DEFINITION of Estate Freeze
An estate freeze is an asset management strategy whereby an estate owner aims to transfer assets to his or her beneficiaries without tax consequence. In some estate freezes, the estate owner transfers assets, usually common stock, to a company in exchange for preferred shares. The company issues new common stock to the beneficiaries at a nominal value.
BREAKING DOWN Estate Freeze
The estate freeze strategy aims to avoid the capital gains tax. When the owner exchanges assets for preferred stock, there will be no capital gains on the exchange. Regardless of whether the gift involves the exchange of common or preferred shares, it will be factored into the estate of the transferor. While gift-tax exemptions and exclusions will be taken into account, appreciation of the gift over time will not.
Estate Freeze and Asset Management Strategies
Asset management firms have several strategies to balance the needs of their clients (e.g. preserving or growing assets under management), also ensuring that the strategies they use are tax-advantaged and intelligent enough to circumvent or not be caught by certain tax stipulations.
In contrast with many commercial banks, asset managers generally require investment minimums, meaning their services are restricted to accounts of high net-worth individuals, government entities, corporations and financial intermediaries. Asset managers offer a variety of strategies, spanning equities, fixed income, real estate, commodities, and international investments.
Many asset managers like J.P. Morgan Asset Management and Goldman Sachs Asset Management have acquired and developed several portfolio managers and strategies that they can offer separately or in combination to meet their clients’ needs. For example, J.P. Morgan Asset Management offers clients upwards of 30 different strategies, spanning 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 REITs (real estate investment trusts).
Fixed income options entail absolute returns, insurance solutions, and mortgage-related strategies. Finally, for alternatives, the firm offers its clients options in infrastructure and private equity, among others. This wide variety showcases what’s available to many accredited investors, in addition to strategies like an estate freeze, when investing with an asset manager.
Estate Freeze and Estate Planning
In addition to strategies in both the public and private markets, many asset managers also offer estate planning tools. Estate planning also considers how to manage an individual's asset base in the event of their incapacitation or death. To this end, it encompasses the bequest of assets to heirs and the settlement of estate taxes. The most basic step in estate planning involves writing a will. Other major estate planning tasks include:
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