Tim Duholke - The Estate Freeze Process
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Transcript of Tim Duholke - The Estate Freeze Process
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A Tax Accountant’s Thoughts about Managing Tax Driven Estate
Planning
Tim Duholke, FCASenior Tax Advisor
Davis LLPEstate Planning Council of VancouverApril 18, 2012
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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
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Process
• Assemble Team• Gathering Facts• Determining Objectives
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Process cont’d
• Structural Considerations• Estate Freeze methods• Living the Freeze• Other issues
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Evolution of a Freeze Structure
A. The Beginning
D M
0p1
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Ho1
Evolution of a Freeze Structure
B. Round One
D & M
0p1
T1Pref 1
D & M, C1-C3
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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
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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
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Team
• Members
• Inter-action
• Responsibilities
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Gathering Facts
• Family Background• Business Background
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Objectives
• Keep the process going!!
• Tax minimization
• Recognition of latent tax liabilities
• Financial security
• Asset protection
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Objectives cont’d
• Retention of control
• Flexibility
• Fair treatment of family members
• Charitable intentions
• Maintain qualification for QSBC status
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Structural Considerations
• Utilization of enhanced CGD• Creditor protection• Income splitting• Age of parents• Utilization of trusts
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Trust Issues
• Types of trusts
• Trust rules
• Drafting trusts
• Use of Offshore trusts
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Structural Considerations cont’d
• Share rights
• Probate planning
• Impact of anti-avoidance rules
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Anti-avoidance Rules
• Attribution rules
• Benefit rules
• Stripping rules
• GAAR
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Freeze Methods
• Taxable transfers
• Capital Reorganizations
• S.85 Freezes
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Section 85 Freezes
• Holding company
• Internal Freeze
• Drop-down
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Holdco
Holding Company Freeze
X
Opco
Pref
Family(trust)common
common
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Opco
Internal Freeze
X
Pref
Family(trust)common
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Old Opco
Drop down freezeX
New Opco
Family/Employees
preferred
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Freeze Methods cont’d
• Amalgamation
• Partnership
• Stock dividend
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Implementation
• Timing
• Liquidation of freeze shares
• Managing the growth
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Managing the Growth
• Participants in Trust
• Contingent participation rights
• Shareholder agreements
• Refreezing and thawing
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Non-tax Considerations
• Operational considerations• Accounting and financing• Shareholders Agreement• Family Law issues
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Advanced Issues
• Valuation• Date of freeze• Death
• Post-mortem planning• Pipeline• S.164 (6)• Use of life insurance
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Opco
Pipeline Example 1/3Estate
common Cost 100FMV 1,000
Land cost 100FMV 1,000
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Opco
Pipeline Example 2/3
Estate
Cost 1,000FMV 1,000
Land cost 100FMV 1,000
NewcoSells shares for $1,000 note
Beneficiaries
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Pipeline Example 3/3
After Section 88 Windup
Estate
Land cost 1,000FMV 1,000
NewcoOwes$1,000
Beneficiaries
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Advanced Issues cont’d
• Emigrating family members
• Blended families
• Integration with date of death planning
• Managing the 21 year rule on trusts
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Seven “C’s” of Planning
• Change – want to implement
• Culture – how does the family work
• Choice – multiple options
• Core concepts – need to understand
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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
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Key Take-Aways
• Freeze not really simple
• Should not be “one shot” engagement
• Documentation is important
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