DEFINITION of Estate Freeze

An estate freeze is an asset management strategy whereby an estate owner seeks to transfer assets to his or her beneficiaries, without tax consequences. In some estate freeze scenarios, the estate owner transfers shares of common stock to a company he invests in, in exchange for preferred shares. The company in turn issues new shares of common stock to the beneficiaries, at nominal value.

The main goal of an estate freeze strategy is to avoid capital gains tax, and when owners exchange assets for preferred stock, no capital gains taxes are incurred. Furthermore, Appreciation and inflation can radically increase an individual's estate tax burden, upon death. Consequently, any estate-reducing program is more effective if it includes techniques capable of shifting appreciation and income to a decedent's intended beneficiaries.

Key Takeaways [PLEASE PLACE IN CALLOUT BOX}
--An estate freeze describes a strategy where estate owners aim to transfer assets to their loved ones, without triggering tax consequences.
--Estate freeze efforts are typically designed and executed by asset managers, who rely on various investment vehicles to achieve the desired effect.
--Estate freezes are typically available to wealthy individuals, corporations, financial intermediaries, and government entities.

Estate Freeze and Asset Management Strategies

Competent asset management firms grow their clients' assets in the most tax-advantaged ways possible. And unlike commercial banks, asset managers generally require investment minimums of $500,000 to $1 million, to reflect their typical client-base, which includes government entities, corporations, financial intermediaries, and high-net-worth individuals.

Asset managers like J.P. Morgan Asset Management and Goldman Sachs Asset Management have cultivated multiple portfolio management strategies, that they may either offer up separately or in combinations, in an effort to customize programs that meet their clients' individual needs. For example, J.P. Morgan Asset Management offers clients upwards of 30 different types of investments, such equity, fixed income, and alternative investments.

Select strategies within equity include U.S. Core, U.S. Growth, and U.S. Small Cap, along with Global/EAFE, and real estate investment trusts (REITs). Fixed income options entail absolute return investments, insurance solutions, and mortgage-related strategies. In the alternative investment space, options include infrastructure, private equity, and commodity plays.

Estate Freeze and Estate Planning

In addition to strategies in both the public and private markets, many asset managers also offer estate planning services, which may facilitate the following tasks:

  • Drafting wills
  • Minimizing estate taxes by setting up trust accounts in the name of beneficiaries
  • Establishing a guardian for living dependents
  • Naming an executor of the estate to oversee the terms of the will
  • Creating/updating beneficiaries on plans such as life insurance, IRAs and 401(k)s
  • Setting up funeral arrangements
  • Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate
  • Setting up a durable power of attorney (POA) to direct other assets and investments

[Important: Estate freeze strategies are generally only accessible to accredited investors--also known as "sophisticated" investors, who customarily boast greater assets than retail investors.]