Have you been wondering why you should undertake an estate freeze? Then you’re in the right place! Find out about the reorganization of shares of the corporation to cap the value of some stock at the fair market value (FMV) at the time of the freeze.
Why Do People Undertake Estate Freezes?
- Postpone payment of capital gains tax that would otherwise be due on your death. (Using the time value of money principle, postponing tax equates to saving tax.)
- Calculate the expected tax that will be payable when the asset is disposed, including the deemed disposition, and plan for its funding.
- Multiply your lifetime capital gains exemption (LCGE) or the lifetime capital gains exemption that applies to the business.
- Give future growth of the assets to the next generation without triggering immediate tax consequences.
- Implement income splitting between family members –in accordance with TOSI rules.
- Postpone paying tax accrued on future growth until the asset is sold by those who will have benefited from the proceeds of said future growth.
- Reduce probate fees.
- Aid succession planning and family law planning.
- Protect assets from creditors.
- Move surplus cash to a holding company on a tax deferred basis.
- Sell preferred shares back to the company (in lieu of dividends) so that over time you reduce historical capital gains that have accumulated in your estate. (As per the income tax act, this will be taxed as a dividend and not at capital gain rate.)
Should I Undertake an Estate Freeze?
Answering “yes” to these questions indicates that an estate freeze is right for your circumstances:
- Are you a, er, mature business owner?
- Is your net worth high?
- Is the growth probability and/or chance of selling your business high?
- Does one heir merit a larger share?
What Are the Disadvantages of Doing an Estate Freeze?
Timing is everything. Beware of freezing shares when they are likely to depreciate. Although you can “refreeze” at a better time, estate freezing is multi-disciplinary – with costs appropriate to the professionals involved.
Whether your family members, key employees, or other successors, careful estate planning will save these beneficiaries from having to pay a hefty tax bill before receiving their inheritance. Because this article is not meant to replace personalized advice, contact Nour Private Wealth (NPW) to discuss if, and why you should undertake 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.