What is an estate freeze?
An estate freeze is a planning technique that locks in (freezes) the current value of an appreciating asset in your hands and shifts all future growth to your beneficiaries. It is typically done by exchanging common shares for fixed-value preferred shares and issuing new common shares to heirs or a family trust. This caps the tax exposure at death on that asset.
How does an estate freeze save tax?
By fixing today's value, the future appreciation accrues to your heirs rather than to you. In the US, this removes future appreciation from your taxable estate, avoiding the 40% federal estate tax on that growth. The larger the expected growth and the longer the horizon, the greater the savings.
When is the best time to do an estate freeze?
Generally before an asset appreciates significantly, while its value is still relatively low, and when you expect strong future growth. The earlier the freeze, the more future appreciation is shifted out of your estate. Business owners often freeze ahead of a growth phase or an anticipated sale.
What are the risks of an estate freeze?
The frozen value is fixed even if the asset later declines, so you may lock in a value higher than what the asset is ultimately worth. A partial freeze or a re-freeze can address this. Freezes also require ongoing corporate compliance, proper valuation, and legal drafting to withstand tax authority scrutiny.