An estate freeze is a sophisticated tool often employed in the realm of estate planning and wealth management, especially within family-run businesses. When executed correctly, it can help reduce taxes owed on your estate upon your death and help transition your business to the next generation in a smooth, tax-effective manner.
So, what is an estate freeze exactly?
Essentially, it’s a tax planning strategy that allows the owner of an appreciating asset (like a business) to ‘freeze’ its value at a certain point in time based on an up-to-date valuation. The future growth of the business is then transferred by gifting to others, frequently children. However, when structured correctly, the owner still retains control over the management of the business.
There are numerous benefits associated with an estate freeze. The most significant of these is the ability to reduce the tax burden upon death. Since the value of the gift is ‘frozen,’ any future increase in the value of the assets will not be included in the estate of the original owner, thus reducing the amount of estate tax payable.
Additionally, estate freezes are an effective way of transitioning wealth to the next generation. They allow the future growth of the business or asset to accumulate in the hands of beneficiaries, providing the next generation with a head start in their wealth accumulation journey. Plus, they won’t owe taxes on the transferred assets, until they die or sell the assets.
It’s important to note that while estate freezes can offer significant tax advantages, they also have potential downsides impacted by variables like business structure and succession plans. For example, if not structured correctly, they may trigger unwanted tax liabilities. Additionally, if the value of an asset decreases post freeze, the original owner could end up paying more in taxes than they would have without the freeze.
Before deciding on an estate freeze technique, individuals should consider their long-term financial goals and the needs of their beneficiaries. To get started consulting a tax professional specializing in estate planning is vital.
RBT CPAs professionals in our Trust, Estate and Gift Practice can provide valuable advice on the suitability of an estate freeze for your specific situation, refer you to an attorney and review legal documentation for accuracy, guide you through tax implications, and help you evaluate potential benefits versus risks.
If you’re interested in learning more, getting started, or reviewing plans you may already have in place, please don’t hesitate to email irahilly@rbtcpas.com or mtorchia@rbtcpas.com.
What’s more, our affiliate, Advent Valuation Advisors, is available to provide the up-to-date business valuation you will need as part of the estate freeze process.
Your RBT CPA client manager is also available to help start the discussion, in addition to handling your accounting, tax, audit, and business advisory needs. Give us a call today and find out how we can be Remarkably Better Together.
RBT CPAs is proud to say 100% of its work is prepared in America. Our company does not offshore work, so you always know who is handling your confidential financial data.