An Introduction to the Family Trust, Part 2

In “An Introduction to the Family Trust – Pt. 1” we reviewed each of the 3 parties that constitute every trust relationship. Here is a simple example of what a trust relationship could look like: Bill and Amy are friends and they have another friend Sheila. One day Bill asks Amy if she will be seeing Sheila soon, and Amy states that she is going to see Sheila tonight. Bill says great and asks Amy if she would mind getting a digital recorder to her and Amy says sure, she would give it to her when she sees her tonight. So Bill gives Amy the digital recorder to give to Sheila. Amy has the digital recorder in her possession for the day and in the evening she gives it to Sheila. In this case Bill is the “Settlor” Amy is the “Trustee” and Sheila is the “Beneficiary”. This is a simple example but it allows us to understand a trust relationship. Let’s now talk about the original “Trust Property” that will be settled into a family trust. The trust property should be a non-income producing property such as a serially numbered silver ingot. The settler must use his or her own funds to purchase the initial property of the trust. Preferably, a personal cheque is used by the settler to purchase the ingot so that a copy of the cheque can be kept by the trustee along with the ingot. Once the settler has settled the trust property into the trust and signed the trust deed their job is done. The creation date of the trust can be dated from the time the settler gives the initial property to the trustee. Unfortunately you cannot backdate the creation date of the trust. The trust can be named whatever you want as there can be more than one trust with the same name, unlike Corporations.

There are 4 main reasons why you would want to set up a family trust:

1. You own or will own shares of Private Corporations
2. You have or will have significant investments and/or assets
3. You want protection from potential future creditors
4. You have specific assets and instructions you want to pass on to the next generation

In the next weeks we will continue to introduce you to the family trust and go deeper into the understanding and use of the family trust!

An Introduction to the Family Trust, Part 1

A family trust is a relationship created by a contract whereby the “settler” gives property to the “trustee” to manage for the benefit of the “beneficiaries”. As you can see from this opening definition there are 3 parties to a trust and we will now give you a basic understanding of each of them.

1. Settlor: The settler, also called a Grantor by some, will transfer property to the trustee to create the family trust. The settler must be a Canadian resident and should not ever be a beneficiary or trustee of the trust as this could incur attribution, which we will talk about in future blogs. Oftentimes, the person wanting to have a trust set up will select a family friend to be the settler.

2. Trustee: There must at least one trustee, but you may have more than one, who will deal with the property of the trust in a “duty of care” capacity for the benefit of the beneficiaries of the trust. The trustee is under fiduciary obligation to manage the trust property in the best interest of the beneficiaries. For practical reasons, most trusts have only one trustee, which is usually the person that wanted to have a trust created in the first place. Sometimes there is more than one trustee, such as a husband and wife, or sometimes a corporation may even be the trustee. It is also important to appoint the next trustee in the case that the current trustee dies.

3. Beneficiaries: Usually the beneficiaries are set up to be the eldest standing family members and the descendants of each of them along with the spouses of all those individuals. This is easier than listing each and every family member, of which you may forget some. The trustee may also be a beneficiary of the trust. It is possible that beneficiaries cannot be deleted or added in the future, thus careful selection of beneficiaries is important when drafting the trust deed. There is not necessarily an obligation to make payments to or for the benefit of any beneficiary. In fact, many beneficiaries may never end up knowing they are a beneficiary of a trust unless they receive a distribution or payment from the trust. You are not required to let anyone know they are a beneficiary. In some cases it makes sense to add God-children and others as beneficiaries as well.

Please see my next blog as we will continue to introduce you to the family trust.