Estate

Question 1

Income paid to minors from an inter-vivos trust is taxed at their graduated rates?

Answer 1

False, it is taxed at the top rate.

Question 2

Estate Freeze

Answer 2

• Primary reason is to freeze value of taxpayer’s specified ‘growth assets’ so that future growth occurs in the hands of the taxpayer’s children or spouse. Generally, it consists of capital property likely to increase in value, such as stocks, bonds, real estate, business interests, and shares of a private corporation.
• Typically, an estate freeze is accomplished through a Holdco where all of the common shares of an expanding company are transferred into a newly incorporated entity and then take back as consideration the Holdco’s preferred shares resulting in the following:
  – The transfer is affected at cost, and no taxable capital gain arises
  – The cost base of the common shares flows through to the preferred shares, along with any gain in the common shares
  – The preferred shares are voting, non-participating, non-cumulative, redeemable shares, with a fixed dividend rate
  – The preferred shares are redeemable at the FMV of the common shares transferred into the holding company
  – The holding company’s common shares are issued to the children in such a way that the preferred shares have more votes than the common shares. Since the preferred shares have a fixed redemption amount, any future growth in the common shares belongs to the children.
  – Thus, the taxpayer maintains voting control in the holding company and receives preferred share dividend income, but the future growth of the assets accrues to the children. The fixed preferred dividend can be set to meet the taxpayer’s income needs.