As mentioned in our last CV TrustCo blog, we will discuss what is left after the federal government’s July 18th tax proposals.  Using a Canadian Controlled Private Corporation may lose some of its tax advantages.  However, Trusts have survived.  This blog will highlight the benefits of holding assets in a Trust and how a Trust can facilitate long term family planning.  

(Trust and Estate law, Family law, and Tax law are all minefields in their own right, and increasing areas in family litigation.  This CV TrustCo blog discusses Trusts and concepts at a very high level, so please read and appreciate accordingly. )

How long can a Trust last?

Trusts can last for a long time.  The rule against perpetuities forbids trusts from holding property for too long past the life of the person who created the Trust. In BC, this rule ensures that a Trust can last for no longer than 80 years from the day it is created; other provinces have different terms.  A BC Trust created in 2017 can’t last past 2097 – which is long enough for three generations to benefit.  (Note that a Trust pays tax every 21 years on its prior gains, but that’s a Federal tax rule, and not a Trust rule.)

A wise man once told me

A good friend of mine, who is a renowned trust and estate lawyer recently told me that a Trust is simply a management tool.  A corporation, partnership and a Trust are all management tools designed to meet specific needs. So, what specific needs does a Trust satisfy?  How about:

  • The inter-generational transfer of wealth.
  • Discretion amongst family members.
  • Protection from creditors.
  • Tax minimization.

Intergenerational transfer of wealth

Property held in a Trust can span generations.  Let’s say I created a Trust in 2017 for my children and their children, and settled $1M in cash to the Trust.  The $1M is no longer mine and can be invested by the Trust for the benefit of my children and grandchildren – it has come out of my estate into theirs.  As the settlement was cash, the transfer to the Trust is tax free and all future income earned on the invested funds is taxed either in the Trust or the beneficiary’s hands – more on tax later.

We will expand on this and other benefits of a Trust to transfer “wealth”, both financial and other, to subsequent generations in an upcoming blog.

Discretion amongst family members

Trust beneficiaries can either be discretionary or non-discretionary both of in terms of income and capital.  A fully discretionary Trust can distribute income and/or capital at the full discretion of the trustees.  So, for 80 years, the trustees can use their absolute discretion to distribute income and capital to all or certain of the Trust’s beneficiaries to the exclusion of others.  Talk about ruling from the grave!

Protection from creditors

The question is: if I am a discretionary beneficiary of a Trust, what do I have?  If I only am entitled to Trust property at the absolute discretion of my trustees, I may not have anything until the trustees permit.

If a creditor starts a claim against a discretionary beneficiary’s interest in a Trust, what can they claim against?  A creditor can arise from personal claims such as marital breakdown, family disputes, and commercial debt obligations, to name a few.  If litigated, it is likely that the beneficiary is in a better position than if they held the asset personally.  Again, Trust litigation is a minefield.

As mentioned in a previous blog, for a trust to work properly, it must be properly administered together with complete documentation and with the independence of trustees.

Tax minimization

Tax paid assets transferred to a Trust do not attract tax.  If the asset to be transferred to a Trust has an inherent gain, say shares of a company, an estate freeze transaction can be undertaken to defer the tax on the gain (see our previous blog series).

Tax paid or tax deferred, a Trust takes the future tax burden out of the Trust settlor’s hands and transfers that liability to the next generation(s).  To ensure tax is not indefinitely postponed, Canada requires that tax is paid on past gains every 21 years.  Run some numbers based on your age and the benefit will become crystal clear.

Also, probate fees should not be payable as the Trust, and not you, owns the assets.

Families, like the Trudeau’s, have long been using Trusts to protect their family from outside parties and, more importantly, themselves, ensuring their family legacy survives multiple generations.  I don’t think Justin will mess with this – in CV TrustCo’s view, Trusts are safe.