The sale process started in January. Preliminary diligence ran through the spring. By June, there was a signed letter of intent. The transaction closed in October at $19 million.
The estate attorney had been recommending a grantor retained annuity trust for three years. The business had been growing. A GRAT funded when the company was worth $6 million and closed at $19 million would have transferred most of that appreciation outside the taxable estate. The technique works by locking in a transfer at a low value: everything that grows above the IRS hurdle rate passes to heirs with no additional gift tax.
The recommendation was deferred. There was always something to finish first. The deal closed before the trust was ever funded.
The $13 million in appreciation went into the estate.
What estate freezes do
An estate freeze transfers the future appreciation of an asset out of the taxable estate at its current value. The estate is frozen at what the asset is worth today. Everything it becomes later belongs to the next generation, not to the estate.
The most common structure is the grantor retained annuity trust. The grantor transfers assets to the trust and receives an annuity back for a fixed term. If the trust assets outperform the IRS hurdle rate. A monthly figure that tracks interest rates, the excess passes to heirs free of gift tax. The taxable gift at funding is calculated as the present value of what remains after the annuity is paid. When the hurdle rate is low and the assets grow quickly, the remainder can be substantial while the gift is nearly zero.
Another structure is the intentionally defective grantor trust. The grantor sells assets to the trust in exchange for a promissory note. Because the trust is structured to be a grantor trust for income tax purposes, the sale does not trigger capital gains. The assets grow inside the trust, outside the taxable estate. The note gets paid back. The spread between the trust’s growth rate and the note’s interest rate passes to heirs without transfer tax.
Both techniques exploit the gap between today’s value and tomorrow’s value. That gap has to exist at the time of funding for the technique to transfer anything.
The window
An estate freeze has a hard timing requirement. The technique captures future appreciation. It does not reach back to capture appreciation that has already occurred.
A business owner whose company is worth $5 million today and $25 million after an acquisition has a $20 million appreciation event. If the freeze is in place before the deal, that $20 million can pass to heirs outside the estate. If the freeze is funded after the acquisition closes, the starting value is $25 million and the freeze captures whatever comes next, but the event that created most of the wealth is already in the estate.
The window is the period between when the asset has a pre-event value and when the liquidity event happens. That window can be years. When a deal is announced or a regulatory filing occurs, the asset’s value reflects the expected outcome immediately. The window closes before the transaction closes.
What the advisors know
The investment banker knows the deal timeline. They know when the letter of intent was signed, when diligence will conclude, when closing is expected. They are managing the transaction.
The estate attorney knows the client’s assets and estate planning situation. They know what techniques are available, what the tax exposure is, and how much of the appreciation a freeze could transfer outside the estate.
The wealth manager knows the portfolio and the concentrated position. They know what the position is worth, how it has grown, and how much of the estate it represents.
None of these advisors, in the standard engagement model, knows what the others know. The banker is not calling the estate attorney with the deal timeline. The estate attorney is not tracking the M&A process. The wealth manager is watching the portfolio but is not part of the estate freeze conversation.
The client talks to all three. Whether the client understands that the M&A timeline is the estate attorney’s most important piece of information is another question.
The calculation that doesn’t happen
The estate freeze analysis requires a projected timeline and a projected value. The timeline comes from the banker. The value comes from the transaction. The estate attorney needs both to know whether there is still a window and how large it is.
Without that information, the estate attorney can recommend the technique in the abstract. They can draft the documents. But the recommendation is generic. The urgency is invisible.
The window that closed in October had been open since January, when the sale process started. It had been open for three years before that, while the business grew from $6 million to the point where the deal made sense. The recommendation was correct throughout. The coordination that would have made the recommendation actionable never happened.
