Should I Implement an Estate Freeze?
Q. Should I implement an estate freeze?
A: An “estate freeze” is the process of fixing the value of your present holdings so that future appreciation and capital gains may accrue to others, generally family members. The fixed value is used to determine probate as well as capital gains arising on death. Probate can be avoided by having a secondary Will. On death, with the exception of spousal rollovers, unrealized appreciation will be reported as a capital gain on your terminal tax return. Your shares may or may not qualify for the $750K capital gains exemption.
Estate freezes may be implemented on operating and investment companies. Effectively the present common shares are exchanged for a special class of fixed value shares and new common shares are issued to those you wish to be entitled to future appreciation. You may still control the company by holding a class of non- participating voting special shares.
The estate freeze also provides the opportunity to income-split dividend income to lower income bracket individuals. This benefit can be significant if funds are required to pay for post-secondary education and other expenditures. It may also reduce your exposure to creditors.
By utilizing a family trust to hold new common shares, the combined available capital gains exemption (maximum $750K) is multiplied by the number of beneficiaries as opposed to one capital gains exemption if there was only one direct shareholder. If structured properly, the trust may assist in purifying the company so your shares will continue to be eligible for the capital gains exemption.
An estate freeze must be properly implemented to avoid potential traps such as an improper valuation and the corporate attribution rules. You must also consider timing of the freeze. If it is implemented too early, your new shares may not be in a position to pay sufficient dividends into retirement. Alternatively, the value may have peaked so that future appreciation will not be significant. In this regard, a partial freeze may be a solution whereby you also subscribe for some new common shares.
You should consult with your professional advisor on all related matters.