Estate Freeze Overview
An estate freeze is a way to cap (or freeze) the current value of an individual's shares in a private company, while preventing further growth in the capital gains tax liability that will result on the disposition of those shares (either while the shareholder is alive or upon death). The result is that that the individual has frozen (or crystallized) their tax liability at that point in time. Generally, any future growth in share value (as well as any resulting capital gains liability) will accrue to newly issued shares held by the next generation.,
The estate freeze transaction typically involves the shareholder exchanging common shares in their company for fixed value preferred shares, which takes place on a non-taxable basis. The value of the preferred shares is equal to the value of common shares at the time of the freeze and will not grow in value. At the same time, new common shares are issued by the company, often to a family trust for the benefit of the next generation. The "freezor" will typically remain in control of the company, either through voting rights attached to the preferred shares or through a separate class of voting shares. The family trust will normally own non-voting common shares.
The estate freeze transaction essentially splits the current and future value of the company into separate component. The current value of the company becomes locked in or "frozen" with the newly created preferred shares which are owned by the initial shareholder(s). The future growth of the company will now accrue to the newly issued common shares.