The freezing of current share value so that your chosen successors can easily participate in the future growth of your enterprise is a common estate planning technique. What if the value of the frozen shares now exceeds the value of the enterprise as a whole?
I wrote about this sometime ago and I think the current economic circumstances create an opportunity to revisit it. The COVID-19 crisis has led to significant reductions in asset values in just about every corner in the economy. Anyone’s guess at this point as to whether the devaluation is temporary or permanent. Nevertheless, it is expected to last for some period to come. In the midst of all this bad news, there may be an opportunity to actually take advantage of the current economic climate.
Assume you completed an estate freeze several years ago when your enterprise was valued at $13 million. Due to recent economic and business conditions associated with the COVID-19 crisis and its implications for the short-term (or long-term), the value of your enterprise has declined such that a current valuation of the enterprise confirms the value to be $8 million; yet you have reason to believe the value will rise again once the crisis is over, and the economy recovers.
Carefully planned, you could undertake to refreeze your shares. A refreeze is a tax planning technique that involves converting your existing freeze shares in this case valued at $13 million into new freeze shares revalued at $8 million.
The benefits of the refreeze are as follows:
1. You will be able to lock in at a lower value, resulting in a reduced income tax liability when the shares are disposed of before or upon your death.
2. Your successors will participate in the growth in value as the enterprise recovers from the current economic conditions as you believe it will. This essentially defers value to the successors.
3. Dividends on the growth (usually common) shares can be distributed sooner as the enterprise returns its former value.
A refreeze can be accomplished in a number of ways and some care must be taken in the implementation, note it will not work for all circumstances. Make sure you consult your pros but consult with them nevertheless in view of the current economic circumstances.
As featured on All About Estates Blog where Baker Tilly WM Partner, Steven Frye, is a regular contributor.
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