My great grandfather was a successful entrepreneur who lived until he was 104. I asked him if life changed for him after he hit 100. "Well, there's no peer pressure," he said.
My great grandfather was smart about his tax planning, too. He didn't pay a cent of tax on any growth in his assets after he turned 75, because he had undertaken an estate freeze at that time.
As I explained last week, an estate freeze is the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. There are many benefits:
•Establishing and capping the tax bill on death. By freezing the value of an asset today, you'll be able to establish with decent accuracy what your tax bill will be upon death, making it easier to plan for those taxes. You might consider, for example, buying life insurance to cover the tax liability. Further, all the future growth from the date of the freeze onward will belong to your heirs and won't be taxed on your death, which caps your future tax bill.
•Deferring the ultimate tax bill. By passing the future growth of your assets to your heirs, you can defer income tax on that growth until a much later time – perhaps until your heirs pass away. Deferring the tax for a generation or more has huge value when you consider the time value of having those dollars at work for the family.
•Multiplying the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these assets.
•Splitting income with family members. A freeze will effectively place certain assets in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.
•Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.
•Protecting assets from spouses. If you or your children own growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage.
•Reducing probate fees. A freeze will cap the value of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.
•Maintaining control over the property. You can enjoy the benefits listed above without giving up control over or use of the assets during your lifetime.
Before completing an estate freeze, you should be content with the amount of growth you've received to date, and the idea that the future growth will accrue to someone else. You should also be confident that there will be meaningful growth of the assets in the future. After all, if there isn't going to be much future growth, then there won't be much growth to have taxed in the hands of your heirs and it may not be worthwhile freezing in this case.