What Is an Estate Freeze Trust?

An estate freeze trust is an estate planning tool that is used to avoid paying capital gains taxes on a security that will be held for an extended period of time. There are a few different methods that can be used in order to form an estate freeze trust.

One of the most popular methods that is used to create an estate freeze trust uses preferred and common stock. For example, let's say that an investor has a large amount of common stock in a company. They know that the value of the stock will continue to increase over the next several years. If they were to sell the stock in the future, it would create a situation where large capital gains taxes would be due. The investor could then trade their shares of common stock for shares of preferred stock. The common stock would go to a beneficiary that could benefit from the future gains in the stock. The investor would be able to get a certain number of shares of preferred stock that they could keep in the trust. They would then be able to live off of the dividends that are paid to the preferred stockholders.

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