What Estate Freeze Strategy is Right for You?

Estate freezes conveniently help lock in your capital assets at its current Fair Market Value (FMV) so that there’s no further capital gains and tax liabilities on its future growth. This strategy provides several benefits to both the owner and the beneficiary when transferring a business. Let’s take a look at the various freeze strategies and what the right one is for you.

Estate Freeze

The classic estate freeze is perfect for a client with a business, typically worth at least $1 million dollars, who wishes to transfer the ownership to their kin or management. The estate freeze locks in the current value into preferred shares for the owner while passing on any future growth to the transferee through new common shares.

This involves the existing owner initially transferring their existing shares into preferred shares in either the operating company or a holding company, which will have a fixed value equal to the FMV of the company. The successor then buys the common shares that are issued from the company for a nominal amount and any further increase in the value is benefited to the successor.

The Partial Freeze

The partial freeze is different from the traditional freeze in the sense that the owner will lock in the present value of the company in preferred shares and further profit through the common shares for any future growth.

How this works is that when the common shares are issued the owner and transferee, both buy the shares for a nominal amount. This is most effective for an owner who wants to continue to participate in the company’s growth, while also broadening the ownership to successors or staff. It’s also beneficial if the owner would like to hold off assigning a beneficiary. The owner can simply issue the shares into a discretionary trust and then later designate the transferee as the trust’s beneficiary.

Wasting Freeze

The wasting freeze allows the owner to redeem the preferred shares over time. This is great for owners who would like to fund their retirement with the company’s proceeds. This method also allows the owner to spread out the tax liability, as the owner will pay tax as the shares are redeemed. However, when the company buys all the redeemed shares, the owner receives a dividend that does not qualify for the LCGE (Lifetime Capital Gains Exemption) because they are not considered capital gains. This redemption is generally taxed at a higher tax rate than capital gains for those in the higher tax brackets.

Estate Re-Freeze

If you are an owner who has already committed to an estate freeze and the value has dropped without a recovery in the near future, this may be the best option for you. This protects the transferees from taking a tax hit if the owner was to pass away before the value recovers. A re-freeze involves bringing the current share value in line with the company’s actual value by creating new preferred shares worth the present value that the owner trades for the original preferred shares.

This option is also beneficial when the company is growing in value and you would like to freeze the company again, or when one introduces new shareholders into the ownership model.

Estate freeze methods have various benefits to owners and shareholders alike. Finding the right one for you can reduce the liabilities incurred when assets are disposed of. To learn more about estate freezes or to discuss other estate planning strategies, speak with your financial advisor at The Beacon Group of Assante Financial Management Ltd.