An estate freeze is a strategy designed strategy whereby estate owner aims to transfer assets to his or her beneficiaries without tax consequence. In most estate freezes, the estate owner transfers assets, usually common stock,to a company in exchange for preferred shares. The company issues new common stock to the beneficiaries at a nominal value.

Various techniques can be used, but they all lock in the value of an asset at a point in time, and pass future growth or profit on to the beneficiaries.

In very general terms, an estate freeze is an estate planning technique to limit the growth of capital property held by you during your lifetime; any future growth in the capital property is transferred to you heirs as a result of the estate freeze. For example, if your business is incorporated, then the shares you own in your company will increase in value. On death, for purposes of income tax, you are deemed to have sold the shares such that your estate must pay taxes on the capital gain. The problem is that your estate is required to pay taxes on unrealized gains.In order to meet the tax liability, the estate may be forced to sell the business in a bad market.

Is it possible to defer the income tax for another generation?

Yes, if the estate consists of family business to be transferred to the next generation and the next generation will be actively continue same business. Otherwise, it is not possible to do so if the deceased owned the assets at death. However, it is possible to transfer the assets before death. There will be a deemed disposition upon transfer of the assets to the next generation and any appreciation prior to the transfer will be taxed.

However, capital appreciation after the transfer will not be attributed to the settlor and will not be taxed until the next generation disposes of the assets or dies.

Methods of Freezing an Estate

There are several methods of effecting an estate freeze including the following: