While recent events are having a significant impact on our clients’ businesses, net worth and above all, their personal lives, the current economic turmoil may be an opportunity for some to maximize the potential benefits of certain common estate planning strategies. For anyone who has been considering implementing an estate freeze, or even for those who have previously implemented an estate freeze, this may be an opportune time to review your situation.
An estate freeze involves implementing a structure whereby you « freeze » the value of your assets and allow for the future growth in their value to attribute to other family members. This is achieved by having the « freezor » receive fixed-value Preferred shares of a corporation, while new Common shares are typically issued to a trust for the benefit of the freezor and his/her family. The Preferred shares issued to the freezor reflect the current value of the underlying assets or business, while the Common shares issued to the trust would have a nominal value upon issuance, but would accumulate value as the assets/business appreciate in value. While the freezor’s direct ownership interest will be fixed in value, it would be possible for that person to access additional value indirectly through the trust, if needed. The key benefits of an estate freeze include the opportunity to limit the tax ultimately payable during one’s lifetime and the ability to plan for how that (fixed) liability will be funded.
There are a number of scenarios where this type of planning might be considered in the current environment, including:
- where marketable securities are owned personally, consider transferring the investments to a holding company on a tax-deferred basis to implement an estate freeze at the current low values;
- where marketable securities are already held in a holding company, consider taking steps to freeze the value of your existing Common shares (if a freeze has not already been implemented);
- where marketable securities are held in a holding company and a freeze transaction was previously undertaken, consider « refreezing » their value if the overall value of the holding company has declined below the redemption value of your existing Preferred shares. This would allow for the future growth from that point to accrue to the Common shares, making the structure more effective than the original freeze;
- where your holding company has accumulated a « capital dividend account » balance, consider declaring a tax-free capital dividend. This would further reduce the value of your holding company, making a subsequent freeze or refreeze transaction even more effective;
- where a Canadian-controlled private corporation carries on an active business that has declined in value, consider implementing a freeze or a refreeze (where a freeze was previously undertaken) transaction. This may have the added benefit of increasing the total lifetime capital gains exemptions that you and your family might be able to claim on a future sale of the corporation; and
- where a trust owns marketable securities, shares of a holding company, or shares of an operating company, it is common that the trust may have to distribute those shares to its beneficiaries prior to its 21st anniversary in order to avoid a deemed disposition at their fair market value. The planning ideas outlined above would be applicable to a trust as well, and may provide an opportunity to minimize the amount that needs to be distributed by the trust on its 21st anniversary, while providing an additional 21 years before the future growth in value needs to be distributed to beneficiaries.
While this may sound complicated and every situation will have its own issues to consider, we can help you develop a plan to reduce the tax paid during your lifetime, leaving more for your family. Please consult your Welch LLP advisor to discuss how we can help in this difficult environment.