The Growing Urgency for Business Valuation in the Modern Day Enterprise
Business valuation in the GTA has gained tremendous momentum in recent times and rightly so, given that it is a focal point for entrepreneurs who are preparing a good estate planning strategy. Most businessmen arrive at unrealistic figures of what their company is actually worth, leading to a conflict of interest between them and their shareholders, family successors, financial partners, potential buyers and tax assessors. Research suggests that people are hardwired to attach a higher value to their own assets as opposed to those of others. In business, this can have detrimental implications.
The Nuances of Estate Planning and Why Business Valuation is a Key Ingredient
To that end, it is of the utmost importance to arrive at a fair value of the company well in advance of estate planning. A third-party objective valuation is paramount, whether you are planning to gift or sell your business to your next of kin. Your business is likely the most valuable asset in your portfolio. If its value elevates the estate above provincial and federal exclusion levels, chances are your successors will inherit a large tax bill. When equipped with the right knowledge, there are ample ways to draft an estate plan that ensures a smooth transition – preferably one that accommodates estate taxes or avoids them altogether.
The federal government levies estate and gift taxes on all property transfers, whether they occur upon the giver’s death (estate tax) or while the giver is still alive (gift tax). A well-executed business valuation helps arrive at a probable figure for both estate and gift taxes to ensure the proper filing of estate tax return.
Drafting a Plan to Avoid Estate Taxes
A strategy that can be incorporated into your estate plan to avoid taxes is giving away a portion of the business or some other like-valued asset while the owner is still alive. Again, having an accurate business value helps you and your advisors arrive at the most advantageous plan of action.
Drafting a Plan to Pay Estate Taxes
If you fall under a category where estate taxes are a concern, having a fair value of your business will help you plan ahead to pay these taxes, i.e. in order to defray these taxes, your estate must be liquid enough. Since the last thing you want to do is saddle your successors with the burden of paying estate taxes to the extent that the business or their personal lives suffer, knowing the fair value helps draft a plan that can involve using other assets or obtaining life insurance.
Drafting a Plan to Accommodate Life Insurance
Going along with the assumption that the business owner enjoys reasonably good health, opting for life insurance is another solution. This is if it is complex to reduce the estate by gifting other assets to the extent that tax can be sidestepped altogether. To put it quite simply, having an idea of the business’s value will in turn determine how much life insurance is required. Accordingly, ownership of the insurance policy can be handled in a way that ensures it isn’t an asset of the estate.
Giving Away Other Like-Valued Assets
If, through a business valuation, it emerges that there is an estate tax problem, having the fair value can help decide what other assets of equal value can be given to members of the family to curtail the size of the taxable estate. This is a good strategy if the owner has no intention of keeping the business in the family. While retaining the business, other assets such as collectibles, real estate, investments, etc. can be gifted.
Giving Away a Portion of the Business
Another likely course of action is to give away a piece of the business while the owner is still alive. This is perfect if the overarching strategy is to keep the business in the family. Based on the business’s value, the owner does not have to relinquish control. To prevent the estate from becoming taxable as the years go by, gifting a piece of the business is more appropriate than cash, as the latter is likely to appreciate with the passage of time.
Summary
Of course, estate planning goes beyond just reducing taxes. It also gives you sizeable control over how your assets are passed down. A concise and clear plan is the need of the hour, and a professional valuation helps achieve that.
The intricacies of valuating your business will largely depend upon its longevity and the industry you are in. To this end, getting an independent third-party appraisal, especially from a company that is familiar with your industry, goes a long way to arrive at an accurate value of the business. Bear in mind that certain industries are very sensitive to business cycles, and this manifests in fluctuating bottom lines for businesses that operate therein.
Are You Drafting an Estate Plan? Turn to Business Valuation Professionals to Implement Your Strategy the Right Way!
The CRA has increased its scrutinization on tax structures and reorganizations. At VSP, we ensure that your tax and estate planning needs are supported by a well-executed business valuation. Call us at 905-305-VSPL (8775) today to add value to your estate planning efforts.