Successful Transitions Through The Generations
Written by Don Anderson, P.Eng. CLU
Written by Don Anderson, P.Eng. CLU
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Unlocking Intergenerational Succession: The Role of the Legato Fund
This article aims to shed light on the pivotal role that a Legato Fund can play in fostering intergenerational succession, transcending its perception as merely an "oversold life insurance product." Initiating the Estate Freeze Embarking on the journey of estate planning often commences with the implementation of an estate freeze, representing the initial stride in a proactive approach. However, for astute business owners, it's imperative to progress to the subsequent stage: addressing the looming 'capital gains taxes that will come due in their estate from an estate freeze.' The Legato Fund Solution Enter the Legato Fund—an insured investment specifically tailored to mitigate the impact of these imminent tax liabilities. By strategically allocating corporate resources to the Legato Fund, business owners can ensure the creation of sufficient and timely liquidity required by their estate, facilitating a seamless transition of assets across generations. Elevating Professional Guidance The efficacy of the Legato solution truly comes to fruition when tax, legal, or portfolio management professionals grasp its effectiveness. Their understanding empowers them to provide invaluable guidance to clients navigating the complexities of intergenerational wealth transfer. As clients seek peace of mind amidst the transition of their lifetime successes to the next generation, the expertise of these professionals becomes indispensable. In essence, the Legato Fund transcends its conventional perception, emerging as a strategic tool in the arsenal of successful business owners striving to secure the legacy of their hard-earned achievements for generations to come. |
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Family Ownership Structure
Under the guidance of their trusted advisors – typically their tax accountant and an estate lawyer – entrepreneurs establish a family ownership "framework." This arrangement often involves a family holding company, one or more family trusts, and the original operating company(ies).
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Valuation of Assets
The founding generation has painstakingly built the business, invested wisely, and cultivated family prosperity while nurturing their kin. When the time is ripe, and with expert counsel, these entrepreneurs execute an "estate freeze," wherein a professional valuator assesses the value of each asset and business. |
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Issuance of New Shares In The Holding Company
A new class of shares, termed "preferred shares," is created by the estate lawyer within the holding company, pegged at the fixed value of assets. The parents assume ownership of these preferred shares, endowed with voting rights. By assigning more voting rights per preferred share than the total allotted to the common shares, the parents retain control of their assets post-freeze.
The succeeding generation begins their asset ownership journey by holding the new "common shares."
Implications of the Freeze
By pegging the asset value at this juncture, the parents secure their capital gains and associated taxes.
By pegging the asset value at this juncture, the parents secure their capital gains and associated taxes.
Deferred Capital Gains To The Estate
Determining the extent of capital gains taxes and their payment deadlines constitutes another crucial aspect of this financial strategy.Following these pre-mortem planning steps with an estate freeze defers these taxes until the demise of the last surviving parent. Despite transitioning ownership to the next generation, the parents need not settle any capital gains taxes on their accrued wealth during their lifetimes.
Determining the extent of capital gains taxes and their payment deadlines constitutes another crucial aspect of this financial strategy.Following these pre-mortem planning steps with an estate freeze defers these taxes until the demise of the last surviving parent. Despite transitioning ownership to the next generation, the parents need not settle any capital gains taxes on their accrued wealth during their lifetimes.
Two Options
The parents have two choices regarding the funding of the capital gains tax liability:
- Leave the capital gains tax bill to their estate, without prepayment or intentional savings.
- Utilize corporate resources, such as retained earnings, to invest in preparations for paying these estate taxes.
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The Legato Fund Solution Introducing the Legato Fund, which can be owned and funded by the family holding company. The Legato Fund, a life insurance-based investment solution tailored for corporations, presents the most cost-effective and tax-efficient avenue for business owners to finance their personal estate. This ensures ample liquidity for fulfilling estate obligations such as the deferred capital gains taxes of an estate freeze, timed perfectly for when those taxes become due. |
Legato: Your Partner In Succession Planning
Business owners and their professional advisors can rely on Legato, independent corporate life insurance specialists, to collaborate seamlessly in crafting impactful solutions.
Don Anderson, P.Eng. CLU
Chartered Life Underwriter
Legato Wealth Management Inc.
March 9th, 2024
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