Common Ownership Transfer Options
This section provides you with some basic information on the ownership transfer options available. It gives you something to discuss as owners and successors. It is also a starting point for your conversation with your legal advisors. Although it can feel expensive, a knowledgeable lawyer can help you make the best decisions for your business and your pocket book.
If you haven’t done so already, bring a legal advisor into the decision-making process. You’ll be much more likely to make the best decision for your situation and avoid costly errors for everyone concerned.
Ownership of a farm can transfer within the family, outside the family or some combination of both. We’ve outlined common methods below and provided some basic information on each.
Gift: The gift can be made upon death or during one’s lifetime.
Estate Freeze: Depending upon the business structure of the farm, a farmer can exchange his/her common shares for preferred shares equal in value. Then someone – usually a child or family trust – can collect the benefit of future growth of the farm by acquiring common shares in the company for nominal price. In that situation the farmer may give up control of the farm at that time or instead may continue to hold the voting control until such time as his or her preferred shares are bought out by the farm. It may be that payments are made on the preferred shares at regular intervals, or when the farm has excess funds. In some cases, the farmer does not expect any payments to be made. Often a farmer might consider gifting his or her preferred shares on death either to the successor or, in some cases, to other family members.
Sale at Fair Market Value: Sales could happen to family members in the same way as an unrelated purchaser.
Mark Complete and continue on for the second part of this topic
Common ownership transfer options (continued)
Share sale: This option is usually more beneficial to the seller as the seller may be able to rely upon tax exemptions to reduce the tax expense of the sale. However, in a share sale there is increased risk of liability to the buyer. The buyer may also need to complete additional restructuring steps to ensure that he/she can maximize tax deductions including on loan interest and minimize taxes.
Asset sale: This option is usually more beneficial to the buyer as the buyer would be assuming less risk. However, an asset sale is often less advantageous to a seller because of the tax implications. Further, in many cases the costs associated with an asset sale may increase.
Employee options: The owner grants options to an employee to buy shares. If the options so qualify, it may be possible for the employee to defer the recognition of the benefit (and therefore pay tax on the benefit) until the option is actually exercised by the employee.
There can be variations or combinations of the ownership transfer options mentioned in the last couple of pages. There’s also many other tools that can help you minimize taxes either on income or on a sale/transfer. These include family trusts and investment or holding companies.
Mark complete and continue on to learn a bit about trusts.
Inter Vivos trusts are trusts created by an individual during his/her lifetime. They’re taxed at the highest marginal tax rate. Inter Vivos trusts are often used as a flow-through to allow for income splitting among family members. These trusts can also be used to maximize the availability of the capital gains exemption in the event of a sale by using the exemption of the beneficiaries of the trust. A trust may also help protect assets for secondary beneficiaries.
Testamentary trusts are trusts established in a person’s will which come about as a consequence of their death. These trusts used to be used as a tax planning tool. However, as a result of legislative amendments, after three years and subject to limited exceptions such as for disabled beneficiaries, these are also taxed at the highest marginal rate. These trusts are now more commonly used to protect assets from misuse by a beneficiary, to protect the assets for future use by secondary beneficiaries or to ensure government benefits for disabled beneficiaries are not negatively affected.
Mark Complete and continue on and learn about the pros and cons of family transfers.