Drawbacks of a Family Trust part 1

Over the last number of blogs we’ve covered many of the benefits of the Family Trust. As you will see after we cover some of the main drawbacks of a trust is that the benefits of a family trust far outweighs the drawbacks!

One of the main drawbacks of a family trust is the cost associated with setting up the family trust. Setting up a family trust requires legal documentation being drafted, thus the majority of the cost is the legal fees to set up the trust. Fees to set up the Family Trust can range anywhere from $2,500 to $8,000, with the average cost being around $5,000 for set up. The fees vary depending on your situation. For example do you need to set up a corporation, set up a holding company, or do you have existing corporations that you want to have the trust own. Although this is costly, keep in mind it is a one time fee. Once it is set up it is quite simple to maintain annually with the major annual cost being the T3 Return filing, which Kustom Design’s T3 prices start at $350 per year. In comparison to the value you get for you and the next generations the price is minimal.

Another drawback of the Family Trust is that CRA has a 21 Year Deemed Disposition Rule. This rule states that a Trust has a Deemed Disposition on assets 21 years after they are acquired, and every 21 years thereafter. The 21 Year Deemed Disposition Rule can be avoided by distributing property to the Beneficiaries before the 21st year or by providing in the Trust that the property will indefeasibly vest in the beneficiaries prior to the deemed disposition.

Another potential issue with Family Trusts is If income is left inside a Trust, the highest marginal tax rate is paid. (Unless it is a Testamentary Trust) Also, in most cases Losses cannot be flowed through like income and gains, however losses can be claimed against Trust Income. Trusts take tax planning to maximize, when used properly they are extremely beneficial and will save you a lot of tax, however if you do not plan properly you may pay more tax.