At Eb Conseil Fiscal, we help entrepreneurs prepare for the future of their business while optimizing their tax situation. An estate freeze is a tax strategy that allows you to lock in the current value of your company, so that future growth can be transferred to other shareholders, often family members or business partners. This not only helps minimize taxes at death, but also ensures a smooth transition of the business to the next generation.
What is an estate freeze?
An estate freeze allows you to crystallize the current value of your company’s shares while transferring future growth to new shareholders. By crystallizing this value, you limit future capital gains tax to the frozen amount and avoid the estate facing significant liquidity problems due to a high tax burden on the shares’ appreciation at the time of death.
When you hold common shares in a company, their value increases as the company grows. Upon death, a taxpayer is deemed to have disposed of their capital assets, which includes shares in private corporations. The tax due on this appreciation can become a heavy burden for your heirs. Through an estate freeze, this growth is transferred to the next generation or new partners, while protecting the value already accumulated.
Estate freeze techniques
- Standard estate freeze
The traditional freezing method involves exchanging your common shares for preferred shares equal in value to the common shares at the time of the freeze. After this operation, new shareholders (often your children or partners) subscribe to common shares that will carry the company’s future growth. This allows you to lock in your current appreciation while guaranteeing a stable income through preferred shares, which can be redeemed progressively to meet your financial needs.
However, this method presents some drawbacks:
- If your preferred shares are fully redeemed before your death, it might be challenging to meet your future financial needs.
- The premature distribution of future appreciation to an unfit or unprepared shareholder can lead to complications.
- Estate freeze through a trust
A more flexible and sophisticated alternative involves carrying out the estate freeze by incorporating a family trust. Just like in the standard freeze, your common shares are exchanged for preferred shares. However, the family trust becomes the owner of the common shares, which concentrates all future growth within the trust. This structure offers several advantages:
- Flexibility in management: The trustees (including the freeze initiator) retain the power to distribute income and capital shares among beneficiaries based on circumstances and needs. This allows for the business transition to be adapted at the right time, to the right person.
- Asset protection: The trust also helps protect future growth from potential creditors or family conflicts, while ensuring the business is transferred in an orderly manner.
Why choose an estate freeze with Eb Conseil Fiscal?
A well-executed estate freeze can provide numerous benefits, both tax-wise and in terms of wealth management. At Eb Conseil Fiscal, we have the expertise needed to guide you through this complex process. We analyze your situation, identify opportunities, and support you throughout the process to ensure that your assets are transferred optimally and securely.
Protect your wealth and ease the transition to the next generation – contact our experts to discuss the best approach for your specific situation.
