The Estate Freeze

The key reason to use an estate freeze is to minimize the capital gains tax liability on assets left to children. It’s typically used when transferring a family business to the next generation. Capital gains on an owner’s interest in the company become taxable in the year of the owner’s passing. A significant tax bill could be a hard hit to the estate and heirs. Or, if the owner intends to cover the tax owing, an excessive sum can be a challenge to offset.

Enter the estate freeze. Simply put, this strategy locks in, or freezes, the business’s current fair market value for tax purposes. The business owner is responsible for paying tax on capital gains assessed at the time of the freeze, but it’s only due once the owner’s final tax return is filed. Future growth of assets from the time of the freeze becomes taxable to the children. An estate freeze can be established in which the parent still controls the business after the freeze.

An estate freeze can also be used for personal estate planning with such appreciating assets as vacation property or non-registered investments.

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