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By Adrian Mastracci
Sounding Board
Vancouver Board of Trade
August 2001, Summer Issue
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.
One such consideration is an "estate freeze". This is the process
where an individual decides to freeze the capital gains on selected
assets currently owned and pass the expectation of future growth
on the selected assets to other family members, often to children
or grandchildren.
Individuals who consider an estate freeze may own a wide range
of assets. Typically, 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 holdings are the most common.
While every case is judged on its own merits, a brief overview
is the following:
- A popular vehicle used to implement an estate freeze is a carefully
designed share structure of a new private company. An individual
generally transfers certain assets at fair market value to the
new company, in exchange for particular shares of equal value
in the new company.
- The family members to whom the future growth is conferred also
become shareholders in this corporation. Typically, the transferring
individual is issued shares that do not give rise to future capital
gains, while the other family members acquire shares whose future
value may rise.
- Valid reasons to undertake an estate freeze may 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 payable, and some income splitting if
the beneficiaries are age 18 or over.
- 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. If the tests are met, the full exemption would save
about $114,000 in income taxes at the new British Columbia rates
for 2001.
- The appropriateness of an estate freeze depends on the transferring
individual's circumstances and those of the members who are expected
to benefit. An approach is to review all the available alternatives
before commencing the process.
- An individual should view an estate freeze as being non-reversible.
Hence, 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 individuals
retain sufficient assets to look after their lifetime financial
needs and, where applicable, to maintain some form of control
in the new structure.
Your estate freeze should be an integral part of a well-crafted
estate plan that achieves specific long-term personal goals. It
also forms part of your succession strategy.
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