to the death of Shareholder A. In essence, the purpose of the estate freeze is to lock in the value of the company as of a certain date. This is achieved by a share exchange whereby Shareholder A will exchange their shares for a different class of preferred shares with a fixed value. Going forward, new shareholders in the company (whether they be individual family members or a family trust) will have any appreciation in the value of the company flow to them rather than Shareholder A, thereby limiting the capital gains tax that the Estate may be exposed to on the death of Shareholder A. This is a very brief summary of what can be a fairly complicated process involving accounting and legal advice.
Another issue that often arises in the course of considering a shareholder’s estate plan is the question of who will take over the operation of the business once the shareholder passes away. There are a number of ways of arranging the transfer of shares to meet the testator’s wishes. In some cases, the testator will have a child or other family member who will be taking over the business. In others, the testator will want the company to be sold and the proceeds from the sale to be available for distribution to the beneficiaries. Specific matters that need to be considered is who the voting shares in the company will be transferred to (as they will be entitled to vote on the composition of the board of directors to run the company) as well as when the testator wants their chosen successor (if there is one) to receive the shares in the company.
In many cases, a shareholders’ agreement for the company in which the testator holds shares may impact the transfer of the testator’s shares on their death. The shareholders’ agreement and the articles of the company should be reviewed carefully in the course of establishing the estate plan.
This is provided as information ONLY; it should NOT be construed as legal advice. You should consult with a lawyer to provide you with specific advice for your own situation. For more information on estate planning/incapacity planning and to discuss your specific circumstances, please contact Vanessa DeDominicis on 250-869-1140 or [email protected]. Vanessa practices in the area of Real Estate and Wills & Estates at Pushor Mitchell LLP in Kelowna and would be more than happy to assist you.
