- Dean C Paley, CPA, CGA ,CFP - http://deanpaley.com -

What is an Estate Freeze?

An estate freeze is not a mid-winter funeral!

If you have a business, the estate freeze is a way to fix the value of your business or investments and transfer future growth to your children and beneficiaries.

The result is that you can split income by shifting capital gains and dividends to other family members and minimize the taxes due at death [1].

What Does An Estate Freeze Do?

When you die, you are considered to have sold all of your assets at their fair market value. If you own a successful business, there could be a large taxable capital gain [2] due on your death.

An estate freeze provides certainty in terms of the final tax bill due on your business by fixing the value of your shares now, as opposed to later. This can be particularly important if you feel the value of your business will continue to grow over time.

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Other advantages of an estate freeze include:

How Does The Estate Freeze Work?

In its most basic form, the estate freeze is simply a corporate reorganization.

You exchange your common shares for common shares that are fixed at the value of the common shares exchanged. At the same time, your beneficiaries (children, grandchildren spouse etc.) can subscribe to common shares for a nominal amount.

After the transaction is complete, the value of your interest in the business is now fixed and will not change. Any future growth is now in the hands of the common shareholders (your beneficiaries!).

What About Control Over The Business?

Owning common shares of a business typically involves voting rights. If you are concerned about turning control over to your beneficiaries or have other concerns, you can use a family trust [6] to protect the shares against mismanagement and retain a measure of control over the business.

Dean Paley is a Burlington accountant [7] who serves the needs of businesses and individuals.