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.
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 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.
Other advantages of an estate freeze include:
- Income Splitting – The estate freeze allows you to put shares in the hands of other family members and have the dividends and capital gains taxed in their hands.
- Creditor Protection – By placing shares in the hands of other family members or in a trust, you can protect your shares from the hands of your creditors.
- Probate Savings – Since your interest in the business is now frozen, the probate value is effectively fixed as well. Note that some jurisdictions allow for multiple Wills, and you may be able to make a separate Will that covers your business shares or other assets that will not require probate.
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 to protect the shares against mismanagement and retain a measure of control over the business.
Dean Paley is a Burlington accountant who serves the needs of businesses and individuals.