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?
Assume you completed an estate freeze several years ago when your enterprise was valued at $13 million. Due to recent economic and business conditions, the value of your enterprise has declined such that a recent valuation of the enterprise confirms the value is now $8 million; yet you have reason to believe the value will rise again before long.
Carefully planned, you could undertake to refreeze your shares. A refreeze is a tax planning technique that involves converting your existing freeze shares in your cased 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. More on this in my next blog.