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Trusts are a tax option with numerous benefits to plan the transfer of assets to family successors.
A business transfer is a process that should be initiated several years in advance and generally includes the transfer, first, of knowledge, then power then equity.
Benefits of a trust
Using a trust can be an interesting alternative from a legal perspective. Because equity is separated, it provides better protection. The trust terms include instructions for replacing trustees and identifying the beneficiaries, which is not the case with a company’s shareholders.
When using a trust in a business transfer to family successors, the owner-manager can transfer future value to the children without having to immediately determine how and to whom shares will be attributed.
A trust can be useful if the shareholder is ready to transfer the future appreciation in value to his or her children who are too young to have an interest in managing the business. It can also be a good option if the children aren’t sure yet about whether they want to take over the family business.
Looking at the options
If an owner-manager plans to withdraw from the business and his or her child will be taking over its operation, there are two options:
- The family trust allocates common shares to the child and there are no tax consequences on the transfer;
- The business exchanges common shares held in the family trust for non-participating shares and the child subscribes for the business’s new common shares.
There are a number of prerequisites to setting up a family trust in an organizational structure, which include:
- Analyzing the current organizational structure;
- Evaluating the shares of the company where the trust will be integrated;
- Setting up the trust;
- Preparing any tax forms required;
- Reviewing the various legal documents.
Our team of tax specialists can advise you on setting up a trust as part of the transfer of a business to family successors. Contact us today for personalized support in this initiative.