Estate Planning for High-Net-Worth Individuals: Estate Freezes Explained

A simple guide to estate planning for high-net-worth individuals, covering estate freezes, preferred and common shares, Section 85 and 86 rollovers, and trusts.

Estate Planning for High-Net-Worth Individuals: A Simple Guide to Estate Freezes

If you’ve built real wealth, whether through a business, a professional corporation, or years of smart investing, estate planning stops being a “someday” task and becomes something that genuinely protects your family’s future. For high-net-worth individuals, one strategy comes up again and again: the estate freeze. It sounds technical, but the idea behind it is refreshingly simple.

What Is an Estate Freeze?

An estate freeze is a strategy that locks in, or “freezes,” the current value of your company or investments today, while any future growth flows to the next generation. In practical terms, you exchange your existing common shares for new preferred shares equal to today’s value. Your children, grandchildren, or a trust then receive new common shares, which start at essentially no value but capture all future growth from that point forward.

Why does this matter? Because it caps your tax liability on the value your company has today, rather than letting it keep growing and creating a bigger capital gains tax bill down the road.

Preferred Shares vs. Common Shares in a Freeze

Understanding the difference between preferred shares and common shares is the key to understanding how a freeze actually works.

• Preferred shares you receive in the freeze are usually fixed in value, redeemable, and often carry limited voting rights. They represent the value of the business as it stands today, and they can be structured to pay you a steady dividend, or simply to sit there as your “frozen” value.
• Common shares represent future growth. Because they start with little or no value at the time of the freeze, any increase in the company’s worth from that point on belongs to whoever holds them, typically your children or a family trust.

This split is what allows the next generation to build wealth from future growth, without triggering a tax bill on value that’s already yours.

Section 85 and Section 86: How the Freeze Actually Happens

Two provisions of the Income Tax Act make estate freezes possible without an immediate tax hit:

• Section 85 rollover: Lets you transfer shares or other qualifying property into a corporation (often a new holding company) in exchange for preferred shares, on a tax-deferred basis. This is common when the freeze involves moving assets into a new corporate structure.
• Section 86 share exchange: Allows you to exchange your existing common shares for new preferred shares directly within the same corporation, without needing a new entity. This is often the simpler route when you’re freezing shares of a company you already own outright.

Both mechanisms serve the same purpose: they let you restructure your shareholdings without an immediate capital gains tax consequence, as long as the transaction is properly elected and documented.

Why a Trust Often Sits at the Centre of the Plan

Rather than issuing the new common shares directly to your children, many high-net-worth families use a discretionary family trust to hold them instead. This adds flexibility:

• Income and future capital gains can be allocated among family members in a given year, rather than being locked in permanently
• Younger beneficiaries can be added later, as families grow
• It keeps a layer of control and protection between family wealth and any individual beneficiary’s personal or business risks

What Happens to the Tax Liability Later?

An estate freeze doesn’t eliminate tax, it defers and controls it. The capital gains tax on the value you froze is generally triggered on a deemed disposition at death, unless it’s rolled over to a surviving spouse or spousal trust. Many high-net-worth individuals pair a freeze with permanent life insurance, so the eventual tax liability is funded without forcing a sale of the business or other assets.

A Few Things Worth Getting Right

• The value of the company must be properly determined at the time of the freeze, since this sets the baseline for your preferred shares
• Family dynamics matter as much as the tax mechanics, decide early who benefits and when
• A freeze is not a “set it and forget it” strategy. Wills, trusts, and corporate structures should be reviewed as the business and family evolve

Final Thoughts

Estate planning for high-net-worth individuals isn’t about avoiding tax altogether, it’s about controlling when and how it applies, so your family keeps more of what you’ve built. An estate freeze, structured properly through preferred and common shares, a Section 85 or Section 86 transaction, and often a family trust, gives you a clear, tax-efficient way to pass on future growth while keeping today’s value protected.

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