A holding company is an entity that has no active business or operations – it simply owns the assets. A holding company can help you to further reduce your risk, and your tax; it can also be an excellent estate-planning tool.
Seven reasons to have a holding company:
- The holding company can keep your assets out of reach of potential creditors and liability claims directed at your operating company should the operating company get sued. Assets shifted to the holding company become virtually creditor proof. This can be done by shifting your profits from your operating company to the holding company with dividends, often on a tax-deferred basis.
- Your holding company can use this money to buy property, stocks or mutual funds, insurance policies etc. The operating company can also lease back some of the assets if it is beneficial.
- In financially strong times you can shift money to the holding company and in weaker years, when the operating companies taxes are lower, assets can be shifted back.
- You can income split with a spouse and children over 18 as holding company shareholders or, if their family trust holds them, they can each receive dividends of almost $40,000 with little tax if they have no or little outside income.
- Having a holding company can be an effective tool for estate planning. It can make intergenerational wealth transfer much simpler. Consider if you died with a large amount of varied assets all held individually, each asset would need to be re-registered in the name of an heir. If you held them in a holding company you just need to transfer the desired amount of shares to the heir you wish to include. So if you want three people or children to be equal heirs, then simply transfer a third of company shares to each.
- If you intend to transfer assets to children or grandchildren under 18, you need to have a trust to hold the shares and very detailed planning to avoid what is known as the ‘kiddy-tax’ attribution rule that is triggered when assets are given to minors.
- Sometimes you can reduce probate fees with a holding company. You will need to have two separate wills for this; one for your holdings that would need to be probated such as real estate and bank accounts, etc, and one for the shares of your private company. The second or business will does not have to go through probate.
You need to factor the costs of setting up and sustaining a holding company to see if it is worthwhile for you. You should also be aware that the holding company cannot claim the $813,600 capital gains deduction, and if certain qualifications are not met, you can trigger double taxation in income earned by the holding company. As always, get professional advice.
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