Is it Time to Restructure?


Previously, I blogged about a client that took my advice and cleaned up the share structure of his business even though at the time the business was not doing well financially. In that case, the client wanted to eliminate some minority shareholders and on my advice used the circumstances to his advantage. However, eliminating minority shareholders isn’t the only strategy to use in tough financial times. There is another strategy for future planning that you can use to your advantage in these circumstances.

Many of my clients have in the past carried out an “estate freeze” whereby they reorganized the share structure at a time when the business was worth more than it is today. That corporate restructuring was implemented many years ago. However, in circumstances where the value of the business has now declined, there is a new opportunity to use the tax laws to reorganize the business to maximize tax savings on the eventual sale of the business.

I had a client a number of years ago who had “crystallized” his capital gains exemption when the value of the business was at a new high. Since that time, the recession of 2009 hit and the value of the business dropped. Knowing that the owner was thinking of selling the business in the next five to seven years, I suggested a reorganization to restructure the business and multiply the capital gains exemption for the time when he actually sells the business.

The strategy was premised on the fact that the owner intended to grow the business for sale and in fact the value was again on the upswing. Therefore, I pointed out that a perfect opportunity was before him …. implement a new reorganization so that when he sells the business he can multiply the $800,000 capital gains exemption among his family. The beauty of this is that all the correct elements would be in place: (1) the value of the business had fallen, (2) the owner saw a substantial increase in value in the next 5 years, (3) a family trust could be established which would benefit from that growth and (4) in his case, there were five beneficiaries of the family trust.

What did this mean to the owner? Well, under the existing structure, he was the only shareholder and in five years on a share sale could have claimed one capital gains exemption ($800,000 in 2014). That means he would not have to pay tax on $800,000 of the proceeds of sale, saving approximately $280,000 of tax. Under the new structure, he could potentially multiply this by five, thereby not having to pay tax on $4,800,000 of proceeds of sale, saving approximately $1,400,000 in taxes!