An estate freeze is a process that aims to limit, partially or entirely, the future growth in the value of original assets. The asset owner or the freezor exchanges the assets for some with a fixed value, referred to as frozen assets. After the freeze, the increase in value of the original assets will be an added benefit to the freezors’ beneficiaries or a trust they establish for their benefit.
Many people are considering estate freezing in their estate planning strategies. You can consult estate planning lawyers in Thornhill to gain more insights into what it entails, its potential benefits, and how to approach the strategy.
Why Do People Undertake Estate Freezes in Canada?
Tax benefits and savings are significant reasons why people consider estate freezes. The process allows them to fix the capital gain on the assets at a lower value for less tax liability upon the freezor’s death. Any subsequent increase in the value of the assets passes on to the beneficiaries of the freeze.
Estate freezes also enable people to satisfy a family law planning objective. For example, it can be structured as a gift of shares to a child during the marriage. In the event of a divorce, the beneficiary may not have to share the frozen assets with the spouse, especially if there is no prenuptial contract.
However, it’s crucial to certify that the value of the assets is not too low at the time of the freeze. It would be beneficial for the asset owner to retain a reasonable value on the assets as the balance to be achieved in the future depends on the value at the freezing point. Working with skilled Thornhill wills lawyers can prevent you from making estate-freezing mistakes.
Is an Estate Freeze a Suitable Estate Planning Strategy for Me?
Everyone who implements an estate freeze in their estate planning strategy does so for varying reasons because circumstances differ across the board. What may work for one person may not work for another, so you must properly evaluate your situation to gauge if it’s a suitable approach.
Factors to Consider When Considering an Estate Freeze
Consider getting the professional perspective of Thornhill wills lawyers. They can evaluate your circumstances in depth and determine if you’re a candidate for the process. Some factors that can help you make an informed decision and which are crucial for the procedure include the following:
- Your age: The older you are, the more appropriate an estate freeze may be
- Your net worth: If your net worth is such that the existing assets will provide for the needs of your beneficiaries throughout their life, an estate freeze may be appropriate
- The growth potential of your business: If the likelihood is high that your business will grow in value over the years or that you will sell it in the future, an estate freeze would be appropriate
- Your success plans and family situation: If one child has a more significant share in the family business than others, an estate freeze may allow for a successful tax-deferred transition.
What Are the Estate Freeze Implementation Methods and Structures in Canada?
How your freeze your assets depends on the nature of the assets and the structure of your corporation. At the very basic, the first step entails valuation. Your estate planning lawyers in Thornhill can help you conduct a proper valuation to establish the value of the capital property or common shares you wish to freeze.
Then, these two steps will follow:
Conversion of the Assets to the Frozen to a Fixed Value
At this step, you have various options to consider:
- You can transfer your common shares to your corporation using a rollover strategy to avoid tax liability. In this case, you will receive your preferred frozen shares in the current value, similar to the assets you wish to freeze.
- Alternatively, you can transfer your assets to a new holding company and receive your preferred stock in equal value to the assets. With a holding company in the picture, you can move passive investments into it from the primary company on a tax-deferred basis. The option provides creditor protection.
- Utilize a family trust to retain some control of the common shares. As one of the trustees, you can decide who and when ultimately receives dividends from the common shares.
Issuing Common Shares with Nominal Value to Others
In most cases, the final step is to issue the new common shares with a nominal value to your beneficiaries, mostly your children, or a discretionary family trust where the children are named as beneficiaries. As the company grows in the future, the value accrues to the common shares and protects your asset from associated death tax exposure.
What Are the Advantages of Estate Freezes?
Apart from the tax reduction benefit that comes with an estate freeze, additional benefits of the strategy include the following:
- Orderly and gradual integration to the next generation while still maintaining control of the assets
- Protection of assets from creditors because the frozen estate is a separate entity from the beneficiaries
- Multiplication of lifetime capital gains exemption (LCGE) that applies to the business
- Transfer of future asset growth to the next generation without the risk of immediate tax consequences
- Allow income splitting between family members for as long as the process complies with the tax on split income (TOSI) requirements
- Reduction in probate fees
Skilled wills lawyers in Thornhill, Ontario, can help you explore more benefits associated with estate freezing. Based on their legal counsel, you can decide whether the strategy suits your estate plan.
Protect The Welfare of Your Future Generation with Skilled Legal Counsel
Many factors go into estate freezing. Even if you decide to use it as a strategy, it’ll only be one component of a well-designed estate plan to help you achieve your estate planning objectives. You must take proper care to ensure you remain with enough assets to sustain your lifestyle and support business plans. Thornhill wills lawyers can help you evaluate all these factors.
Our law firm is passionate about guiding clients through the estate planning process with confidence and support. We will put our experience to work to help you meet your business and family needs. Get in touch with us to get started.