Life Insurance and Estate Freezes

Jorge Ramos CFP CLU

As we get older, we become increasingly aware of the need to pave the way for the next generation. When it comes to estate planning, there is no one-size-fits-all package. While some estates are straightforward and require only a will and two executors, others can be incredibly complex, dealing with business and investment assets and more. Generally, the more a person makes in life, the more there is to leave behind, and it can become quite complicated for executors and family members to sort out. It is not unheard of for estates to take years to be settled.

In some cases, it took over a decade for affairs to be sorted out. One way Canadians can help make this process simpler is setting up an estate freeze. An estate freeze is an asset management tool used in estate planning that can help mitigate future tax liabilities. When asked to define what an estate freeze is, Jorge Ramos, the Director of National Accounts and Advanced Marketing at Industrial Alliance Insurance explained, “It is for someone who is wealthy… who has stocks, owns businesses. They take these assets and roll them into a company.” This company would be incorporated and the clients would give themselves what are called “preferred shares,” which are a type of share that gets paid dividends from the company before the regular “common” shares would be.

As Ramos explained, these shares would be in the amount of the company’s valuation at the time of the estate freeze. So, in his example, if a company were worth $1 million, the client would receive $1 million in preferred shares. The beneficiaries would receive common shares in the company, which would have no value in the present, but whose value would grow over time. Because of this, any future growth in the company would be in the beneficiaries’ names and not the parents’, Ramos elaborated. The parents in this case would only pay tax on their share.The main disadvantage of an estate freeze is its complexity. Because of the assets involved, there is more accounting involved and more planning. It is by nature a more complex form of estate planning, involving estate planning lawyers, tax lawyers, accountants, and investment or insurance professionals.

The benefits of estate freezes, however, are that clients retain control over the assets held by the company while benefiting from a legal reduction in tax liability. Another bonus Ramos mentioned is that because of the estate freeze, clients will know ahead of time what their tax liability would be at death. Once that figure is known, the clients can then purchase life insurance in that amount to offset or cover the estate taxes. However, they do need the right type of coverage.

Because of the nature of the estate freeze, any life insurance purchased has to cover a longer span of time. Ramos advised, “It should be some kind of permanent insurance because insurance is needed at the very end of life.” So when purchasing life insurance for the purpose of covering tax liability in an estate freeze, it is best for clients to choose either whole life or universal life coverage.

Estate freezes are mainly used in cases where parents want to pass a business down to their children, or to set up trusts for the children. An example of this that Ramos provided was of one of his recent clients. The client was the owner of a growing business currently valued at $6 million — a father of two children, a 21-year-old son (who works at the business) and a 17-year-old daughter. As the client was aware that the business would pass down to his children, the estate freeze formed a family trust for the children. As the business grows, so does the value of the children’s trust fund. As well, because of how the estate freeze was set up, both the client and his wife “were also crystallizing the capital gains advantage, so the first $800,000 of shares sold are tax free because the client and his wife are shareholders in the company.” By declaring capital gains on these shares, the client saves quite a bit of money that would otherwise have gone to taxes.

Setting up a family trust through an estate freeze helps benefit both the parents and children involved. It ensures that assets, including the family business, that are not meant to be sold upon death remain in the family, and in cases where the children are minors, it ensures their interests are protected and looked after. In situations where the family business is to pass to the children, it helps ensure a smooth transition from one generation to the next.

Like every asset management or estate-planning tool, estate freezes are not for everyone. They are complicated and involve a multitude of professionals such as lawyers, accountants, insurance agents, and investment advisors. However, for people who are wealthy and own businesses or a variety of assets, an estate freeze can be a great boon. Along with proper wills, they facilitate estate tax preparation and business succession issues while ensuring clients remain in control of their assets for the rest of their lives. And the right type of insurance ensures that the burden of tax liability lessens.

Death is not something anyone wants to think about and many people worry about what will happen after they pass on. While many Canadians have a will in place, for business owners, investors, or other wealthy individuals, ensuring that every last detail is in place can be crucial. Whether it is to ensure that the family business passes down, that dependents’ needs are provided for, or that tax liability is minimized while retaining control of assets, estate freezes are a viable option. Combined with permanent insurance, they can ease transitions and ensure that no one is left out in the cold.

For more details on this or any other life insurance matter, please contact us at 1-866-899-4849, or visit this page.

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