Tim Duholke - The Estate Freeze Process

A Tax Accountant’s Thoughts about Managing Tax Driven Estate

Planning

Tim Duholke, FCASenior Tax Advisor

Davis LLPEstate Planning Council of VancouverApril 18, 2012

Opening Observations

• Effective estate planning really needs to address the tax consequences arising before, on and after death

• Estate freezing can be an important fundamental consideration in succession planning

• Proactive planning should save tax

Process

• Assemble Team• Gathering Facts• Determining Objectives

Process cont’d

• Structural Considerations• Estate Freeze methods• Living the Freeze• Other issues

Evolution of a Freeze Structure

A. The Beginning

D M

0p1

Ho1

Evolution of a Freeze Structure

B. Round One

D & M

0p1

T1Pref 1

D & M, C1-C3

Ho2

Evolution of a Freeze Structure

C. Round Two

D & M

0p4(US)

T1

Pref 1

D & M, C1-C3

VT

T2

Pref Ho1Pref D, C2

Common

In1

C1-C3

Common

0p1 0p2 0p3

Ho2

Evolution of a Freeze StructureD. Currently

D & M

0p4 (US)

T1Pref 1

VT

T3

Pref

Ho1

Pref 2

D, C2

CommonIn1

C2 & Family

Common

0p1 0p2 0p3

T2

Pref 2

Common

C2

Pref 3

Team

• Members

• Inter-action

• Responsibilities

Gathering Facts

• Family Background• Business Background

Objectives

• Keep the process going!!

• Tax minimization

• Recognition of latent tax liabilities

• Financial security

• Asset protection

Objectives cont’d

• Retention of control

• Flexibility

• Fair treatment of family members

• Charitable intentions

• Maintain qualification for QSBC status

Structural Considerations

• Utilization of enhanced CGD• Creditor protection• Income splitting• Age of parents• Utilization of trusts

Trust Issues

• Types of trusts

• Trust rules

• Drafting trusts

• Use of Offshore trusts

Structural Considerations cont’d

• Share rights

• Probate planning

• Impact of anti-avoidance rules

Anti-avoidance Rules

• Attribution rules

• Benefit rules

• Stripping rules

• GAAR

Freeze Methods

• Taxable transfers

• Capital Reorganizations

• S.85 Freezes

Section 85 Freezes

• Holding company

• Internal Freeze

• Drop-down

Holdco

Holding Company Freeze

X

Opco

Pref

Family(trust)common

common

Opco

Internal Freeze

X

Pref

Family(trust)common

Old Opco

Drop down freezeX

New Opco

Family/Employees

preferred

Freeze Methods cont’d

• Amalgamation

• Partnership

• Stock dividend

Implementation

• Timing

• Liquidation of freeze shares

• Managing the growth

Managing the Growth

• Participants in Trust

• Contingent participation rights

• Shareholder agreements

• Refreezing and thawing

Non-tax Considerations

• Operational considerations• Accounting and financing• Shareholders Agreement• Family Law issues

Advanced Issues

• Valuation• Date of freeze• Death

• Post-mortem planning• Pipeline• S.164 (6)• Use of life insurance

Opco

Pipeline Example 1/3Estate

common Cost 100FMV 1,000

Land cost 100FMV 1,000

Opco

Pipeline Example 2/3

Estate

Cost 1,000FMV 1,000

Land cost 100FMV 1,000

NewcoSells shares for $1,000 note

Beneficiaries

Pipeline Example 3/3

After Section 88 Windup

Estate

Land cost 1,000FMV 1,000

NewcoOwes$1,000

Beneficiaries

Advanced Issues cont’d

• Emigrating family members

• Blended families

• Integration with date of death planning

• Managing the 21 year rule on trusts

Seven “C’s” of Planning

• Change – want to implement

• Culture – how does the family work

• Choice – multiple options

• Core concepts – need to understand

Seven “C’s” of Planning cont’d

• Complexity – of choices and in concepts

• Critical thinking – balance theory and practical

• Care for client – now and in future

Key Take-Aways

• Freeze not really simple

• Should not be “one shot” engagement

• Documentation is important