How to Reduce Tax Liability When Planning a Family Succession for Your Business
Planning on handing over your business to the kids? Here are a few tips on how to reduce tax liability when planning a family succession for your business.
Starting your own business is no easy task, but it may be rewarding enough to have you thinking about passing down the company to the next generation of owners/operators who will carry on your legacy.
If your kids want to join the family business, it’s time to confront an issue that every small-business owner should consider: how letting them in will affect your taxes. It’s possible that you could end up paying more when the company is passed on to future generations than you paid when you originally started it.
If you are planning on handing over your business to the kids, here are a few tips for reducing tax liability when planning a family succession for your business.
The more advance notice you give, the better chance you have of avoiding additional taxes. There are rules requiring distributions from retirement plans within five years of death, but you can make tax-free transfers within your lifetime.
Keep it under the radar
A recent change to estate law allows for more discretion in avoiding estate taxes and income taxes by using trusts. These changes should be put into writing and kept as private as possible, not published on your website or social media channels. These strategies should be done through professional legal and tax counsel, not your accountant.
Have a buy-sell agreement
Not only will this help you transfer control of the company to someone without having to sell or liquidate their shares, but it can also reduce estate taxes if there is no surviving beneficiary.
Leave the right business assets
Be sure to leave the right business assets. Liquid, marketable securities that can be sold immediately tend to attract more taxes than real estate or equipment that will remain in the business.
Leverage your insurance
Insurance can play a large part in reducing future tax burdens and should be factored into your succession plan. Use trusts and life insurance to pass on a tax-free inheritance, but keep in mind that not all assets are insurable.
Plan your estate
It is very important for business owners to have an estate plan. Without a plan, your family may end up paying more taxes than necessary and can cause additional stress and heartache during such a difficult time.
Be sure to file your return
Make certain to file all necessary returns in a timely fashion. You can’t take advantage of any tax benefits if you miss the deadline for filing your taxes, including extensions.
Work with an accountant
If you are not familiar with estate planning, it is highly recommended that you seek professional help from an experienced accountant.
If you’re looking for an experienced accounting partner who will help take your business to the next level, contact usfor more information. Visit our blog for more articles, news and updates about small business accounting, tax planning, CRA audits and bookkeeping.
- Family Successions: What Bill C208 Means for Small Businesses in Canada - February 16, 2022
- Best Practices & Tax Tips for the Self-Employed in Canada - February 16, 2022
- How to Reduce Tax Liability When Planning a Family Succession for Your Business - February 15, 2022