A holding company is a special type of company that holds assets rather than operating a business. These assets can include things like shares in other businesses, real estate, or investments like stocks and bonds. The main purpose of a holding company is to protect and manage assets. It’s a key part of smart financial and estate planning, especially for those looking to preserve wealth and pass it on efficiently.
When a person owns shares in a holding company, they essentially own the value of everything the company holds. If they pass away, the ownership of those shares can be passed to their beneficiaries through their estate. This allows the assets to be transferred in a smoother, more organized way. Holding companies are often used to reduce taxes, protect assets from creditors, and provide control over how wealth is managed.
Why Use a Holding Company?
There are several important benefits to using a holding company for managing wealth and planning your estate:
- Protecting Assets from Creditors
A holding company can help protect your assets from creditors. If you own valuable assets like real estate or shares in a company personally, those assets could be at risk if someone sues you or makes a legal claim against you. However, if the assets are owned by a holding company, the risk is limited. The most that could be claimed would be the value of the assets inside the holding company, not your personal assets. This makes it a useful tool for protecting family wealth and minimizing risk.
2. Maintaining Control and Flexibility
A holding company gives you more control over how your assets are handled, both during your life and after you pass away. If you own assets personally, they are passed directly to your beneficiaries when you die. This means the beneficiary gets full control of those assets. But, with a holding company, you can pass on the shares of the company rather than the individual assets. This allows you to create rules about how those assets should be managed, even after your death. You could use something like a shareholder agreement to guide the use of the company’s assets, ensuring they are handled according to your wishes.
Additionally, using a holding company during your lifetime allows for more flexibility in how you manage your income. Instead of receiving all your earnings at once, you can “smooth” your income over time, potentially lowering your tax bill.
3. Reducing Probate Costs
When a person passes away, their estate usually goes through a legal process called probate. Probate involves validating the will and transferring the assets to the beneficiaries. However, probate can be expensive and time-consuming, especially in places like Ontario where the Estate Administration Tax (EAT) can cost 1.5% of the estate’s value. Assets held inside a holding company don’t need to go through probate because the shares of the company are passed directly. This helps save time and money during the transfer of wealth.
4. Tax Planning and Estate Freezes
A holding company can also be a powerful tool for managing taxes. One of the most common strategies is called an “estate freeze.” During your lifetime, you can freeze the value of your assets at their current value. This means that when you pass on, your tax bill is based on today’s value, not the future growth. The future growth of the assets is passed on to your beneficiaries, which defers and lowers the taxes they will need to pay.
For example, if you own shares in a growing company, you could freeze their value now and pass on the future growth to your heirs. This has two main benefits: it limits your own tax burden at the time of death, and it allows your heirs to benefit from the growth of the assets over time.
5. Succession Planning
A holding company is useful for succession planning. Instead of transferring each individual asset, like property or business shares, you transfer the shares of the holding company. This simplifies the process and ensures that the assets are passed on in a controlled and organized way. It also allows you to ensure that the beneficiaries manage the assets according to your wishes, which is particularly useful when passing on business ownership or large investments.
For more information about how a holding company can work for you, talk to your financial planner. Also, feel free to grab a copy of The Art of Retirement, which will help you on your path to an effective retirement plan.
