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Reducing Your Tax Burden with an Estate Freeze

Nov 8, 2018 9:30:00 AM The MacMillan Estate Planning Team Tax Planning, estate freeze


The taxation of an estate after death will vary depending on regional laws. Still, significant tax losses in one form or another are an important concern no matter where you are. If you want to maximize the wealth of your estate by minimizing tax burden, an estate freeze is a useful tool.

Death and Capital Gains Tax

To outline the use of an estate freeze, we’ll focus on Canadian tax law as the context of our example. Unlike in the United States and United Kingdom, there is no “estate tax” or “inheritance tax”. Instead, when an individual dies, their legal representative files a deceased tax return. Taxes are therefore taken from the estate as it is settled. Any assets not inherited by the surviving spouse or common law partner are a “deemed disposition” immediately upon death. This is essentially treated as a sale at fair market value, which is subject to capital gains tax. This is true whether or not the assets go through probate.

The Estate Freeze

Because your company is part of your estate, its value as an inheritance can be significantly depleted by capital gains tax. One of the most useful ways to alleviate this tax burden in the event of your death is an estate freeze. There are many ways to approach this strategy, but a typical freeze allows you to exchange your common shares for preference shares and issue new common shares to a family trust or to your children. While the common shares you issue will accrue value as your company grows, your preference shares will retain the value they had at the time of the exchange, significantly reducing capital gains tax liability in the long term.

Further Advantages

One concern you may have about exchanging your common shares for preference shares may be that your voting rights within the company will change. However, voting shares (often known as “skinny” shares) can be issued in conjunction with this exchange so that you can retain control within the company. This will also allow you to draw a salary if necessary. Additionally, it’s important to note that skinny shares have no monetary value and only provide you with voting rights. When you choose the right type of freeze and it is structured properly, your business will far better withstand the settling of your estate upon your death.

The specialists at MacMillan Estate Planning are some of the most well-respected in the industry. We serve families across Canada, the U.S., and the U.K. with the utmost degree of skill, sensitivity, and dependability. Call 1 (833) 266-6464 to begin creating your plan today.

At MacMillan Estate Planning, our team of professional trust and estate practitioners, chartered accountants, financial planners, and legal professionals look forward to assisting you with the design of your estate plan and will ensure you build, protect, and enjoy your wealth. The information provided is general and may not be suited to your objectives or sufficient to ensure the protection of you and your family. You should not act on this information without providing MacMillan Estate Planning with the opportunity to ensure that it is suitable for your unique situation.

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