The Benefits of an Estate Freeze

With good planning with your accountant, lawyer and financial advisor, estate freezing can help reduce taxes on your assets, while maintaining control and access.

Many business owners have seen substantial growth in their corporate assets and are approaching retirement age. As their assets continue to grow in value, the income tax bill that will be owed when they are gone continues to grow as well. Currently, the amount of annual income tax paid is significant.

An estate freeze is a process which takes certain assets that you own today and freezing them at today’s value. Any future growth in the value of those assets will be attributed to other persons i.e. your heirs (children, family, trust, etc.) The assets are transferred to a new company under section 85 of the Income Tax Act which allows them to transfer these assets in exchange for preferred shares of the company that will be frozen in value.

The transfer will take place on a tax deferred basis thus there will be no tax paid at the time of transfer. Common (growth) shares in the company to which all the future growth in value will be credited to will be issued to your heirs or possibly a family trust.

There is the option to trigger the capital gain on private company shares when making the transfer to the new (holding) company. By using the lifetime capital gains exemption each shareholder is entitled to an exemption of $824,176.00 in 2016. This process will reduce taxes later when the shareholders sell the shares, transfer them to another owner or pass away.

There are numerous advantages to considering an estate freeze. In most cases the fees spent for legal and accounting advice now are much less that the income tax consequences of poor planning.

The benefits of an estate freeze are


Life insurance owned by the corporation is often a less expensive way of funding after implementing an estate freeze. Given that the income tax rules are changing effective January 1, 2017, a discussion of this process and how life insurance can be incorporated into the solution is recommended to happen now and not later! New life insurance policies issued, in force and paid by premium prior to January 1, 2017 will be grandfathered under the current income tax rules. Life insurance policies issued changed or converted from term  to permanent life insurance (Universal life or Whole life) after January 1, 2017 will have less tax sheltering room for investments, reduced tax free flow of proceeds through the capital dividend account and possibly higher cost for actual life insurance. Act now and consult your financial advisers to see if either the estate freeze or the positioning of additional corporate owned life insurance or the conversion of Term Life insurance to a permanent life insurance plan makes sense for you. If the answer is “yes” get moving!  Life insurance policies can take two or more months to be approved and issued, January 1, 2017 is only months away!