When a person passes away, they are deemed to have sold all of their capital assets at fair market value (FMV), immediately before they died. This can include investments, residence, vacation home, other real estate, etc.
If there is a surviving spouse, the deemed disposition can be delayed by transferring the estate to them. Otherwise, the proceeds (FMV less the adjusted cost base) from the “sale” of these capital assets will result in a capital gain.
When this happens, the tax liabilities that arise can quickly deteriorate the value of your estate, and reduce your beneficiaries’ inheritance, dramatically. And, because you are not actually selling the assets, any taxes owing will have to be paid by another means, which may result in beneficiaries having to sell assets from your estate to pay the tax.
Luckily, there are tools available that can help offset these liabilities and ensure that your objectives are not undermined. One of which is an estate freeze.
An estate freeze is an asset management strategy that helps lower the amount of liabilities incurred, when your assets are disposed of. When a freeze is implemented, the value of your capital asset is locked in at its current FMV. As such, any further growth will not be considered as proceeds when you die.
Essentially, you’re “freezing” the value of your assets so that there will be no capital gains, or other tax liabilities, on future growth.
It’s a strategy that is most often used when transferring a business as it provides several benefits to both the business owner and beneficiary.
Benefits to the Owner
- Maintains shares at current value
- Can continue to collect dividends on their shares
- Maintains control over business
- Limits tax consequences
- Preserves the size of your estate
- Has access to a more accurate estimation of tax liabilities, at death
Benefits to the Beneficiary
- Inherits the business
- Benefits from the businesses continued growth
- Limits tax consequences
- Preserves inheritance
In most business-related estate freezes, the owner’s common shares are exchanged for preferred stock and the beneficiary, or a trust, receives new common shares. However, there are different estate freeze methods, that may better serve your specific purpose.
