Estate Tax Freeze

This refer to the couple of tax savings alternatives posted I. Before appreciation of the transferable interest the company is recapitalised with the parents holding Pref. Shares and 100% of company value and voting right. The children are the common shareholders and enjoy the appreciation of their common share value which was initially conceptualised to have 0 cost basis. hence at the time of transfer no gift tax is levied. At the demise or bequest done by the parents the pref. Shares are redeemed by the company and the voting rights now pass onto the children, the common shareholder. My qs. Is how the redemption of pref. Shares happen? Is there no taxes at redemption? Who bears the taxes then? ( i am referring to the Wilsons example in CFAI) II. Family Limited Partnership (FLP) is another alt. that comes into play if the trasferrable interest has appreciated much in value. The DLOC and DLOM applies. However there still is a tax element in this, unlike the estate tax freeze the interest is taxable. My qs. Is if so, when does the tax pay happen? Is at the time of transfer (at a much depreciated value) or at some point in time in future or at the time of parents’ death? Need clarity. Thanks

Regarding your first question , I believe there is tax at redemption. Below is my understanding but I am also doing the best I can with the same material and no practical background on this, so confirmation from other participants would be appreciated.

The point of this kind of structuring is not to avoid any tax. You can’t. The point is just to transfer the assets as early as possible to avoid transferring them when they have grown much in value. At the same time you cannot transfer the assets too early because you need to keep in control and your children are too young to take control over them, or any similar reason.

With this structure, you transfer future growth to them at a time when future growth is not yet accounted for in the valuation for tax purposes. So it is virtually 0. So there is no transfer tax on this.

But the initial value, which is the value of the preferred shares, will be taxed upon transfer and when the preferred shares are redeemed, it is a taxable event.

Who bears the tax? Well depends. If it is a lifetime gratuitous transfer when it happens, then it could be the recipient or the transferor depending on the jurisdiction. If it is a bequeath then it is the recipient obviously.

Preferred shares = initial value

Common shares = future growth

At the time of the bequest, the asset value has grown but the tax only applies to the initial value and not to the total value, as future growth was already transferred earlier at 0 tax.