Learn more about the advantages of an estate freeze during estate planning here.
Tax Advantages During Lifetime
While the freezor is alive, it might be possible to split business income and capital gains among various family shareholders (normally using a trust), providing access to the marginal tax rates. The income attribution and tax on split income (TOSI) rules must be considered when attempting to income split with family members through a corporation.
Wasting Freezes or “Serial Redemptions” can be implemented to generate retirement income to the shareholder and reduce his overall tax liability at death. The prevailing tax rates and the company’s unique tax attributes will determine the effectiveness of this type of estate planning.
Tax Advantages at Death
The value of the preferred shares does not grow once they are frozen. Therefore, the tax liability is also fixed at that point in time. The person undertaking the freeze can then easily plan for the future tax liability. If the freezor later wishes to partake in the company’s further growth, that person (or their spouse) can then be included as a beneficiary of the trust. So, as the company’s value may continue to grow, future appreciation is attributed to the common shareholders, usually the children and other heirs of the business owner.
The freezor’s predetermined future tax liability will arise if the shares are held until death; in this way, advance planning can be undertaken as to the funding of this liability.
When it Might Not Be a Good Time to Undertake a Freeze
An estate freeze is not recommended if the shareholder is young and not yet able to reasonably anticipate costs and liabilities arising in the future. Nor is it recommended if the intended common shareholders, namely the beneficiaries of the family trust, will still be relatively young if the common shares need to be distributed because of the 21-year rule. Consider this illustration of the 21-year rule: if the children/next generation are 6 and 7 years old when the freeze is undertaken, they will receive their common shares from the trust at ages 27 and 28. The benefactor may consider this too young to receive and manage a large amount of wealth.
Please remember that this article is not a substitute for personalized tax advice from your wealth advisors. Nour Private Wealth (NPW) is a Canadian company servicing clients across seven provinces. For more information on all forms of wealth creation and preservation, contact us today and speak to one of our wealth advisors. We will gladly further discuss the advantages of an estate freeze.
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.