What is an Estate Freeze?

An estate freeze is a strategic estate planning technique used to minimize tax liability and transfer wealth to your loved ones. Here’s how it works:

Locking in Value: The current value of an estate’s assets is “frozen,” for the original owner (often referred to as the “freezor“).
Future Growth: Any future appreciation or increase in value of the assets accrues to the benefit of the freezor’s heirs (often referred to as the “freezees“).
Tax Benefits: By freezing the value of the estate at its current level, the freezor potentially reduces the capital gains tax liability that would be incurred upon their death, since the tax is calculated based on the value of the assets at the time of the freeze, instead of at the time they pass.
Control Retention: Despite transferring future growth to the freezees, the freezor can often retain control over the assets.

Key Considerations

Tax Implications: It’s crucial to carefully evaluate the tax implications, as the strategy can have significant effects on both the freezor and freezees.
Legal and Financial Advice: Estate freezes involve complex legal and financial arrangements, so professional advice is essential to ensure compliance with laws and regulations and to optimize the strategy’s effectiveness.
Family Dynamics: The interests and relationships of family members should be considered, as an estate freeze can impact family dynamics and succession plans.

Example Scenario

A business owner, nearing retirement, owns a company valued at $5 million. To implement an estate freeze, they might:

Exchange their common shares for preferred shares valued at $5 million (fixed value).
Issue new common shares to their children, who now benefit from any future growth in the company’s value.

If the company grows to be worth $10 million in the future, the original owner’s estate remains valued at $5 million (the value of the preferred shares), while the additional $5 million in growth is attributed to the children (holders of the common shares). This way, the capital gains tax on the additional $5 million growth is deferred until the children dispose of their shares.

Is an Estate Freeze Right for You?

An estate freeze is a sophisticated tool for managing estate and tax planning, aiming to preserve wealth and facilitate its transfer to future generations in a tax-efficient manner.

This blog post provides legal information but is not a substitute for legal advice. If you have a question about this topic or another legal matter, contact Naz Khodarahmi for a complimentary consultation. You can book a consult through www.macushlaw.ca through our booking system or contact Naz at [email protected] or (236) 476-3188.