The concept of estate freezes is not entirely new to most business owners. But we will assume otherwise for this article. So, what is an estate freeze?
An estate freeze fixes the value of an asset that is frozen in the hands of the owner until their demise or the sale of their shares in the company. Freezing allows the freezer to estimate the expected tax liability that may arise after the owner’s death or when their company shares are sold. Estate freezing applies to several assets, such as the shares of a corporation and others.
Business owners usually employ this panning strategy to transfer the value of their business to the future generation while deferring the tax that would be payable on the future growth to the time that the asset is sold by the parties who are expected to be the beneficiaries from the future growth.
The owner exchanges their common shares for fixed-value preferred shares in this arrangement. This exchange is usually tax-deferred, and the owner then issues new common shares to the next generation via a trust or directly.
The redemption value of the preferred shares would be the same as that of the common shares at the transfer time. This equality caps the tax liability on these shares and ensures that future growth will be associated with the new common shares the next generation gets.
Factors To Consider Before An Estate Freeze
Freezing too early can be detrimental. Hence, Ottawa Certified Financial Professionals advise business owners to make due considerations before freezing. Here are some factors you should consider before deciding to freeze your estate or not;
The first factor is value – the value of your company. Knowing your company’s value is a sure way to determine if there will be enough funds for you and your spouse when you retire.
The second factor you should consider is your age. Your age and that of your children will help you determine the right time to freeze so you do not end up passing too much value to the future generation.
Next is deferral, which serves as an excellent alternative to issuing shares directly to the next generation. You can use a trust to defer the decision of who gets the shares and when they should get it. This will come in handy if your children are still young. In addition, it makes planning for ownership for older children more flexible, especially if not all of them are active in the business.
The list of factors to consider regarding estate freeze is not exhaustive. In addition to the few we have mentioned above, you should consider your insurance. Business owners usually employ insurance to deal with tax liability on death. It can also help to balance the estate between the children who are active in the business and those who are not.
In Conclusion
Estate freezing is not a one size fits all approach. If and when you decide to go for an estate freeze, ensure you speak to your Ottawa CFP to see if it is the right move for your business at that point. They can also advise you on using insurance as an excellent tool to get the best out of your estate planning.
