Michael owns 100% of the common shares of a successful manufacturing company, 'Alpha Inc.', which he started 20 years ago. Its current value is $5,000,000, and it is expected to grow significantly. He wants to transition ownership to his children while minimizing future estate taxes. Which type of share would Michael typically retain in an estate freeze transaction?

Question: Michael owns 100% of the common shares of a successful manufacturing company, 'Alpha Inc.', which he started 20 years ago. Its current value is $5,000,000, and it is expected to grow significantly. He wants to transition ownership to his children while minimizing future estate taxes. Which type of share would Michael typically retain in an estate freeze transaction?

Answer options:

• New common shares with no fixed value. ✅ Redeemable preferred shares with a redemption value equal to the current fair market value of his common shares.
• Non-voting common shares that participate in future growth.
• A combination of common and preferred shares with no specific redemption features.

Correct answer: Redeemable preferred shares with a redemption value equal to the current fair market value of his common shares.

Explanation: In an estate freeze, the existing common shares are exchanged for new 'freeze' preferred shares, typically with a redemption value equal to the current FMV of the common shares. This freezes Michael's wealth, allowing future growth to accrue to new common shares issued to his children.