Why would I implement an Estate Freeze? What are the benefits?

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

An estate freeze is an important estate planning strategy where you have significant appreciating assets, like businesses and/or real estate, from which you are seeking to manage and minimize the tax burden on these assets, ensuring a more efficient transfer of wealth to future generations.

The primary reason for implementing an estate freeze is to "lock in" the current value of an asset for tax purposes, thereby preventing future growth from being taxed in your estate upon your death. In Canada, when you pass away, you are "deemed" to have sold all your capital assets at their fair market value. This can trigger a significant capital gains tax liability, especially if your assets have appreciated considerably over time. An estate freeze mitigates this by shifting the future growth to other beneficiaries.

Consideration should be given to undertaking an estate freeze in the following scenarios:

  • You own a rapidly growing business: Your business is your largest asset, and its value is expected to continue to increase significantly.

  • You have substantial appreciating assets: This could include real estate, investment portfolios held in a corporation, or other high-growth investments.

  • You want to transfer wealth to the next generation: You have a clear vision of passing on your assets to your children, grandchildren, or other heirs.

  • You're approaching retirement: You want to solidify your financial position and determine your future tax liabilities.

  • You want to plan for business succession: You wish to smoothly transition ownership and control of your family business to the next generation.

The decision to undertake an Estate Freeze is driven the critical prospective benefits that can be achieved, including:

  • Capital Gains Tax Deferral and Minimization:

    • Limits Future Tax Liability: This is the most significant benefit. By freezing the value of your assets today, you cap the capital gains tax that will eventually be payable on those assets in your estate. Any future appreciation in value accrues to the new shareholders (your beneficiaries), effectively bypassing your estate for tax purposes.

    • Tax Deferral: You don't trigger the capital gain immediately. The tax on the "frozen" value is deferred until you actually sell or are deemed to dispose of the preferred shares (often upon your death). This allows you to retain capital for a longer period.

  • Efficient Wealth Transfer to the Next Generation:

    • Passes on Future Growth: The primary mechanism of an estate freeze allows the future growth of your valuable assets to be transferred to your chosen beneficiaries (e.g., children or a family trust) without being taxed in your hands. This is a very effective way to build generational wealth.

  • Business Succession Planning:

    • Smooth Transition: For family-owned businesses, an estate freeze is an excellent tool for intergenerational succession. It allows the current owner to fix their interest in the business's current value while enabling the next generation to acquire the future growth.

    • Retention of Control: Often, the "freezor" (the original owner) can structure the preferred shares to retain voting control of the company, even though the growth shares are held by others. This allows for a controlled transition of management and ownership over time.

    • Provides for Retirement Income: The preferred shares received by the freezor can be redeemed over time, providing a source of retirement income while gradually reducing the value of assets that would otherwise be subject to tax in their estate.

  • Potential for Income Splitting:

    • Tax Savings for the Family: If structured carefully and in compliance with the "Tax on Split Income" (TOSI) rules, an estate freeze can facilitate income splitting. Dividends can be paid on the growth shares held by beneficiaries who are in lower income tax brackets, potentially reducing the overall family tax burden. This is generally most effective with adult children.

  • Multiplication of the Lifetime Capital Gains Exemption (LCGE):

    • If your business shares qualify as "Qualified Small Business Corporation Shares" (QSBCS), an estate freeze can enable your beneficiaries to use their own LCGE on the future appreciation of the shares they hold. This can significantly reduce or even eliminate capital gains tax on the future growth when they eventually dispose of those shares.

  • Certainty and Planning:

    • Predictable Tax Liability: By freezing the value, you gain a clearer picture of the maximum capital gains tax liability that will arise upon your death. This certainty allows for better estate planning, including the potential for purchasing life insurance to cover the anticipated tax bill.

In essence, an estate freeze is a strategic move to proactively manage your future tax obligations and ensure that your wealth, particularly appreciating assets, is transferred efficiently to your chosen heirs. However, it's a complex strategy that requires careful planning with tax, legal, and valuation professionals to ensure it's structured correctly and achieves your specific goals..

Significance of Professional Advice: As with most tax planning strategies, an estate freeze is a complex technical process, which requires the application of strict rules to the particular facts and circumstances. It is highly recommended to seek advice from an accountant and a tax lawyer to ensure legal compliance and to properly structure the transaction for your specific circumstances and objective outcomes.

For knowledgeable and experienced tax law representation for estate freezes and other tax planning strategies, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

Why would I implement an Estate Freeze? What are the benefits?
An estate freeze is an important estate planning strategy where you have significant appreciating assets, like businesses and/or real estate, from which you are seeking to manage and minimize the tax burden on these assets, ensuring a more efficient transfer of wealth to future generations. . . .  Continue reading.

What scenarios can take advantage of an Estate Freeze?
Serious analysis and investigation should be undertaken, and consideration to the implementation of the appropriate estate freeze, where you have significant appreciating assets, like businesses and/or real estate, that you are seeking to manage and minimize the tax burden on these assets, so as to ensure a more efficient transfer of wealth to future generations, in particular in the following scenarios. . . .  Continue reading..

What are Common Estate Freeze Strategies?
When contemplating the use of an estate freeze strategy, the appropriate strategy will be determined by the asset(s) that are to be frozen, your particular tax situation, the objective outcomes being sought, among other factors, such that an appropriate tax strategy and procedure might be pursued to realize optimal results. . . .  Continue reading.

What are Potential Risks / Disadvantages of an Estate Freeze?
As with every legitimate tax planning strategy, it almost goes without saying, that there are potential risks and disadvantages with instituting an estate freeze. Nevertheless, it is through the recognition of the potential risks and disadvantages that you might be able to either avoid their occurrence or minimize their adverse impact, such that understanding these risks and concerns is an important facet in getting the most out of an estate freeze. . . .  Continue reading.

Can an Estate Freeze be Reversed (Thawed)?
As the name implies, an estate freezes effectively freezes those assets that have been subjected to the legal procedure of an estate freeze. Nevertheless, there may well arise circumstances at a later date that you no longer benefit from having those assets effectively frozen. In those circumstances, is there a legal process to reserve your original actions, such that you are effectively thawing or defrosting particular assets that were frozen pursuant to your earlier estate freeze. . . .  Continue reading.

Estate Freeze: Reasons & Benefits

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