Tag: estate freeze
We have blogged over these past couple of weeks about the novel issues which have arisen with the drafting and execution of Wills during the COVID-19 pandemic. Although we remain hopeful that there will be guidance and/or legislative changes from the government soon regarding how to address issues such as the witnessing of Wills for individuals who are in quarantine or self-isolation, a recent article from Dale Barrett in Lawyers Daily notes that it may not all be doom and gloom surrounding estate planning during the COVID-19 pandemic, as the recent significant drop in the stock market could make it an ideal time for certain individuals to complete an “estate freeze”.
An estate freeze at its most basic accomplishes exactly what the name implies, insofar as it “freezes” the value of an individual’s assets at a particular date and time prior to their death, with any “future growth” on the assets being attributed to someone else (often the individual’s children). The use of an estate freeze is often done as a tax planning tool, with the underlying rationale being an attempt to reduce the potential taxes associated with the deemed disposition of their assets upon their death, which is accomplished by “freezing” the value of the assets at their current value such that the growth is not as great as it otherwise may have been (assuming the asset would continue to grow in the future). Although the structure that is required to accomplish this is somewhat complicated and will require the involvement of professionals, in a very basic overview it is typically accomplished by having the individual create a new company that will ultimately hold the assets being “frozen”, with two classes of shares being created the first which is retained by the individual implementing the freeze and fixed at the value of the assets on the day the of the freeze, with the second class of shares being attributed any “gain” in value of the assets after the freeze attributed to someone or something else other than the individual carrying out the freeze (often ultimately benefiting their children). The implementation and steps required is more complicated and nuanced than the description above suggests, and will almost certainty require the involvement of professionals to ensure that the individual does not go offside complex tax rules, but you get the basic idea.
Although the availability and potential use of an estate freeze is not for everyone, the recent drop in the stock market associated with COVID-19 could create a potential advantage and incentive for people considering an estate freeze to do so now as they could potentially “freeze” the value of their assets at a lower value than they otherwise may have been able to. If you are considering an estate freeze you may wish to speak with a professional now about whether it may be an opportune time to do so and to ensure that it is properly implemented.
Thank you for reading and stay safe and healthy.
The holiday season is upon us, and with it comes family gatherings, buying and wrapping gifts, and travel. Suffice to say, it can be a hectic and busy time. Nonetheless, with 2018 on the horizon, many of us take the time to reflect and set resolutions for the upcoming year. Despite this, so many Canadians do not have a Will.
Why not? Estate planning need not be trying, and the holiday season is a perfect time to start considering your estate plan.
With this in mind, I thought I would highlight an article from the Globe and Mail which does a great job of highlighting issues to get you thinking about your estate plan:
- Get started – make a detailed list of your assets, liabilities, and joint assets, and think about your family’s needs and lifestyle.
- Consider your options – do you want your bequests to be absolute, subject to the terms of a trust, or gifted during your lifetime?
- Appoint representatives – think about who you trust to administer your estate and ensure that they are up for the job.
- Special circumstances – are there any beneficiaries who have special circumstances such as those receiving ODSP, that would benefit from specific trusts?
- Taxation – meet with a professional to understand tax consequences and the vehicles available to limit the payment of taxes, including the use of joint ownership and estate freezes.
- Cottages – should your estate involve the cherished family cottage, think about whether you want it sold, or shared amongst family members. If the latter, think about preparing a co-ownership agreement.
Wishing all of our readers a happy New Year!
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The recent Ontario Superior Court of Justice decision in Ozerdinc Family Trust provides a helpful reminder as to the steps lawyers should take when advising trustees of a Trust with respect to the twenty one year rule against perpetuities.
Under the provisions of the Income Tax Act, capital property is normally taxed upon its “disposition”. In the case of a Trust, according to section 104(4) of the Income Tax Act, there is a deemed disposition every twenty one years after the original settlement of the Trust as long as the Trust holds property that is subject to the rule.
Such property includes: shares of a qualified small business corporation, qualified farm property, and qualified fishing property; marketable securities (including mutual funds and portfolio investments); real and depreciable property; personal-use and listed-personal properties; Canadian and foreign resource properties; and, land held as inventory. At the same time, certain types of capital property are exempt or excluded from the operation of the rule depending on such factors as residency or the nature of the trust.
In order to avoid and/or mitigate any taxes owing as a result of the deemed disposition, there are numerous planning options available to trustees including changing the residency of the trust, or entering into a corporate freeze. Trustees may also simply decide to do nothing.
Therefore, at a minimum, trustees must consider the date of the impending deemed disposition, as well as available tax planning measures to avoid/mitigate any taxes resulting from the deemed disposition. An obligation to advise trustees of these issues often falls on the professional who assisted with the settling of a Trust.
In Ozerdinc Family Trust, Justice Marc R. Labrosse found that the defendant law firm was negligent in failing to advise the trustees of the impending deemed disposition date, as well as the available tax planning measures available to them. Although the facts in this case are nothing novel, it nonetheless acts as a helpful reminder as to the steps lawyers should take when advising trustees of a Trust.
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Dr. Donovan Waters, Q.C., recently published an insightful article, “Estate Planning When Authorising Trust Terms are Absent” (2016) 35(3) ETPJ 251, that examines whether it is a breach of trust to carry out an estate freeze that excludes or adds new beneficiaries.
An estate freeze fixes the value of a current trust (“Trust A”) and transfers the future growth to another trust (“Trust B”). Dr. Waters looks at whether Trust B can have different beneficiaries than Trust A. There are various reasons why trustees may want to change the beneficiaries of a trust – such as cross-border tax implications for Canadian citizens living in the US, a divorce or new marriage, to name a few.
However, given the nature of the fiduciary relationship between trustees and beneficiaries and given that a trustee is obligated to discharge the duties set out in the trust instrument, Dr. Waters is of the opinion that it is a breach of trust for trustees to exclude or add to existing beneficiaries by way of an estate freeze, unless authorised by the terms of the trust instrument. Trustees owe a duty to serve the best interests of the beneficiaries, and excluding a beneficiary from Trust B is antithetical to that beneficiary’s best interests.
Assuming authorising terms must be present in the trust instrument in order for trustees to perform an estate freeze, Dr. Waters’ asks what kind of language is sufficient to empower an estate freeze. He is of the opinion that the trust instrument must expressly (and not generally) authorise a freeze.
Assuming that Trust A is already in existence and provides no authorisation to vary or to carry out an estate freeze, Dr. Water’s is uncertain whether a court would grant a freeze, even if the relevant variation of trusts legislation provides the court with the jurisdiction to vary. While Canadian courts have taken a positive approach and facilitated variations when the variation is sought for the benefit of the beneficiaries, there is no benefit to the beneficiaries of Trust A who are excluded from Trust B. As such, for the beneficiaries of Trust A who are excluded, a court would likely require significantly more “benefit” than is granted by the variation sought by the trustees of Trust A.
Finally, Dr. Waters’ offers helpful advice for drafting new trusts that expressly authorise trustees to perform an estate freeze.
As the world continues to “shrink” as a result of globalization and as Canadian beneficiaries may be more likely than in past decades to take up domicile in another country, drafting solicitors should consult with their clients about what powers to grant to their trustees to adapt to a changing world.
Thank you for reading.
This week on Hull on Estates, Natalia Angelini and Noah Weisberg discuss the relationship between estate freezes and trusts as considered in Donovan Waters’ article located in the Estates and Trusts Pension Journal.
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
Today on Hull on Estates, David Smith and Holly LeValliant discuss whether an estate freeze can be considered a fraudulent conveyance. David and Holly discuss the Ontario Superior Court of Justice case Reisman v. Reisman 2012 ONSC 3148 and compare it to the Ontario Court of Appeal’s decision in Stone v. Stone 2001 CanLII 24110 (ON CA).
If you have any questions, please e-mail us at firstname.lastname@example.org.
Earlier this year I blogged on the impact of baby boomers on the practice of estate lawyers. I commented in that blog about boomers inheriting the wealth of their parents, who are possibly the richest group in Canada. Below I have summarized some housekeeping tips for these affluent individuals when considering their estate plan, proffered by David Louis in Aging Boomers Up the Estate Planning Ante – Part II, published in the May 2007 edition of The Estate Planner.
- the estate freeze – don’t forget about the value accumulated in a family trust when estate planning. Otherwise, you may find yourself making elaborate instructions in your Will without considering that your personal assets are worth only a fraction of your business and investment interests.
- personally held assets – you could benefit from transfering buildings and other assets into a corporation or partnership, so that the exposure on the deemed disposition would be treated as a capital gain, rather than be fully taxable.
- Pre-Mortem Redemptions – if a corporation is generating refundable tax, it may be advantageous to systematically redeem freeze shares (as the personal tax resulting from deemed dividends on redemption would largely be tax-paid).
- family law considerations – keep in mind that if an estate freeze was effected prior to the marriage of a beneficiary, it is not clear that a distribution from the trust after the marriage would be protected from a family law claim (if the marriage ended), which could mean a fight over the post-marriage appreciation.
Natalia R. Angelini