Covering capital gains tax liabilities on accrued increases in the value of your business shares is one thing. Deferring, in whole or in part, the tax liability is another. A common succession planning technique for dealing with capital gains taxes is the "estate freeze."

An estate freeze is a reorganization of your affairs in which you replace assets that are increasing in value with ones that have a fixed value. Most often, this involves exchanging the common shares of the business for fixed value preferred shares. Your children then subscribe for new common shares. This allows them to participate as owners in the capital appreciation of the shares in the business from the time of the estate freeze onwards. You, on the other hand, have frozen the value of your shares and have therefore, frozen your capital gains tax liability.

You may be able to use your $500,000 capital gains exemption to shield yourself from capital gains taxes on the increased value of the business to the date of the estate freeze. It may also be possible for you to receive a steady flow of dividend income from the business.

An estate freeze is both a tax-deferral method and a way of passing the business to your children. However, there are always other considerations involved with the transfer of a family business from one generation to another. For example, perhaps only one of your children wishes to remain active in the business. In that case, providing fair share inheritances to your other children may become a sensitive issue, particularly when you make the transfer of ownership prior to your death.