Preserving Family Business Equity Across Generations
For successful business owners, sudden estate tax liabilities upon death can threaten the survival of a family business. Under Canadian tax law, an individual is deemed to dispose of all assets at fair market value immediately prior to death.
An Estate Freeze coupled with a Discretionary Family Trust allows business founders to lock in their current capital gain liability while transferring future equity growth tax-free to the next generation.
How an Estate Freeze Works
- Exchange Common Shares: The founder exchanges existing voting common shares for fixed-value preferred shares equal to current market value.
- Issue New Common Shares: A newly created Family Trust subscribes for new growth common shares at a nominal price.
- Future Growth Allocation: All future growth in corporate value accrues to the Family Trust for the benefit of children or grandchildren.
Multiplying the Lifetime Capital Gains Exemption (LCGE)
Upon the ultimate sale of the business, the Family Trust can allocate capital gains among multiple family member beneficiaries, allowing each family member to utilize their individual LCGE threshold (over $1,000,000 per person).