In the current market downturn, privately held businesses could benefit from an estate freeze, and financial planners should familiarize themselves with this strategy, according to a new Grant Thornton white paper.

The paper by the accounting and advisory firm outlines the estate freeze and its role as a financial planning strategy in the current market environment.

The strategy is typically used to limit and defer future tax liability by freezing the market value of assets if they are expected to increase in value over time. But in the current market downturn, the estate freeze offers potential as a flexible and multi-purpose succession and estate-planning tool, according to Grant Thornton. Furthermore, this “presents opportunities for savvy financial planners,” the paper says.

Specifically, the firm says that current low business valuations make it an excellent time to freeze business or investment assets, such as company shares or real estate. By freezing such assets, their value can rise while the tax liability is deferred during the lifetime of the freeze. In addition, the tax liability on death will remain the same, providing certainty regarding the tax that will be owed on the owner’s death.

Companies that already have a freeze in place can also take advantage of the current market environment by re-freezing the assets if their value is now less than it was at the time of the freeze. This reduces the fixed value of the assets and reduces the tax liability upon death.

“This is a key strategic consideration for businesses that already have a freeze in place,” the paper says.

An estate freeze can also be useful in presenting opportunities for income splitting between family members, according to Grant Thornton. In certain circumstances, for instance, the value of growth in the frozen assets could accrue in a family trust, allowing family members to split the income to provide tax savings for the family as a whole.

The firm also points out that an estate freeze could be an effective part of an overall succession strategy. By freezing assets and creating one or more family trusts, the paper notes, business owners can realize tax benefits and maintain some control over the future of the business. The strategy can help business owners address issues of future ownership, management, inheritance and business legacy.

Grant Thornton warns that it is crucial to explore all the implications of the estate freeze strategy before making a decision. The paper notes that timing of the freeze, with respect to the life-expectancy of the client, is particularly important.

“A careful assessment of current needs, future plans and financial facts is key to the effective implementation of an estate freeze or re-freeze strategy,” the paper says.

IE