Along the lines of “a penny saved is a penny earned”, a guiding principle in estate planning is that “tax delayed is money earned”. A prime application of this principle is an estate freeze.
What exactly is being frozen in an estate freeze?
- Taxes — If you could pay today’s taxes at your death, you and your family will presumably have more to work with while you are living
- While these taxes may not be entirely avoidable, it may be possible to put a freeze on some of them
- In a sense, an estate freeze allows an individual to tell the government how much tax that person will pay, and when the person intends to pay the tax
Who might be interested in an estate freeze?
- Likely it is someone who has accumulated a fair amount of wealth, but not necessarily — it may simply be someone who is expecting growth
- Some examples may be a cottage, an investment portfolio, or a small business corporation
- The focus is on isolating the capital gains tax liability that a person has presently, and shifting the future tax liability to others — ideally one or two generations out in time
What does an estate freeze look like?
- There are innumerable variations on how an estate freeze might be carried out
- It may involve trusts, corporations, existing share re-structuring, sales or a combination of these
- The common characteristic is that beneficial ownership is being rearranged so that asset growth is being shifted to be taxed in later generations
- As well, usually life insurance is put in place to pay the frozen tax at the benefactor’s death
Are there any drawbacks to an estate freeze?
- If the values do not increase, or in fact go down, the exercise will have been a waste of time or may even cause more cost than if it had all been left alone
- As well, the transactions in the strategy have to be bona fides, which means that the property owner has to give up a degree of control — sometimes complete ownership transfer
What if a person changes his/her mind in future?
- A well-structured freeze will have exit strategies which also have cutesy names like “thaw”, “gel”, “unfreeze”, “re-freeze” — but nothing is foolproof
- Obviously, professional advice is a must before undertaking any estate freeze steps