• Samer Tohme

Estate Planning in the Pandemic: Make the Most of Today and Plan for Tomorrow

The global pandemic has brought certain realities into clear focus. If you are a high-net-worth individual (HNWI) in your 50s and 60s, you may be thinking about how you can best plan for the future. Now is a good time to take stock of your family assets and take a step back to think about some of those big decisions you might have been putting off. Although many may be feeling the impact of the pandemic — on both a personal and business level — careful estate planning is one way you can continue building the value of your business going forward.

1. Consider Freezing Your Estate

Given the current climate, now may be an appropriate time to consider an estate freeze. Estate freezes are a good course of action to take if the value of the business is at a low point, especially if you are looking to defer tax liability upon death. Estate freezes allow the future growth of the company to be transferred to your next of kin. Estate freezing is named as such because it effectively allows the value of the shares to be ‘frozen’ at fair market value, and future growth to be accrued to new shareholders (typically the next generation). You could benefit from an estate freeze in several aspects:


● minimize the tax on your estate upon death, ultimately increasing the amount your family and heirs will receive

● reduce final sale taxes by accessing your family member’s lifetime capital gains exemptions

● generate a source of annual income on frozen shares by annually redeeming them


Whether you have already frozen your estate, have considered doing so in the future, or have never considered an estate freeze, now is the time to take a second look at your estate planning.


Many businesses are, of course, currently experiencing a decline – but it’s not all bad news. Points of low valuation can offer a prime opportunity to carry out an estate freeze, or even to consider a refreeze if you’ve already done so.

By freezing your assets at their current free-market value, you effectively cap your tax liability upon death. So if the values are currently low, then it’s an opportunity to minimize the tax on your estate upon death — which ultimately preserves that wealth for your family. When the time comes for the economy to bounce back, those values will also bounce back, so make the most of the opportunity to plan your estate now.

Thawing and Refreezing Your Estate

Estate freezing can be carried out more than once. If there’s been a significant depreciation in values since your previous freeze, then it might make sense to thaw and refreeze your estate. Of course, an estate freeze does involve professional fees and costs, but these are likely offset by the potential benefits of refreezing at a lower valuation.

Let’s say you froze your estate at a value of $5 million, exchanging your common shares for frozen preference shares with a fixed value of $5 million. You establish a new family trust with your two adult children as beneficiaries, distributing those shares to the trust. However, in the current circumstances, your business value has depreciated to $3 million. If you thaw and refreeze it, then you can exchange the $5 million fixed value shares for $3 million fixed-value shares. This reduces the face value of the shares by $2 million, giving rise to a tax deferral of deemed disposition tax of around $540, 000, provided the business value has bounced back to $5 million at the time of your death. This means that the $2 million growth has effectively been preserved and transferred to your two children via the family trust.


Have You Been Putting off An Estate Freeze?


It can be a daunting step to take, but it’s worth considering if you want to increase financial security for your family going forward. In particular, taking this opportunity to carry out that long-considered estate freeze can minimize your estate taxes and preserve wealth for the next generation. Given that the current conditions are likely to be tax-saving, now is a good time to put those plans into action.


Should You Reconsider Whether An Estate Freeze Is Right For You?


Perhaps you’ve previously decided that an estate freeze isn’t the right decision for you, or maybe you’ve never even thought about it. However, a lot has changed in the face of the global pandemic—perhaps your business, your assets and your plans for the future may have changed somewhat too—so some re-evaluations may be in order. Although these big decisions can be tough, it’s important to regularly reassess your estate planning and keep your affairs up to date. One thing the pandemic has made clear is that our lives and our health can change in an instant. With the climate of depreciated valuations, this is a prime opportunity to plan your estate. It may well be an appropriate time to take advantage of tax-saving conditions, maximizing the financial security of your family in the future.

2. Think About How You Can Help Others

Charities and non-profits all over the world are facing increased pressure from the pandemic – and the people accessing those services need help now more than ever. Luckily, there are ways for you to play your part in supporting these causes without necessarily relying on a large outflow of cash. You can donate shares of a public company to charities instead, which is a strategy that also has tax benefits. The capital gains inclusion rate of donated shares is zero, but you’ll still get full donation credit based on their FMV.


Another thing to consider is whether you’d like to establish a charitable foundation or donor-advised funds. These options give you the flexibility to contribute to these foundations or funds, who will then distribute the donations to your chosen charities. The donations can be staggered–still resulting in an up-front donation tax credit–and the foundation will distribute the donation over time.

3. Protect the future for yourself and your family through a power of attorney, will and life insurance

Power of Attorney

As we have seen of late, things can change in an instant. In the event that you are somehow unable to speak or make decisions for yourself—for example, if you are in intensive care, or on a ventilator unit—then a power of attorney (POA) is a person who has been given prior permission by you to act on your behalf. Having a POA provides security that your beneficiaries and family will be able to carry out your wishes and access your financial assets as intended.

Wills

A will is a document that sets out your wishes for how to handle and distribute your assets in the event of your death. In Canada, if you don’t have a will at the time of death then your home province will be responsible for deciding how to distribute your assets – regardless of your wishes. This can also be a costly process, fraught with delays, and can lead to complications and disagreements for your beneficiaries.

If you are a HNWI, then your will should detail your exact wishes—setting out your appointed executors, and how, when, and to whom your assets will be distributed, including bequests to individuals and charitable organizations—and should tie into your overall estate planning. Wills should be regularly revised, especially if any of your personal or financial circumstances have changed. Your will is an opportunity for your life’s legacy to come to its intended conclusion, so it is vital to have detailed and clear instructions, alongside the help of a trusted POA.

Life Insurance

Having an adequate life insurance policy in place is an integral part of estate planning. In the event of your death, life insurance policies can liquify your estate, avoiding the forced sale of assets by your estate to cover taxes. If you are freezing your estate now, then the lower valuation can mean you’ll require a lower death benefit to fund your deemed disposition tax. This can reduce the premium costs associated with the process, so now is a good time to take advantage of depreciation.

4. Invest in the future by working with a professional

There are so many aspects to consider in estate planning, particularly if you are a HNWI. It’s a complex process, and there are likely to be tax implications. Without the experience and understanding of a team of advisors, it can be a struggle to navigate the complexity of these implications. It’s recommended that you work with a team of advisors, who can tie in your estate plans across the breadth of opportunities available to you. This can ensure smooth estate planning and avoid hiccups caused by different professionals working separately on your estate. A poorly organized estate plan will ultimately cost yourself and your family more in the long run. Ultimately, you should strongly consider working with a professional now, to preserve your wealth for the future.

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