Business owners: What are the benefits of an Estate Freeze?

As you may know, I practice corporate & tax law with a focus on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs. One technique that I like to use is called Estate Freeze. Hence, Today, I would like to share an article written by Bessner Gallay Kreisman, Chartered Accountants.

What are the benefits of an Estate Freeze?

For an owner-managed business, tax minimization is central to the overall financial plan. One popular tool is an estate freeze. An estate freeze is a corporate re-organization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due to deemed disposition rules at death and provides a deferral of tax.

A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization. The use of a trust facilitates income-splitting strategies between family members, and if properly planned, can also result in each beneficiary being able to utilize their $750,000 capital gain deduction concurrently. In a company that is expected to experience continued growth, the ability to benefit from multiple capital gain deductions can result in substantial tax savings.

For many companies that have already undertaken such a freeze, the current economic climate has unfortunately eroded valuations. However, from an estate planning perspective the decrease in values may have created a unique opportunity to re-freeze shares. Re-freezing at a lower value can help further reduce the tax liability upon death and defer the same to the next generation.

An important factor to consider with any estate freeze is the valuation of the shares being frozen. Given the nature of a freeze, and the potential benefits to non-arms length parties, the need to ensure a fair and impartial valuation is critical. While many may believe an ad-hoc valuation is sufficient, determining the value that may be attained in an open and unrestricted market, between informed and prudent parties, is a complex process that poses several challenges. A formal report ensures that adequate research is conducted and the valuation can be defended in the event the transaction comes under review by the taxation authorities.

Given the unique characteristics of each situation, effectively implementing such a strategy requires careful consideration of both technical and non-technical components. An estate freeze is only one component that can be utilized as part of a global tax and estate plan.