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What Actually Happened Over Time in this Family Business

By Ted Polci, CLU, TEP

One of the benefits of longevity in my business has been the opportunity to see many of our business insurance and estate plans work out as intended, over time.

In 1993/94 we determined that a family business client was liable for just over $5M in capital gains tax on the death of its several shareholders.

We developed a plan that took advantage of the legislation in effect at that time that would actually reduce tax payable on death by approximately $1.8M. The idea was to use insurance to finance the redemption of shares when a shareholder died. The tax saving was enabled by two factors: the “Capital Dividend Account” which permits life insurance proceeds to be paid out of the company tax free, as well as the fact the shares redeemed effectively reduce the amount subject to capital gains tax.

Since that time there have been a couple of deaths of family members whose shares were redeemed with insurance proceeds as intended. As well, the tax was reduced as expected. All has gone according to plan, so far. We are now revisiting the estate plan and shareholders agreement to maximize the advantages available. In certain specialized “grandfathered” situations, it is possible to eliminate all tax due on death by simply adjusting the insurance amounts. This is even more valuable now as the estate values per family have grown considerably. There is no limit to how much capital gains tax may be eliminated in this way.

Many businesses will qualify for this special tax treatment and should review their shareholder arrangements with their professional advisors to take full advantage.

A funded share redemption plan in a family owned business can make the transfer of a family business relatively painless in many cases. I would be pleased to respond to questions on this opportunity.

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