Estate planning can often seem complicated, especially when you’re dealing with an incorporated practice. When you set up your corporation, you knew what you hoped to achieve—higher savings, lower taxes and more investment options. Now you need to make sure your estate plan minimizes the impact of taxes on your estate.
Protecting your assets is simple if you follow these four steps.
Carefully select an executor of your estate
A professionally prepared will1 is the core of any estate plan. Your will must name an executor2—meaning the person or trust company responsible for distributing your estate according to the terms outlined in your will. As a result, your will must empower the executor with the authority required to do the job properly.
If you have a corporation, you will need to name an executor who is not only capable of fulfilling the duties mentioned above, but also understands complex estate issues as they pertain to corporations.
For complex estates, consider a professional executor
It’s probably a good idea to consider hiring a professional to act as your executor or co-executor, because your executor will be responsible for making the complicated decisions that are required to ensure the most tax-effective treatment of your corporation’s shares. The executor may also be asked to provide an expert opinion on the decisions made by the director of the corporation who oversees the company’s activities. Administering an estate with a corporation or holding company requires knowledge of, and an understanding of the interplay between, corporate and personal income tax issues.
Avoid double taxation on your estate
“Double tax” can occur on the estate of an individual who owns shares of a private corporation like a medical professional corporation or an investment-holding corporation. Because estates that involve shares in a corporation or a holding company are complex to administer, an appropriate estate plan is the key to avoiding unnecessary taxation.
Generally, one level of tax could occur upon your death when you are deemed to have disposed of your corporation’s shares at their fair market value. This could result in a taxable capital gain reported on your final personal income tax return. A second level of tax could occur when the corporation sells its appreciated assets and pays dividends to your estate, if your executor decides to wind up the corporation.
Engaging a professional executor can help reduce the chance of issues such as potential double taxation through the use of advanced tax planning strategies.
Realize the benefits of corporate-owned insurance
Corporate-owned permanent life insurance, such as universal life or whole life insurance, offers unique estate planning benefits. Deposits to a permanent life insurance policy owned by your corporation are made with corporate after-tax dollars, which generally makes this insurance coverage more cost-effective than using personal after-tax dollars. And growth from any investments held within a permanent life insurance policy is on a tax-deferred basis, which creates the potential for greater accumulation over the long term (meaning more money goes to your loved ones).
If your corporation is the beneficiary of your policy, the death benefit will be paid to your corporation tax-free. This benefit, less the policy’s adjusted cost basis (ACB), which is the net amount of the principal and interest reported on tax slips, minus withdrawals, is added to your corporation’s capital dividend account and can be used to pay tax-free dividends to surviving shareholders or to the estate. The ACB can be paid out as a taxable dividend.
By working with your MD Advisor on your estate plan, you can implement the steps above to protect your family and your assets.
1 In the province of Quebec, notarial wills do not require probate, whereas all other wills do require probate and are subject to a fixed application fee. All references to probate and probate tax in this document should be read accordingly.
2 An “executor” is called a “liquidator” in the province of Quebec and an “estate trustee” in the province of Ontario.