Pandemic's impact on portfolios and businesses could be leveraged into tax- and estate-planning positives
For affluent Canadians and small business owners staring down the barrel of retirement, the ongoing coronavirus crisis must feel like a devastating financial blow. But for those with canny wealth advisors and estate planners in their corner, what feels like a retirement-planning setback could be turned into a tax and estate planning opportunity.
“One very simple way to preserve wealth for the next generation, as well as minimize your ultimate tax liability, is undertaking an estate freeze,” wrote Silvia Jacinto and Jeffrey Steinberg of Crowe Soberman LLP in a new blog post.
Jacinto and Steinberg explained that by “freezing” the value of their ownership in a business or portfolio of assets, high-net-worth individuals can cap their tax liability with respect to the business or assets upon their death at today’s value – as opposed to the fair market value of such assets on the individual’s passing – with any future appreciation in value being passed on to the next generation.
“Assuming that values are significantly lower at this time, it may be prudent to undertake an estate freeze, thereby minimizing the amount of tax that your estate will pay on your death [and] therefore, preserving more wealth for the next generation,” the two said, noting that the economy and valuations are bound to improve in the future.
An appropriately structured estate freeze, they added, could allow those with stakes in an active business to access other family members’ lifetime capital gains exemptions on a future sale of shares of the business, with the net impact being minimized taxes paid overall on an ultimate sale.
“The ‘frozen’ shares that the individual receives in the estate freeze can provide a source of annual income, while further minimizing tax on death,” the two added, noting that the benefit is made possible through annual redemptions of the frozen shares held by the freezer.
While some HNW individuals might already have implemented an estate freeze of their assets prior to the pandemic, the arguably unprecedented damage it’s caused for businesses and financial-market sentiment may mean current fair-market valuations have dipped below their “freeze” value. In that case, Jacinto and Steinberg said, it may be worth considering whether “thawing” and refreezing at current valuations would make sense.
“If anything, this pandemic has made us reflect on our health and mortality, reminding us once again, of two fundamental truths – death and taxes,” they said. “This is the perfect time to reflect and plan for the future, and with depressed valuations, ‘the ducks are in a row’ and well positioned for an estate freeze.”