How To Implement An Estate Freeze

Have you been contemplating implementing an estate freeze, but unsure of how to go about it? Then you’re in the right place to learn about the steps required for this valuable estate planning tool, but before being able to learn about how to implement an estate freeze, we need to lean exactly what an estate freeze is, so let’s start there.

What is an Estate Freeze

In short, an estate freeze is a financial planning strategy used to lock in the value of a person’s assets for estate planning purposes. It involves transferring ownership of certain assets to another party, such as a trust or a corporation, in exchange for preferred shares that have a fixed value. By doing so, the owner can freeze the value of their assets at a certain point in time, which can have significant tax and estate planning benefits. For more information, read this blog which explains more in depth about “What An Estate Freeze Is” but now that we know what it is, let us take a look at home we can implement an estate freeze.

Implementing a Freeze

An estate freeze is an option for individuals like you to legally set the value of your corporation, qualified small business, real estate portfolio of passive assets, publicly traded securities, or investment accounts at what they are currently worth for tax purposes. Your circumstances will determine which of the freezing techniques will be most beneficial. Make an appointment with your tax advisor to discuss your options, as the information herein should not be considered a substitute for personalized tax advice.

Three Steps for Implementing an Estate Freeze

Step 1: A proper valuation must be done to determine the value of the capital property to be frozen. Going forward, we will assume that capital property refers to shares in a private corporation.

Step 2: You convert your common stock to fixed value preferred shares with a value equal to that of the common shares at the time of the freeze.

At this stage, there are various options available:

  • If you own your own business, you can transfer your common shares to your corporation on a rollover basis and avoid triggering any immediate tax liability. In exchange, you receive frozen preferred shares of the same current value.
  • Another option is to transfer your common shares to a new holding company in exchange for preferred stock. A holding company lets you move passive assets to it from the operating company on a tax-deferred basis, thus qualifying the operating company’s shares for LCGE purposes
  • Utilizing a family trust when implementing your estate freeze lets you retain some control of the common shares in your role as (one of the) trustees of the trust Despite its increased reporting and accounting burden, a family trust is highly recommended when implementing an estate freeze.

Step 3: New common shares with a nominal value are then immediately issued to others, typically your children or a discretionary family trust with the children designated as beneficiaries. Future growth of the company then accrues to the common shares – and outside of your estate and associated death tax exposure.

Real-World Examples of Estate Freezes

Let us say that John owns a business worth $10 million. If John were to pass away, his heirs would inherit the business and would be responsible for paying any associated taxes. However, if John were to implement an estate freeze by transferring ownership of the business to a holding company in exchange for preferred shares, he could lock in the value of the business at $10 million. This would allow his heirs to inherit the preferred shares instead of the business, which can result in significant tax savings.

Why Do People Undertake Estate Freezes?

An estate freeze works to:

  • Postpone payment of capital gains tax that would otherwise be due on your death and reduce probate fees.
  • Calculate and plan to fund the expected tax.
  • Take advantage of lifetime capital gains exemption and income splitting between family members. Transfer future appreciation of the assets to the next generation. Get professional guidance about private annuities, attribution rules, and tax on split income (TOSI) rules.
  • Protect assets from creditors.

Understanding the Tax Implication of an Estate Freeze

Implementing an estate freeze can have significant tax implications. For example, by freezing the value of their assets, individuals can reduce their future tax liability and ensure that their heirs receive more of their assets. However, it’s important to note that the tax laws surrounding estate freezes can be complex, and it’s recommended to consult with a tax professional to fully understand the implications.

Additional Resources About Estate Freezes

For more information on estate freezes and how they can benefit your financial plan, check out the following blogs from NPW:

For more in-depth insights about implementing an estate freeze, make an appointment with any Nour Private Wealth advisor today.

This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal, or accounting advice. Please speak with your accountant about tax or accounting advice. Individual circumstances and current events are critical to sound investment planning, and not all investments are suitable. Please speak with your investment advisor prior to investing.

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