Did you consider using an estate freeze?
WHAT IS AN ESTATE FREEZE?
Simply stated, an estate freeze is a transaction or series of steps undertaken to allow future growth in the value of one or more assets to accrue to someone else, the beneficiary of the freeze. The beneficiary of the freeze is usually the person, or persons, who will ultimately become the beneficiary of the freezor's estate.
The freezor is the individual who initiates the freeze. The income generated by the frozen assets may be transferred to the beneficiaries, or the freezor could decide this on an ongoing basis. An estate freeze limits the value of the freezor's estate to the value at the date the freeze is implemented. The current value of the asset is usually retained by the freezor, although often in a varied form.
The term "freeze" refers to fixing the value of an asset at its current value. By freezing the values today, the freezor can accomplish a number of objectives. The freezor can quantify the tax liability, which will be triggered upon death or the disposition of a freezor's assets. The freezor can also take steps, in many circumstances, to actually work towards reducing those liabilities over a period of time. By limiting the value of the estate, the freezor also reduces the exposure to probate and other estate settlement costs
For those individuals with Qualified Small Business Corporations, the number of taxpayers who are shareholders, and most important, the estate can effect an orderly transition between generations, ensuring that an individual's assets go where they want them to go.
COMMON METHODS OF ESTATE FREEZING:
The following are the most common methods of estate freezing: When the property to be frozen are business assets, the assets may be transferred to a corporation utilizing the provisions of section 85 of the Income Tax Act in order to avoid the triggering of an immediate capital gain. The transferor will be issued "freeze" shares and a trust for the children will subscribe for the common shares.
If the property to be frozen are shares of an incorporated business or an investment holding corporation, a freeze will normally involve a tax-free reorganization of capital utilizing section 86. The transferor gives up his or her growth shares in return for "freeze" shares and a trust for the children will subscribe for the common shares. If the operating company is owned by a holding company, the operating company may declare a stock dividend to the holding company equal to the retained earnings. A trust for the children then subscribes for common shares. The freezor converts to "freeze" shares and a trust for the children subscribe for common shares.
The most often used methods of estate freezing are the section 85 and 86 freezes. The following is an example of a complete section 86 (1) estate freeze.
EXAMPLE
To understand what happens in an estate freeze situation, a simple example should clarify matters. X owns all of the common shares of X Corp. X's original share investment in X Corp. was $100.00, and it is now worth $400,000.00. X expects it to increase in value significantly over the next several years. X has two children, both in their early 20s, who work in the business.
First, X exchanges his common shares of X Corp., for 400 new preferred shares; this can be done as a corporate reorganization without triggering any income tax. The preferred shares are voting shares, thus allowing the freezor to continue to exercise control. They are also retractable at any time for $1,000.00 per share. In other words, X can demand that the corporation pay $400,000.00 for the shares at any time. Each of X's children then subscribe for 50 new common shares in X Corporation, paying $1.00 per share. Now assume X Corp. value rises to $900,000.00. X's preferred shares are still worth $400,000.00 and the common shares are now worth $500,000.00. X has thus transferred the "growth" in the corporation to his children at no tax cost to X.
As noted above, a properly implemented estate freeze will result in the maximizing of the value of the estate that will accrue to the freezor's beneficiaries. As an individual is generally deemed to dispose of property on death, resulting in a tax liability, reducing the value of one's estate that is subject to tax maximizes the value of the assets received by the beneficiaries. The estate freeze should be utilized by more individuals who own small, medium and especially large companies where there is expected growth for the business.
Using an estate freeze provides many advantages. To make sure that such a strategy meets all your objectives, it’s wise to consult experienced tax and legal advisors
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