Estate freeze: the basics

An estate freeze locks in the current value of your assets, usually shares of a private company, so that future growth passes to the next generation. Tax on that future growth is deferred to your successors.

Benefits

• Tax planning: caps the tax you will owe on death at today's value
• Succession: gives a structured path for transferring the business
• Control: you can keep voting control while growth goes to others
• Protection: when set up properly, can help protect assets from creditors

How it works

• Value the business or assets being frozen
• Exchange your growth shares for fixed-value preferred shares
• New growth shares are issued to family members, often through a family trust

Who is involved

A tax advisor to design the structure, an estate lawyer to draft documents, a business valuator to set fair market value, and often an insurance or investment advisor to plan for the tax that will be due on death.

When to consider it

• You are in good health and planning for the long term
• You expect the business or investments to grow
• You want to begin passing wealth to the next generation

Planning considerations

An estate freeze is not necessarily appropriate simply because a business or investment portfolio is expected to appreciate in value.

The decision should consider the owner's retirement and cash flow requirements, the anticipated future growth of the assets, family succession objectives, and the potential income tax liability on death.

The structure must also account for the interaction of corporate tax rules, shareholder benefits, family trust provisions, and the 21-year deemed disposition rule where a trust is involved.

An important consideration is whether the owner is comfortable transferring future growth to the next generation while retaining sufficient economic value and control.

In some circumstances, a partial freeze or a structure that provides greater flexibility may be preferable to a complete transfer of future growth. The appropriate approach depends on both the tax consequences and the family's longer-term financial and succession objectives.