Estate Freezes

An estate freeze refers to an estate planning method used to minimize taxes. When an estate freeze occurs, the value (and tax liability) of the estate assets are “frozen” at a specific point in time, and all future growth is typically taxed in the hands of other family members, usually your spouse and next of kin.

How to Perform an Estate Freeze

One way of performing an estate freeze is to gift assets to your adult children prior to your death. You should first calculate how much money you need to survive during retirement, and then ascertain if you have assets in excess of that amount.  Excess assets are then gifted and the future income and growth is then taxed in your children’s hands.

When you make this gift, you will be deemed to have disposed of your assets at fair market value, which may have tax repercussions. You should also be comfortable with the idea that these assets will legally belong to your children.

Estate Freezing without Losing Control  

A formal estate freeze involves setting up a corporation (if the assets are held personally) or engaging in a share reorganization (if the assets are held by a corporation).  In a formal estate freeze, all outstanding shares of a particular class of shares held by the freezor are exchanged for fixed value shares. New common shares are then issued the beneficiaries.  The freeze essentially caps the freezor’s capital gain in the corporation as of the time of the restructuring. Any gain that accrues after the reorganization will benefit the new common shareholders as opposed to the freezor. This method allows you to retain control of your assets during your lifetime, as your children do not receive direct ownership and who instead receive a share interest in a corporation (with different share rights) who owns the assets.

Use of Discretionary Trusts

A discretionary family trust is often part of an estate freeze.  A trust can allow you to pass on the future growth of these assets to a number of beneficiaries, including minor children who would have an entitlement and receive benefit. The family trust would subscribe for shares in the corporation owning the assets so that children would not mismanage the assets, as the family trust would be able to determine which beneficiaries receive which assets, and when.

 

Related Posts

Gifts Made During Lifetime

Inter vivos gifts are gifts made by a person during his or her lifetime, as opposed to leaving gifts in a Will (inter vivos is Latin for “between the living”). Inter vivos gifts are sometimes disputed, with the allegation being the gift giver was “unduly influenced” by the recipient of the gift – often a

Read More »
Scroll to Top