Estate freezes can raise important questions—like whether the freezor’s spouse should seek independent legal advice (“ILA”). This blog unpacks why that recommendation matters.

Estate Freeze

Consider the following estate freeze, which intentionally is explained in a “bare bones” manner. A spouse (“Freezor”) is exchanging their common shares in a Canadian controlled private corporation (“Family Corp.”) for fixed value preference shares. A new discretionary family trust is settled for the benefit of the Freezor, their spouse (“Spouse”) and their issue (the “Trust”). The trustees of the Trust (the “Trustees”) subscribe for common shares of Family Corp. The Freezor and the Spouse are legally married with no marriage contract.

The effect: The Freezor’s interest in Family Corp. will be ‘frozen’ at an amount that is equal to the fair market value of the preferred shares. The Trust will be entitled to the future ‘growth’ in value of Family Corp. through its ownership of the common shares.

The Significance: The estate freeze may impact payment that the Spouse otherwise would have received in the event of marriage breakdown.

ILA Recommendation

ILA and ensuring that Spouse appreciates and accepts the transaction may be recommended because:

1. Spouse is divesting themself of a direct personal right to a proportion of the future growth in value of Family Corp. as such right will benefit the Trust and of which Spouse is but one potential beneficiary, and so subject to fiduciary duties. Rather than the growth in value continuing to grow in shares held by Freezor, future growth in value will be in the common shares held by the Trust.
2. Freezor will take back preference shares in Family Corp. with share rights that differ from the class of shares in Family Corp. that Freezor currently owns.
3. The choice in who will act as Trustees and have the power to appoint replacement or additional Trustees will have an impact on the administration of the trust. There may be multiple trustees that include an independent person(s), meaning unrelated to the Spouse and Freezor.
4. The Trustees of the Trust will be subject to fiduciary duties and have discretion regarding to whom and in what proportions to make distributions that may be limited by certain sections of the Income Tax Act (Canada), for example, s. 75(2) and s. 74(4) (meaning Spouse cannot benefit while being a “designated person” in relation to Freezor). The beneficiaries will not only be Freezor and Spouse, but their children and any more remote issue, together possibly with certain corporations and trusts.