A family trust is a type of trust established solely for the benefit of your family. There are two primary reasons you might wish to create a family trust. First, you may wish to obtain a tax advantage. Second, you may wish to distribute assets to your children (who are designated as beneficiaries of the trust) while maintaining control over the assets in a safe harbour environment.
One of the major advantages of a family trust is that it allows you to split income among several beneficiaries instead of reporting all the income personally. Where these beneficiaries have a limited income, their tax rates tend to be substantially lower, thus resulting in a significantly less tax burden. Despite the enactment of the “kiddie tax” rules by the Department of Finance, which has caused many advisors to advise their clients that family trusts are tax neutral at best, a properly structured family trust can continue to deliver this tax benefit. For example, rather than paying for a child’s college or university expenses using after-tax dollars (48% in Alberta), these amounts can be allocated directly from the family trust (the same strategy can be employed using cash from a corporation).
A second major tax advantage involves amplifying the capital gains exemption. The family trust can be used as a method of multiplying your enhanced capital gains exemption. When the qualifying asset is expected to continue increasing in value to the point where the gain will be in excess of your exemption, the asset can be transferred to the family trust. You can claim the exemption when the transfer into the trust occurs. After that, all gains will be attributable to the trust. Instead of realizing the gains, the trust can allocate the gains to your family members, who can each claim the capital gains exemption. In this way, the capital gains exemption can be multiplied by the number of your family members.
Often when an heir receives a large sum of money without the ability to manage it, the money is spent quickly and the person has nothing to show for it. Where there’s concern that such a person may lose their assets – to creditors in a bankruptcy, to an estranged spouse in a marriage breakdown, or to the villains and thugs who prey on those who lack experience and judgment – it may not be desirable to transfer the assets directly to the individual. By transferring the assets to a family trust, you can ensure they remain under separate control and aren’t simply wasted. The funds can be paid out to your heirs as beneficiaries of the trust to satisfy living expenses or to provide a steady income stream. This approach can ensure your assets provide long-term benefit to your family, safe from the risks of both the known unknowns as well as the unknown unknowns.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.