Tim Duholke - The Estate Freeze Process

1. A Tax Accountant’s Thoughts about
Managing Tax Driven Estate
Planning
Tim Duholke, FCA
Estate Planning Council of Vancouver Senior Tax Advisor
April 18, 2012 Davis LLP

2. 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

3. Process
• Assemble Team
• Gathering Facts
• Determining Objectives

4. Process cont’d
• Structural Considerations
• Estate Freeze methods
• Living the Freeze
• Other issues

5. Evolution of a Freeze Structure
A. The Beginning
D M
0p1

6. Evolution of a Freeze Structure
B. Round One
D & M, C1-C3
D&M
T1
Pref 1
Ho1
0p1

7. Evolution of a Freeze Structure
C. Round Two
C1-C3
T2
Common
D&M D & M, C1-C3
Pref 1 In1
Common
T1
Ho2 Pref
D, C2
Pref
Ho1
VT
0p4(US) 0p1 0p2 0p3

8. Evolution of a Freeze Structure
D. Currently
C2 & Family
T3
T2
T1 Common
D&M
Pref 1 Pref 2
Common
Pref 2
Common In1 Pref
C2
D, C2
Ho2 Ho1 Pref 3
VT
0p1 0p2 0p3
0p4 (US)

9. Team
• Members
• Inter-action
• Responsibilities

10. Gathering Facts
• Family Background
• Business Background

11. Objectives
• Keep the process going!!
• Tax minimization
• Recognition of latent tax liabilities
• Financial security
• Asset protection

12. Objectives cont’d
• Retention of control
• Flexibility
• Fair treatment of family members
• Charitable intentions
• Maintain qualification for QSBC status

13. Structural Considerations
• Utilization of enhanced CGD
• Creditor protection
• Income splitting
• Age of parents
• Utilization of trusts

14. Trust Issues
• Types of trusts
• Trust rules
• Drafting trusts
• Use of Offshore trusts

15. Structural Considerations cont’d
• Share rights
• Probate planning
• Impact of anti-avoidance rules

16. Anti-avoidance Rules
• Attribution rules
• Benefit rules
• Stripping rules
• GAAR

17. Freeze Methods
• Taxable transfers
• Capital Reorganizations
• S.85 Freezes

18. Section 85 Freezes
• Holding company
• Internal Freeze
• Drop-down

19. Holding Company Freeze
X Family(trust)
Pref common
Holdco
common
Opco

20. Internal Freeze
X Family(trust)
Pref common
Opco

21. Drop down freeze
X
Old Opco Family/Employees
preferred
New Opco

22. Freeze Methods cont’d
• Amalgamation
• Partnership
• Stock dividend

23. Implementation
• Timing
• Liquidation of freeze shares
• Managing the growth

24. Managing the Growth
• Participants in Trust
• Contingent participation rights
• Shareholder agreements
• Refreezing and thawing

25. Non-tax Considerations
• Operational considerations
• Accounting and financing
• Shareholders Agreement
• Family Law issues

26. Advanced Issues
• Valuation
• Date of freeze
• Death
• Post-mortem planning
• Pipeline
• S.164 (6)
• Use of life insurance

27. Pipeline Example 1/3
Estate
common Cost 100
FMV 1,000
Opco
Land cost 100
FMV 1,000

28. Pipeline Example 2/3 Beneficiaries
Estate
Sells shares for Newco
$1,000 note
Cost 1,000
FMV 1,000
Opco
Land cost 100
FMV 1,000

29. Pipeline Example 3/3
After Section 88 Windup
Beneficiaries
Estate
Owes Newco
$1,000
Land cost 1,000
FMV 1,000

30. Advanced Issues cont’d
• Emigrating family members
• Blended families
• Integration with date of death planning
• Managing the 21 year rule on trusts

31. Seven “C’s” of Planning
• Change – want to implement
• Culture – how does the family work
• Choice – multiple options
• Core concepts – need to understand

32. 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

33. Key Take-Aways
• Freeze not really simple
• Should not be “one shot” engagement
• Documentation is important