Estate Freeze Trust

A trust can be created as a part of an overall plan to avoid estate taxes on future appreciation of particular assets. If it is anticipated that certain property will appreciate in value over the years, it often makes sense to transfer full or partial ownership to an Estate Freeze Trust—to avoid estate taxes on the asset.

A client in his mid-forties owned Microsoft stock with a value of about $2 million. We calculated that if the value of his portfolio increased at about 7 percent per year, at age 75 the stock would be worth $16 million. The potential estate tax liability was roughly $9 million. Also, of immediate concern, the entire amount of his savings was exposed to lawsuit risks from his business.

To solve both problems, we put the stock into a Family Limited Partnership. The client and his wife were the general partners—retaining control over the assets. The Limited Partnership interests were transferred to the Estate Freeze Trust. The $2 million value was discounted for tax purposes so that the total amount of the gift was equal to the exemption amount. (After the discount was applied to the $2 million, the gift was valued at $1.3 million.) The stock was fully shielded from any potential claim, and the entire value of the asset was removed from the client’s estate. If the value of the stock appreciates even slightly, millions of dollars in taxes will be saved for the family.

The same principle would apply to ownership in a start-up company which you believe will increase in value over a number of years. When you start a business, the initial value is generally low. That presents an opportunity to transfer ownership and remove future appreciation from your estate without creating a taxable gift or using a portion of your lifetime exemption. A real estate investment, which has little initial equity but has potential to appreciate, is also a good candidate for the Estate Freeze Trust.