An estate freeze is a tactic available in Canada to fix the current value and taxes of assets of a person but give the future growth to someone else. This means the original person gets to continue controlling the asset but someone else to benefit (and pay the taxes) at a later date.
This is something that usually involves a small business or a family-owned enterprise. It lets the original owner to keep control during their lifetime, but after their passing, the asset goes to the named person or persons who are liable for the taxes. So it basically defers or delays the payment of taxes but the new owners get to reap the benefits of an increase in value.
Reasons for implementing this technique include:
Reduce and delay tax, including probate fees.
Using up all lifetime capital gains exemption (LCGE) or you have a spouse or child(ren) who have not used their LCGEs.
Keep the business in the family or in the hands of a trusted friend or employee.
This is not some form that you can simply download from the internet. It takes careful planning. If it is something you are even remotely considering, first contact your accountant and attorney. It will involve corporate law experts and estate planners. Your Will must be written to ensure that the freeze is set up when you die. It could also involve matrimonial issues.
If the estate freeze is not set up properly, it could create an income tax nightmare.
With the complexity of this choice, you will probably have to pay additional fees to your attorney and accountant. It may be that you need to secure the services of specialists in the field of estate freeze trusts. Once it is set up, the regular corporate accounting fees may also increase.
Timing is another critical issue. If the freeze trust will last longer than 21 years, there are other tax and legal implications. If you consider selling the asset, there could be problems.
If there is a family trust already established, this further complicates the whole issue.
In general, it is a good idea to avoid having a U.S. citizen as the beneficiary in this arrangement. The United States Internal Revenue Service has very specific regulations surrounding gift taxes and trusts. If you are determined to include a U.S. citizen, you should add an attorney from across the border into the discussions.
When new shareholders come into the estate freeze, there should be a shareholders agreement put into play. This would ensure that there are conditions for the sale or transfer of those shares. It may also include any restrictions that the original owner may impose.
While this is certainly a complex procedure, it can also be a very effective estate planning tool. If you have questions or are interested in the prospects of this arrangement, please feel free to contact us. We will be happy to set up an appointment and discuss the options and possibilities.
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- The Capex Team