Purtzki, Johansen + Associates


Your investments are down? Good time for an estate freeze!

What is an estate freeze?

An estate freeze refers to transfer of the future growth of your corporate investments into the hands of your children. An estate freeze limits the value of your estate reflected in your corporate holdings at the date the freeze is implemented. Accordingly, capital gains and other tax exposure on the future growth of the investments that otherwise would arise on your death are now deferred to the next generation.

Why do an estate freeze now?

The decline in the stock market has reduced the value of many investment portfolios. It was only a four months ago, when the value of your investments in the Corporation were $2.5 million. Now they shrank to $1.8 million. You are confident that your stocks will recover fully at some time in the future.

Implementing the estate freeze is a straightforward procedure. You convert your common shares to fixed value shares at the current market value of $1.8 million. New common shares are then issued to your children. The shares are set up so that you retain absolute control over the company.

Upon your death, you are deemed to have disposed of all your assets at their fair market value and your estate is required to pay the capital gains tax on this deemed disposition. Your capital gains tax is based on the $1.8 million value, regardless of the current value of the investments. So it makes sense to implement an estate freeze when the value of the investments is down.

Once the estate freeze is implemented, then any funds you withdraw from the company should in the form of a partial redemption of the fixed value shares. If all the shares worth $1.8 million are redeemed before you die, then you completely avoid the capital gains taxes on death, since the value of the corporate investments is all attributed to your family members. Even in the event that the corporate investment value is $5 million on your death, you would totally avoid the capital gains taxes.

Freezes are very common in family businesses. You can also use an estate freeze when you have a corporation with passive investments such as a stock portfolio, but you need consult with your PJ&A advisor to help you manage the corporate attribution issues.

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