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February 25, 2001 --
A carefully designed estate plan is one that
withstands the tests of time. The first ingredient
is a comprehensive will that carries out the wishes
of the individual. However, not all estate matters
need to be dealt with upon the death of the individual.
There is much one can do during one's lifetime
to accomplish some unique personal goals. One
consideration for many is an "estate freeze".
This is a process where an individual can decide
to place a limit on the growth for his or her
account of some or all of the assets currently
owned and pass on the expected future growth on
the selected assets to the benefit of other family
members, in many cases to a child or grandchild.
An individual who would consider an estate freeze
may own a wide range of assets. Typical assets
for consideration in an estate freeze are a portfolio
of stocks and bonds, a family business, a family
farm, shares in a variety of private companies,
and a portfolio of real estate investments.
While every case is judged on its own merits,
a popular method to carry out an estate freeze
is by using an appropriately designed share structure
of a private company. The general concept is for
an individual to transfer certain assets at today's
fair market value for particular shares of equal
value in the private company.
The family members to whom the growth benefit
is conferred also become shareholders in this
corporation. Accordingly, the individual becomes
the owner of shares that do not give rise to future
gains, while the other family members acquire
shares whose future value may rise.
There are a number of valid reasons to undertake
an estate freeze. Some of the applicable ones
include the desire to pass on a family business
or operating farm to another family member in
an orderly fashion, a deferral of income taxes
to a younger generation, a possible reduction
in probate fees, minimizing income taxes ultimately
payable, and perhaps a form of asset protection.
When a qualifying farm or small business is involved,
the $500,000 capital gain exemption should be
reviewed to determine if it can be utilized in
part or in full. Further, the private company
structure may accommodate some income splitting,
especially when the beneficiaries are age 18 or
over.
The appropriateness of an estate freeze depends
on the transferring individual's circumstances
and those of the other members who are expected
to benefit. An approach is to review all the alternatives
available to you before commencing the process.
An individual is well advised to view an estate
freeze as non-reversible. Therefore, considerable
thought should be given to the adequacy of the
asset base remaining in the individual's hands
before any transfers take place.
Two important considerations are that the transferring
individual retain a sufficient level of assets
to look after the financial needs for his or her
lifetime and, where applicable, to maintain some
form of control in the new structure.
The contemplation of an estate freeze should
be an integral part of a well-crafted estate plan.
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