Benefits of an Estate Freeze
With good planning with your accountant, lawyer and financial advisor, an estate freeze 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 continues to grow as well. Currently, the amount of annual income tax paid is significant.
What is an Estate Freeze
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 on legal and accounting advice now are much less than the income tax consequences of poor planning.
- Reduces taxes at death – future growth of the shares in the company accrue to the common shareholder or family trust.
- Using the Lifetime Capital Gains Exemption which is available on certain private company shares and qualified farm and fishing property.
- Splitting income with family through the use of a family trust.
- Protecting assets when the future growth of a company will be held in the trust and will be protected from creditors.
- Reducing probate fees as a result of freezing the value of the shares, any future growth will not be part of the shareholders’ estate and thus not subject to probate fees.
- Maintaining control while holding preferred shares which were exchanged for the common (growth) shares. The senior shareholders will continue to have control and access to the assets in the private corporation.
Life insurance owned by the corporation is often a less expensive way of funding after implementing an estate freeze. The income tax rules are changing effective January 1, 2017, a discussion of how life insurance can be incorporated is recommended. New life insurance policies issued, in force prior to January 1, 2017, will be grandfathered under the current income tax rules. Life insurance policies issued, changed or converted 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. Consult your financial advisers to see if either the estate freeze or the positioning of additional corporate-owned life insurance plan makes sense.