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What is an Estate “Freeze”?
Generally, an “estate freeze” is any technique that allows a person to fix or “freeze” an asset’s value for estate and gift tax purposes at a given time, so that any future appreciation in value of the asset can pass to a recipient at no additional tax cost.
In a sense, all outright gifts made during your lifetime result in an estate freeze of sorts because you no longer own the asset. The asset, and any future appreciation in its value, will belong to the recipient, and will not be included in your estate. However, many people would like to make gifts of the future appreciation of their property, but still retain some of the benefits of currently owning the property. For example, you might want to keep use or control of a property and just give away the future growth in value of the property to a child or to grandchildren. Or you might like to keep some of the income generated by an asset, but transfer ultimate control over the asset to the next generation.
Estate freeze techniques become more attractive the larger your potential estate. If your estate is likely to be in the top federal estate tax bracket (i.e., for taxable estates in excess of $3,000,000), 55% of every dollar of future growth in the value of your assets may end up having to be paid to the federal government in estate taxes at your death. If state death taxes or income taxes will also become due at your death, the effective tax rate will be even higher.
The estate freeze techniques described in this Advisory are highly sophisticated, and are generally recommended only for clients who are facing estate taxes even after establishing tax efficient wills (or revocable trusts), insurance trusts, and other more basic estate planning instruments. Also, as is to be expected, some estate freeze techniques work better with certain assets than with others. Some estate freeze techniques are considered by the Internal Revenue Service to be “aggressive,” and, unfortunately, none are guaranteed to achieve the intended results. Thus, in implementing estate freezes, it is important to proceed carefully, with a full understanding of the implications of these potentially valuable estate planning techniques.