What is an estate freeze?
An estate freeze is a reorganization of the shares of a private company undertaken to “freeze” the growth in value of a particular class (or classes) of shares at the fair market value thereof at the date of the freeze. Think of it as a snapshot of the fair market value of a business at a moment in time, and then having the future growth accrue to new shareholders
Why do people undertake estate freezes?
One of the most common reasons is to freeze the value of a business to permit the future growth to be attributed to another family member, including the next generation. This objective can defer all or portion of the income tax liability that would otherwise arise on the death of the freezor.
An estate freeze may also be undertaken for succession planning purposes. For example, a child of the freezor might work in the family business, while another child may not. As part of an overall estate plan, it might be appropriate to freeze the value of the older family member’s shares and bring in the working child as a shareholder, while separately providing for the other child in a will by equalizing them with other estate assets, such as real estate.
With a properly executed estate freeze, an income tax savings objective can be achieved. Every individual is entitled to a Lifetime Capital Gains Exemption, which can currently shelter up to $883,000 of capital gains on the sale of shares of certain types of corporations. If the primary shareholder’s shares are frozen and new shareholders are introduced as part of the estate freeze, one can multiply the number of capital gains exemptions that could be available on a sale of shares, potentially saving significant income taxes in the future.
Finally, another reason to undertake an estate freeze may be to satisfy a family law planning objective. A properly structured gift of shares to a child during the child’s marriage may result in not having to share the gift with a spouse in the event of a separation or divorce, where no existing domestic contract otherwise excludes that interest.
Should I undertake an estate freeze?
Everyone’s circumstances are different, so while it might be appropriate for one person to undertake an estate freeze, it may not be appropriate for another. Consult your professional advisor to determine if an estate freeze is appropriate for you.
What are the factors that I should consider when deciding to undertake an estate freeze?
Again, everyone’s circumstances are different. However, some factors to consider include:
- The age of the freezor(s). Generally, the older the freezor(s), the more appropriate an estate freeze may be.
- The net worth of the freezor(s). Where an individual’s net worth is such that their existing assets will provide for all of their needs throughout their life, a freeze might be appropriate.
- Growth potential of the business. The higher the probability the business will experience growth in future years and the greater the chance the business may be sold in the future, the more likely that an estate freeze would be an appropriate course of action.
- Family situation and succession. Does one child merit a greater share of the family business than another?If the answer is yes, an estate freeze may permit a successful transition on a tax-deferred basis.
If I undertook an estate freeze five years ago, is there any reason for me to do another one?
If the value of the shares that the freezor received on the past estate freeze have gone down in value significantly, then it might be appropriate to consider doing another freeze. With the unfortunate impact of COVID-19, many assets/businesses have seen a decrease in value, so there may be an opportunity to refreeze and pass more growth to other shareholders.
What are the disadvantages of doing an estate freeze?
If you freeze at a high-value and the value subsequently goes down, you may have to consider undertaking a refreeze, especially if one of the primary objectives was to defer an income tax liability upon death. Another disadvantage is that an estate freeze involves professional fees and costs. You will require professional assistance, including accounting, tax, legal and valuation work. An estate may also complicate the shareholdings of a corporation. New shares are issued to the freezor and to new shareholders. These shares will have different rights and characteristics that need to be fully understood by those involved. In addition, a Shareholders’ Agreement is generally recommended to be incorporated into an estate freeze in order to govern the relationship between the shareholders post-freeze.
If I decided to undertake an estate freeze, how long would it take?
That will depend on the existing and future corporate structure. If there is one company, the freeze should not be that complicated and likely could be completed within a couple of months. However, if there are multiple entities in your corporate group, the estate freeze may be more complicated and could take more time.
Is now a good time to undertake an estate freeze?
If you believe that the value of your business is at a low point, the growth potential is high and/or you want to accomplish one or more of the objectives referred to above, it may be a good time to consider an estate freeze or a refreeze.
How Can Crowe Soberman Support You?
In these uncertain times, it is essential to remain agile and proactive as the COVID-19 situation unfolds. Having timely access to financial experts, insights and news as quickly as possible is critical—and that’s where we can help.
We have established a dedicated COVID-19 Resource Hub, highlighting areas of business operations that will likely be impacted by coronavirus. Whether you need to discuss your current financial situation and learn what options are available to you, or you want to be guided through the appropriate cash flow management strategies for your business, our team of experts are ready to help you at every step of the way. Please do not hesitate to reach out to your Crowe Soberman professionals for support during these challenging times.
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This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.
