Put business assets on ice to save tax
Among the unique tax strategies available to small business owners is an estate freeze. It's used to "freeze" the value of your business and related tax on your death and transfer the future growth and tax liability to the next generation.
So, for example, if you have shares worth $1 million that could grow to $3 million in your lifetime, you can use an estate freeze to cap your taxable assets at $1 million. You won't pay immediate tax on any capital gains. And the $2 million in expected capital gains will be taxed to your children, grandchildren or other future owner.
We've helped our business clients execute this flexible wealth technique in a number of ways, but the basic concept is the same: parents exchange their existing equity shares for preferred shares, which do not grow in value, and issue new common shares to adult children at a nominal value.
Opportunities include:
- you retain control of the business, if desired
- income is split with your children, who receive company distributions from the date of the freeze as well as the eventual capital gains on the sale
- tax on capital gains can potentially be deferred for decades
- the capital gains exemption can be crystallized and multiplied with other family members.
An estate freeze can be implemented through a holding company or a trust. Combined with a life insurance policy, it offers additional benefits. With a better idea of what the tax bill will be on your death, you can buy the right amount of insurance to pay your estate taxes. Alternatively, insurance could be used to provide funds for a child in the business to buy your shares, or a cash inheritance for children who are not involved.
Estate freezes are difficult to reverse. You need to ensure you are leaving yourself enough assets to comfortably support you through what could be a long retirement.
An estate freeze is the cornerstone of many succession plans. Let our team help you determine how a full or partial freeze could be incorporated into your plan to save tax and meet your business goals.
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This Report is written by Investment Planning Counsel, a fully integrated Wealth Management Company. Mutual funds available through IPC Investment Corporation and IPC Securities Corporation. Securities available through IPC Securities Corporation, a member of CIPF. Insurance products available through IPC Estate Services Inc. Mortgage broker services provided by IPC Save Inc. (ON Lic. #10227).