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Estate Freezes What are they & how do they work?

Estate Freezes What are they & how do they work?. What is an Estate Freeze?. It is a transaction that allows you to exchange shares that are increasing in value for shares and other assets that are fixed in value. Benefits of an Estate Freeze. Control assets during life

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Estate Freezes What are they & how do they work?

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  1. Estate Freezes What are they & how do they work?

  2. What is an Estate Freeze? • It is a transaction that allows you to exchange shares that are increasing in value for shares and other assets that are fixed in value

  3. Benefits of an Estate Freeze • Control assets during life • Transfer assets without immediate tax liability • Shift increase in asset value and associated tax liability to next generation • Create an income stream • Creditor protection

  4. Without an Estate Freeze Example: • Father (45) has company with a FMV of $5,000,000 • ACB is $0 • Eligible for $500,000 capital gains exemption • Father marginal tax rate is 50% • His tax liability at death :$1,125,000

  5. Without an Estate Freeze Additional assumptions: • Father continues for 15 years, without an estate freeze • Father now aged 60 • Business has doubled, FMV $10,000,000 • Father dies age 60: • Capital gains tax liability, business asset, has increased from $1,125,000 to $2,375,000

  6. Without an Estate Freeze • With estate freeze at 45, tax liability at 60 would have remained at $1,125,000. • Excess $1,250,000($2,375,000 – $1,125,000) would pass to the next generation (children and grandchildren)

  7. Without an Estate Freeze Missed opportunities : • Income split (eg. dividends) with wife and children/grandchildren • Provide inheritance to family • Create a future income stream • Multiply capital gains exemption • Creditor proof corporation • Create a legacy that would remain in family

  8. Accomplishing an Estate Freeze Section 85 Opco Step 1: Your exchange common shares of Opco for fixed value preferred shares of same value 1 Family Trust Step 2: New non-voting common shares would be issued to family trust Holdco 2 Step 3, You transfer 100% preferred shares with FMV equal to value of common shares to newly incorporated holding company 3 Beneficiaries children grandchildren YOU

  9. Estate Freeze – Section 85 Advantages • Can combine more than one asset/company in the transaction • Assists in creditor protecting • creates vehicle to receive tax-free intercorporate dividends • Provides flexibility if partial freeze intended Disadvantages • Somewhat complex • May complicate future share sale transactions

  10. Accomplishing an Estate Freeze Section 86 Step 1: You exchange Opco shares for preferred shares YOU Commons Preferreds Family Trust Step 2: New non-voting common shares would be issued to family trust Opco 2 Beneficiaries children grandchildren

  11. Estate Freeze – Section 86 Advantages • Simple • No additional corporate entity • Maintains existing structure Disadvantages • No creditor protection

  12. Estate Freeze – Summary Seriously consider when : • Limit/reduce/fix tax liability • Income splitting • Creditor protection • Purification of corporate assets • Multiply Capital Gains exemption • Keep maximum business value in family • Failure to consider may cause problems if business owner dies or becomes disabled

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