Protecting your Legacy: Planning for Private Company Shares

When a shareholder passes away, the financial and tax implications for their estate can be substantial. From the deemed disposition of company shares to the distribution of capital assets, heirs can face significant taxation – sometimes even double taxation – if careful planning isn’t in place. But with the right strategies, advisors can minimize the tax burden and ensure more of a client’s hard-earned wealth passes to their beneficiaries.

Using RazorPlan Advanced, advisors can model complex tax scenarios, evaluate outcomes and identify solutions such as corporately owned life insurance to maximize the value transferred to heirs.

Let’s take a closer look at a real-world situation:

Planning for the Seresins

Jake Seresin retired this year after selling his business for $4M. He invested the proceeds in his holding company in a balanced portfolio, which now earns a steady 5% per year. Jake and his wife, Maddie, each own 50% of the company with a nominal paid up capital (“PUC”) and adjusted cost base (“ACB”).

In addition, the Seresins have $250,000 each in their RRSP accounts. In retirement they plan on spending $15,000 per month on their lifestyle drawing from both corporate and personal assets as shown below:

With their retirement lifestyle planned for, the next question becomes critical: how will their estate be affected if no tax planning is done? And more importantly, how can post-mortem planning strategies make a meaningful difference?

No Planning: The High Cost of Inaction

When no planning is done, at the death of the shareholders their shares are deemed to be sold at Fair Market Value (FMV) and their estate is deemed to have acquired them at a cost equal to the FMV.

If the estate then decides to liquidate these assets so that it can settle the estate by way of a dividend, the assets will be subjected to double taxation. There will be taxes on the capital gain created from the deemed disposition and dividend tax when the assets are distributed.

For the Seresins, assuming both shareholders passed away today the tax consequences would be the following:

The impact is striking. If the Seresins faced this scenario, they would only pass $1,019,940 of their $4 million business proceeds onto their heirs – less than a third of what was initially available.

Share Redemption and Loss Carryback: Turning Taxes into an Advantage

A common post-mortem planning strategy is the share redemption and loss carryback option. Under this strategy, the company redeems the shares of the shareholders after their death which in turn triggers a tax loss that can be used on the deceased’s final tax return. The capital loss that is triggered by the share redemption reduces the personal taxes payable at death and increases the amount the heirs will receive.

Planning to use a share redemption and loss carryback will save the Seresins over $1 million dollars in taxes immediately increasing the value passed on to their heirs.

Using the corporate post-mortem report provided in RazorPlan allows advisors to outline the tax events that occur and compare the first two options against each other. This report shows the benefits of implementing a loss carryback strategy:

For Jake and Maddie, implementing a share redemption with a loss carryback today at age 65 already shows a significant impact, and the potential grows even further when combined with life insurance.

Enhancing the Plan with Life Insurance

Adding an insurance policy to the loss carryback strategy might seem like a small step today but the growth in the cash value of the policy along with the preferential tax treatment of the insurance death benefit will result in a significant impact long term. Assume we add a joint last to die permanent insurance policy that is funded from the corporate investment account to the Seresin’s plan. If we look at their plan when Jake reaches age 90, we see the benefits of the insurance:

By incorporating life insurance into the loss carryback strategy, the clients can increase the amount of their assets that are transferred to their heirs after taxes.

Using the Focus Planning Estate Planning report in RazorPlan allows to show the difference in the estate value and estate taxes between the two scenarios. We see that the clients will have higher estate value and pay less taxes under the scenario that uses a loss carryback with insurance (purple line in the charts below):

Using RazorPlan’s corporate planning features and post mortem reports, we can show this couple that they can maintain their retirement goals and reduce the potential tax liability that their estate will face from their business assets.