You may have heard of estate freezes, but what are they, and should you consider one?
An estate freeze is a tax-planning strategy that allows business owners to shift the future growth of their company to the next generation while capping their tax liability on a sale or at death. It involves exchanging common shares for fixed-value preferred shares on a tax-deferred basis. The next generation then receives new common shares, either directly or through a trust. The preferred shares lock in the company’s current value, limiting taxes, while the new common shares capture any future growth.
While this approach can be highly effective, timing and planning are crucial. Consider these key factors:
- Value: Is your business’s current value, along with other resources, sufficient to fund your retirement?
- Age: Both your age and the ages of your children are important. Freezing too early could shift too much future growth, potentially leaving you short.
- Deferral: A trust can offer flexibility by deferring decisions about share ownership. This is particularly useful for minors or when some children are active in the business and others are not.
Estate freezes require careful planning to maximize benefits. For instance, insurance is often paired with an estate freeze to manage tax liabilities and ensure fair distribution between children who are active in the business and those who are not.
If you’re considering an estate freeze, book a meeting with Denis today. He can guide you through the process and show how insurance can support your goals.