During these unprecedented times, the value of your client’s private corporation or other assets may have dropped 10%, 20%, 30% or more. While this result is very challenging, it may be the right time to take advantage of the lower value in order to reduce future taxes.
The Estate Freeze
An estate freeze minimizes the tax payable on the death of a shareholder by “freezing” the value of his or her shares, and shifting the future growth in value of the corporation to the next generation. The process usually consists of one or both parents exchanging their common shares, on a tax-deferred basis, for fixed value preferred shares. The lower value of businesses in today’s market may present an opportunity to reduce the tax liability on the parents’ death and potentially transfer more wealth to the next generation on a tax efficient basis when the economy recovers. Common shares issued under the freeze can be given to the children. If the parents are uncertain as to which child should own shares of the corporation, or wish to have flexibility for the future, a family trust could be used to hold the shares on behalf of the children, other family members (including the parents), and even a family holding company.
The Re-Freeze
If the parents have already completed an estate freeze in a previous year, and if the value of the corporation has declined to the point that the preferred shares are now worth less than their stated value, there is an opportunity to re-freeze and lock in the lower value for the parents. This would also allow for a reduction in the tax liability on death. In addition, if the original estate freeze had a family trust owning the common shares, the trust’s shares could be frozen at the lower value and a new trust created. This has the added benefit of restarting the 21 year rule in the new trust (a trust is deemed to dispose of its assets at fair market value every 21 years).
Estate freezes are common planning tools that may have particular value in the current economic environment. There are many complex rules that apply and it is imperative that clients obtain the necessary advice from professional tax and legal experts.
There are other opportunities that may exist in the downturned market, such as selling assets to family members to realize losses to offset capital gains realized in the year or prior years (be careful of the superficial loss rules and the impact on a corporation’s capital dividend account), and purifying a corporation so it can qualify for the qualified small business capital gains exemption.
To learn more about these various tax opportunities, contact your local PPI office.