A turbulent economy may present a unique opportunity to limit capital gains taxes for business owners. Georgia Swan, Tax and Estate Planner with TD Wealth, joins Kim Parlee to talk about a key business succession and estate-planning tool: the estate freeze.
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[MUSIC PLAYING]
- Hello, and welcome to the Money Talk COVID-19 daily bulletin for Monday, May 4. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Georgia Swan, she's a Tax & Estate Planner with TD Wealth, about our key business succession and estate planning tool used during these turbulent times. But first, here's a quick wrap of today's headlines.
The COVID-19 pandemic drove Air Canada to a $1 billion net loss in the first quarter as most air travel came to a halt. The company CEO called it the darkest period ever in the history of commercial aviation.
More fallout for the airline industry. Legendary investor Warren Buffett announced his company Berkshire Hathaway sold its entire stake in the four largest US air carriers. Meanwhile, clothing company J Crew filed for bankruptcy, marking the first major retail bankruptcy during the coronavirus pandemic.
Here at home, provinces across the country are set to begin easing COVID-19 restrictions. Ontario, Quebec, Alberta, Manitoba, and Saskatchewan are among those set to take another step towards reopening.
Meanwhile in Italy, the government is facing increasing pressure to speed up reopening the economy as a number of COVID-19 deaths and infections fell to the lowest level since the shutdown began on March 10. And that's a wrap of today's headlines. Next, Kim Parlee's conversation with Georgia Swan.
KIM PARLEE: Georgia, the question is, I own a family business and my plan is to pass it on to my family. And I've heard that, in all this uncertainty and downturn, this actually might be a good time for an estate freeze. So what is it and why?
- Well, an estate freeze is basically an estate planning tool that we use when, as in your example, we transfer family businesses to the next generation. It's a way of pushing the tax consequences of that transfer to the next generation.
Because whenever you transfer a capital asset, there's a capital gain, and therefore tax associated with it. Now, the reason that it's good in this particular market is that it's very dependent on the value of assets.
And while we're looking for a silver lining in what's going on right now, because those assets might be valued at a little lower than what they would usually be valued, it's a good time to look at this planning tool if you were already thinking that it was time to get the next generation involved in your business.
- So let me ask you. I mean, I understand what you're saying at a high level. You know, valuations are down so it's a good time to evaluate for the person who's passing it on. How does it work?
- OK. Well, when you look at a corporation, and usually this is what these estate freezes are used for. They're used for family-owned businesses that are run through a corporation. Corporations at, again, a simple level, have two types of shares. Common shares, which those are the ones that grow as the business gets more successful, and preference shares.
Now, the thing about preference shares is that they don't tend to go up-- they don't go up in value, but they have other benefits to them like maybe voting rights so they can control the business. Or they have the right to dividends before dividends are paid out anywhere else.
So what an estate freeze does is it-- the parent owner, let's say it's a parent that's passing the business on to their kids, will exchange the common shares that they have and take back preferred shares.
So they might retain the voting control, retain the right to receive an income from the business in their retirement, but they push those shares that increase in value to the next generation. And they can do that using certain things that are available to them through the income tax act so that when it happens, their tax burden at that time is either completely eliminated or greatly diminished.
- So I'm assuming that this is not going to be a quick process. So even though we say right now, you know, the timing is good from a valuation standpoint, take that into consideration. This isn't going to something that's going to happen in hours or days. It takes a little longer to put in place.
- No, it does. You know, we've been discussing it at a very simple level, but they are complicated transactions and they do take time. But I think what people should take away is the fact that certainly, if they were in the process of doing this planning before this entire situation happened, don't stop. Keep going.
Because as I said, as we're looking for a silver lining, these depressed values that we're seeing right now might be very beneficial. We don't know how long this is going to last, so I don't want to scare anyone from starting the process.
While we're all hoping that things get back to normal sooner rather than later and the markets rebound, unfortunately we don't know how long it's going to last. So therefore, I'm not saying that you may not still have time to put something in place.
But certainly, if you have an estate, if you already did an estate freeze in the last few years, this might give you a benefit of-- to revisit it, because sometimes there are methods to tweak ones that are already in place that this market might give an opportunity to.
- Are there any watch outs? I mean, if you're going to go through this process, regardless of the timing of when we are right now, what are things you need to think about with an estate freeze?
- OK. First of all, they're complicated, so you need to get very experienced advisors. Accountants, lawyers, people that have done this before. Then both the parent and the children need to have their own independent legal advice. They need to know what their rights and responsibilities and obligations are.
And even though it's a family business, you need to make sure you put in place proper shareholders agreements so everybody has their obligations and everything's spelled out. And also, there are mechanisms put into place if maybe things don't work out very well, and we have to maybe undo this at some point in the future.
And as well, there needs to be full and frank and open conversations about what the parent's expectations are for the business on a go forward basis, and then with the new generation's expectations are from a go forward basis. So lots of talk, lots of good advice, lots of planning needs to be put in place.
KIM PARLEE: Last question for you, Georgia. Have you been talking to lots of people about this? I mean, I'm sure this has been a hot topic of conversation.
- Yeah, we have. We've been talking to quite a few people. Certainly, of course, anybody that was in the process of doing this was worried about, you know, what do we do now. But law firms and accountants are still out there. They're still getting it done.
And then of course, anybody that has already done one, we've been actually reaching out to them to say, hey, how is it going. Are the family dynamics still working well, do we need to maybe tweak it, are there any advantages to doing some tweaking.
And then of course, you know, people are calling us up and saying, OK, we're in this situation. Is there any good that we can find in it. So yeah, we're talking to a lot of people about it.
- All right. Well, we appreciate the silver lining. Georgia, thanks so much.
- Thank you. Thank you. It's good to see you again.
- Yeah, you too.
[MUSIC PLAYING]
- Hello, and welcome to the Money Talk COVID-19 daily bulletin for Monday, May 4. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Georgia Swan, she's a Tax & Estate Planner with TD Wealth, about our key business succession and estate planning tool used during these turbulent times. But first, here's a quick wrap of today's headlines.
The COVID-19 pandemic drove Air Canada to a $1 billion net loss in the first quarter as most air travel came to a halt. The company CEO called it the darkest period ever in the history of commercial aviation.
More fallout for the airline industry. Legendary investor Warren Buffett announced his company Berkshire Hathaway sold its entire stake in the four largest US air carriers. Meanwhile, clothing company J Crew filed for bankruptcy, marking the first major retail bankruptcy during the coronavirus pandemic.
Here at home, provinces across the country are set to begin easing COVID-19 restrictions. Ontario, Quebec, Alberta, Manitoba, and Saskatchewan are among those set to take another step towards reopening.
Meanwhile in Italy, the government is facing increasing pressure to speed up reopening the economy as a number of COVID-19 deaths and infections fell to the lowest level since the shutdown began on March 10. And that's a wrap of today's headlines. Next, Kim Parlee's conversation with Georgia Swan.
KIM PARLEE: Georgia, the question is, I own a family business and my plan is to pass it on to my family. And I've heard that, in all this uncertainty and downturn, this actually might be a good time for an estate freeze. So what is it and why?
- Well, an estate freeze is basically an estate planning tool that we use when, as in your example, we transfer family businesses to the next generation. It's a way of pushing the tax consequences of that transfer to the next generation.
Because whenever you transfer a capital asset, there's a capital gain, and therefore tax associated with it. Now, the reason that it's good in this particular market is that it's very dependent on the value of assets.
And while we're looking for a silver lining in what's going on right now, because those assets might be valued at a little lower than what they would usually be valued, it's a good time to look at this planning tool if you were already thinking that it was time to get the next generation involved in your business.
- So let me ask you. I mean, I understand what you're saying at a high level. You know, valuations are down so it's a good time to evaluate for the person who's passing it on. How does it work?
- OK. Well, when you look at a corporation, and usually this is what these estate freezes are used for. They're used for family-owned businesses that are run through a corporation. Corporations at, again, a simple level, have two types of shares. Common shares, which those are the ones that grow as the business gets more successful, and preference shares.
Now, the thing about preference shares is that they don't tend to go up-- they don't go up in value, but they have other benefits to them like maybe voting rights so they can control the business. Or they have the right to dividends before dividends are paid out anywhere else.
So what an estate freeze does is it-- the parent owner, let's say it's a parent that's passing the business on to their kids, will exchange the common shares that they have and take back preferred shares.
So they might retain the voting control, retain the right to receive an income from the business in their retirement, but they push those shares that increase in value to the next generation. And they can do that using certain things that are available to them through the income tax act so that when it happens, their tax burden at that time is either completely eliminated or greatly diminished.
- So I'm assuming that this is not going to be a quick process. So even though we say right now, you know, the timing is good from a valuation standpoint, take that into consideration. This isn't going to something that's going to happen in hours or days. It takes a little longer to put in place.
- No, it does. You know, we've been discussing it at a very simple level, but they are complicated transactions and they do take time. But I think what people should take away is the fact that certainly, if they were in the process of doing this planning before this entire situation happened, don't stop. Keep going.
Because as I said, as we're looking for a silver lining, these depressed values that we're seeing right now might be very beneficial. We don't know how long this is going to last, so I don't want to scare anyone from starting the process.
While we're all hoping that things get back to normal sooner rather than later and the markets rebound, unfortunately we don't know how long it's going to last. So therefore, I'm not saying that you may not still have time to put something in place.
But certainly, if you have an estate, if you already did an estate freeze in the last few years, this might give you a benefit of-- to revisit it, because sometimes there are methods to tweak ones that are already in place that this market might give an opportunity to.
- Are there any watch outs? I mean, if you're going to go through this process, regardless of the timing of when we are right now, what are things you need to think about with an estate freeze?
- OK. First of all, they're complicated, so you need to get very experienced advisors. Accountants, lawyers, people that have done this before. Then both the parent and the children need to have their own independent legal advice. They need to know what their rights and responsibilities and obligations are.
And even though it's a family business, you need to make sure you put in place proper shareholders agreements so everybody has their obligations and everything's spelled out. And also, there are mechanisms put into place if maybe things don't work out very well, and we have to maybe undo this at some point in the future.
And as well, there needs to be full and frank and open conversations about what the parent's expectations are for the business on a go forward basis, and then with the new generation's expectations are from a go forward basis. So lots of talk, lots of good advice, lots of planning needs to be put in place.
KIM PARLEE: Last question for you, Georgia. Have you been talking to lots of people about this? I mean, I'm sure this has been a hot topic of conversation.
- Yeah, we have. We've been talking to quite a few people. Certainly, of course, anybody that was in the process of doing this was worried about, you know, what do we do now. But law firms and accountants are still out there. They're still getting it done.
And then of course, anybody that has already done one, we've been actually reaching out to them to say, hey, how is it going. Are the family dynamics still working well, do we need to maybe tweak it, are there any advantages to doing some tweaking.
And then of course, you know, people are calling us up and saying, OK, we're in this situation. Is there any good that we can find in it. So yeah, we're talking to a lot of people about it.
- All right. Well, we appreciate the silver lining. Georgia, thanks so much.
- Thank you. Thank you. It's good to see you again.
- Yeah, you too.
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