This is our latest blog post in our series dedicated to estate planning. With summer in full swing, the weather outside is downright balmy. What better way to provide some much needed relief from the heat than talking about a chilly topic, estate freezing? We already touched on estate freezing in a previous blog post, 3 Common Uses for Living Trusts as Estate Planning Tools, but we thought it deserved a second look and a standalone article since it’s such a powerful estate planning tool.
With the baby boomers set to inherit a whopping $1 trillion, representing the biggest intergenerational transfer of wealth in Canadian history, estate freezing has never been more important. Here’s an all too common scenario: you’re a baby boomer in your early 60’s about to enter retirement. You’ve achieved financial freedom – you have more than enough money to comfortably live for the remainder of your live. Your net worth will continue to grow as you age, since you won’t be spending everything you earn – but so will your tax liability. Wouldn’t you rather leave your heirs with a sizable estate instead of a large tax bill owing when you pass away?
An estate freeze is when you take certain assets you own today and “freeze” them at their current value. The future growth will accrue with someone else, such as your kids or inside a family trust. What you want to accomplish with an estate freeze is to lessen the tax bill of the estate when you pass away. Estate freezing makes most sense when you have a sizable investment portfolio or a family-owned business. Estate freezing is combined with a family trust to maximize your tax savings.
What are the Benefits of an Estate Freeze?
By freezing your estate, you can accomplish the following things:
You can reduce your taxes upon your passing. When you freeze your assets, the growth will accrue inside the family trust you set up. Your heirs will eventually pay their fair share of taxes, but their tax liability will be lessened considerably.
You can shelter your capital gains using the lifetime capital gains exemption (LCGE). The LCGE is available for specific private company shares and qualifying farm and fishing property. You could save a significant amount of taxes each year by taking advantage of this exemption.
You can income split. The Family Tax Cut may be gone, but that doesn’t mean you can’t do income splitting. An option is to set up a new holding company, whereby income is earned and distributed to a family trust. The tax burden is lessened since it’s taxed in the hands of your heirs.
You can protect your assets. If you ever file for bankruptcy, the assets are protected inside the holding company and protected from creditors.
You can save on probate fees. Since your estate is frozen, the future growth of the assets won’t be hit with costly probate fees when you die.
You can stay in the driver’s seat. With an estate freeze, you stay in control of your assets. If you own a company, you’ll still voting rights for the preferred shares.
Estate freezing is a powerful tool, but can be complicated to set up. If you’re thinking of using an estate freeze to protect your assets from the taxman, it’s important to plan ahead. Need help with your estate planning? Feel free to contact our office for a helping hand.