We had a great response to our last article, Planning with Trusts as we Age, which discussed some of the benefits of using trusts beyond the age of 65. We received many great questions as well – the most common of which is when (if at all) is it a good time to set up a trust earlier in life.
Considerations for setting up a family trust
To clarify, a trust set up during one’s lifetime is called an inter-vivos trust, as opposed to a trust created in your will, a testamentary trust. also, the terms “inter-vivos trust” and “family trust” are used interchangeably – we call both a “family trust”. A family trust can be set up with as much or as little discretionary power given to trustee(s) as desired. But keep in mind, the more discretion a trustee has, the more flexibility there is to take advantage of certain beneficial tax opportunities, family planning, etc.
There are several reasons and benefits to setting up a family trust earlier in one’s lifetime. Is there a specific time that’s better than another? One of the many answers can be found in our first article of a four-part series on Estate Freezes from about a year ago; the question posed there was “how rich do I need to be to set up a family trust?” In this context, a typical person starts a business, incorporates, and achieves some form of financial success. At some point, the planning conversation centres around the ability to fix a chunk of one’s tax bill (freeze) on their demise, and of shifting future wealth to one’s family – that is where a family trust can play a part in an estate freeze.
However, there can be other times in one’s entrepreneurial career to set up a family trust.
If you are an owner in a business, it can be beneficial to have the shares be owned by a family trust instead of yourself personally. What if you are an employee who is part of your company’s succession plan and are negotiating to start buying into the company? Having the family trust being the one buying the shares of a business would allow some tax efficiencies such as potentially splitting any dividends received from the company among the beneficiaries of the family trust who are of the age of majority.
Alternatively, if there are capital gains earned in the family trust, either through the sale of business shares, or from a stock portfolio or other capital assets owned by the family trust, these capital gains can be attributed to beneficiaries. These funds, instead of actually being paid directly to a beneficiary, can be paid to others on their behalf (tuition fees, child care costs, sports clubs or other extracurricular activities, etc.). Of course, proper records identifying all aspects of the payment are necessary.
There is some additional administrative work involved in all of this – additional tax returns (for the family trust, and potentially for any beneficiary not already filing returns), and slips to be prepared, proper records to be kept, etc., to ensure that the family trust is treated as an actual family trust, and not seen as a tax avoidance vehicle by Canada Revenue Agency.
Additional benefits of a family trust include:
Privacy – the family trust deed is a private document whereas a probated will is a public document.
Probate fees – On one’s death, any assets owned by a family trust do not pass through probate. Probate savings would be $14 of tax for each $1,000 of value.
Litigation risk – if someone is ultimately unhappy with how you’ve treated them in your will, the assets owned by the family trust should not be subject to wills variation. Through the family trust, the trustee(s) are able to deal with the family trust’s assets at their discretion.
There are many caveats involved in setting up and using family trusts that may put all your planning in jeopardy, such as ensuring that the person setting up (“settling”) the family trust is not a beneficiary and does not benefit from the family trust in any way. Also, in order to have funds to buy assets in the first place, loans have to be properly papered and interest paid.
On the soft-issue side, family trusts are a great vehicle to help transition wealth to future generations and can be used as a learning and management tool to help prepare kids for inheritances and sustaining family legacies.
While family trusts can be a great vehicle to help steward wealth to the next generation and can also provide tax and estate planning benefits, there are many technical nuances surrounding them, so please be sure to speak to your professional advisors before deciding if it’s right for you.
CV TrustCo brings an independent and informed perspective on trust and estate planning combined with the security of a regulated trust company.
CV TrustCo’s team of seasoned professionals work with you and your advisors to design and execute a tailored estate plan. CV TrustCo provides a range of fiduciary services and can act as the executor and trustee of your legacy, carrying out your estate plan as you intended.
The result: you will have a clear understanding of your options, a practical plan for your legacy, and the security and reliability of a financial institution acting as your power of attorney, executor and trustee.
Our estate planning posts consider estate planning issues at a high level. Before you commence any form of estate planning, please consult with tax and legal advisors