Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Estate Freeze

What it is:

An estate freeze is an estate planning strategy used by an owner to lock in an asset's value and avoid future tax liability when the asset is transferred to a beneficiary.

How it works (Example):

An estate freeze is commonly used for:

  • Transfer of control of a privately-owned business between generations
  • Division of income among family members
  • Protection from creditors 
  • Tax deferment from shares sold of the privately-owned business

In most cases, an estate freeze is used when ownership of a company is passed from one generation to the next.

For example, when a business owner (parent) is ready to "pass the torch" to their beneficiaries (children), they may exchange their common stock in the company for preferred shares. The company then issues new common stock to the beneficiaries (children). 

Why it Matters:

By transferring the asset to their beneficiaries before the tax liability comes due, the current owners (parents) are able to control the asset during their lifetimes and pass it on to their beneficiaries (children), but without having to pay the tax liability associated with the increase in the asset's value.