Why set up a family trust?

A family trust is established when legal title to property is transferred by a person (the “settlor”) to a trust, that is created for a particular purpose. A wide variety of assets can be held by family trusts, including real estate, cash, a portfolio of securities such as shares, bonds and mutual funds, and the shares of privately held corporations.

Once the assets are transferred to the trust, they are then administered by one or more trustees for the benefit of the beneficiaries, who have an interest in the trust’s property and/or income. The beneficiaries may be individually listed when the trust is formed, or may be identified later as part of a specified group (such as “children” or “grandchildren”).

The settlor and trustees execute a trust deed evidencing the settlor’s intention to create the trust, as well as setting out the rights, duties, and obligations of the trustees, and the principles governing the trust.

Once the assets are transferred to a trust, they are legally separate and distinct from the assets of the settlor, trustees and beneficiaries.

Potential Benefits of using Family Trusts

Income Splitting:

  • The owner/manager of a business who would like to split income with a spouse and adult children with low incomes (for example, university students) in order to reduce taxes.
  • For those who own significant investment assets or have an investment corporation, family trusts can be used to split income from the investment assets or corporation among adult children.
  • A Family Trust can be a tax-effective way to provide for a former spouse and/or children of a previous marriage.
  • A Family Trust can be a tax-effective vehicle for providing for elderly parents or other adult relatives who require financial support.

Succession Planning:
For an owner of a business with children who may or may not be interested in becoming active shareholders, Family Trusts can be a very useful succession-planning tool, providing a vehicle for ongoing management and control of the business. In this case, the trustees of the Family Trust could hold the shares of the corporation for the benefit of the entire family until the succession of the business has been determined.

Creditor Proofing:
For someone who is concerned about possible financial difficulties in the future, a Family Trust can help to provide creditor proofing and financial security for his or her family.

If all income and capital distributions are at the discretion of the trustees, the beneficiaries’ creditors generally cannot seize any of the Family Trust’s assets. In addition, under an appropriately established Family Trust, the Trust may help to provide some protection of assets from future marital property claims involving a beneficiary.

Tax Planning for the sale of a business:
Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of the shares of a Canadian business. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust.

Reduction of taxes on death:
A Family Trust could be used as a means of transferring the growth in the value of a family business to the next generation on a tax-deferred basis.

Support for Elderly or Special Needs Individuals:
A Family Trust can be an effective way to provide for their ongoing financial needs.

By holding assets in a family trust the above benefits can be achieved while the trustees maintain full control (subject to their fiduciary duties as trustees) over the trust property. It is important to note that it is the trustees who control the trust property and not the settlor. The settlor, however, sets the terms of the trust in the trust deed and the trustees are bound to act according to the terms of the trust deed as well as general trust law. In addition, the settlor can be a trustee of the family Trust.

Notice: While family trusts offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.


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