What is an Estate Freeze

Jenny Handwerk |

What is an Estate Freeze 


An estate freeze is a transaction in which the value of assets that appreciate is locked in or "frozen." The idea is to shift the future appreciation of the assets and the corresponding tax responsibility to other taxpayers, typically relatives. 

Implementing an estate freeze involves trading in property with growth potential (like ordinary shares of your company) for non-growing property (like fixed-value preferred shares of your company). Estate freezes usually only make sense when there is a clear successor or next generation of owners, and there is an expectation that the firm will increase in value and generate capital gains.

The corporation that runs the firm is typically the owner's most valuable asset. Fixing, or "freezing," the value of the corporation's shares allows the original owner to keep the current ("frozen") worth of the assets while tax-efficiently transmitting the corporation's value to the next generation. In essence, the amount of capital gains and other taxes owed is decreased when an owner passes away since the estate is valued for tax reasons at the frozen value rather than its current worth.


Benefits of Implementing an Estate Freeze 


Minimizing or deferring capital gains upon death


Implementing an estate freeze allows the freezer to avoid paying capital gains tax on the total amount of future increases in the corporation's worth that would otherwise occur at death, which makes it possible to minimize or postpone capital gains upon death.


Income tax advantages


The preference shares that the freezor obtains will not appreciate; therefore, when those shares are subsequently sold, their capital gain will also not rise. As a result, there is some assurance regarding the tax that will be paid for the preference shares upon the freezer's death.

Suppose the estate freeze is set up so that any increase in the value of the shares accrues to the freezer's children, assuming that the children outlive the freezer. In that case, the tax liability associated with the increase in value of the common shares will be postponed until the child who receives them either disposes of them or passes away, whichever comes first.


Income Splitting Opportunities


An estate freeze allows for income distribution among family members under acceptable conditions by requiring family members or a family trust to subscribe for a corporation's common shares. However, it is crucial to note that the ability to split income is still subject to certain attribution restrictions, which must be carefully evaluated before imposing an estate freeze.


Reduction in probate fees


Provincial probate fees payable by the freezer's estate after death can also be lowered, if not eliminated, with careful planning. This can be accomplished by redeeming preference shares. At the same time, the freezor is still alive (known as a "wasting freeze"), using multiple wills or transferring shares to an alter ego or joint partner trust, with the latter option only available if the freezor is 65 years or older.


Family legacy assets


An estate freeze can also be a useful strategy to transfer ownership and control of a family legacy asset, such as a family business, to the next generation. Incorporating a trust into the plan can ensure that the structure is adaptable, allowing the freezor to consider, for example, which of his or her children or grandchildren is most suited to take over control of the business when the freezor is ready to cede that power.


When would you consider an estate freeze?


Before considering an estate freeze, ensure you don't need future growth to support your legacy and lifestyle. An estate freeze is most effective when you desire to achieve one or more of the following goals.


  • You aim to minimize and defer taxes.
  • You own a business and have family members take over after retirement or death.
  • You want to split your income with family members in a lower marginal tax band than you. 


Final Notes 


An estate freeze or refreeze approach can be critical to your business succession and estate plan. Because estate freezes and refreezes are complex transactions, consult with your chief financial officer at Handwerk Consulting to determine whether one is right for your case.