Benefits of a Family Trust - Part 2

Income splitting is another major benefit of having a family trust. When tax planning you want to have the lowest household income, and income splitting is a very important tool to minimize your taxes. Income splitting allows lower income earners to receive additional income at a lower marginal tax rate. In a trust, dividend income can be split between beneficiaries. So if dividends come into the trust, they can be distributed between all beneficiaries. However, with respect to dividends from corporations that are not listed on a prescribed stock exchange, they must be allocated to beneficiaries who have reached the age of majority, which is 18 in Alberta. Interest income that comes into the trust may also be split amongst beneficiaries as well.

The other type of passive income that a trust may receive is Capital Gains, and typically they cannot split between spouses and family members after the fact. To split Capital Gains without a trust the individuals that want to split the gain in the end have to jointly purchase the asset. This can be an issue in tax planning as you don’t always know what income brackets the joint individuals will be in when they sell the asset, or one of the individuals may not have the funds to acquire the asset. However, with a trust you can split the Capital Gain amongst the beneficiaries after the sale of an asset. This is key in tax planning as Capital Gains can be large and are typically claimed by individuals who are in higher income brackets as they originally purchased the asset.

Not only can you split the Capital Gain among the beneficiaries of a trust, but if the Capital Gain is eligible for the Capital Gains Exemption (currently $750,000 lifetime exemption) you may also utilize any or all of the trusts’ beneficiaries Capital Gains Exemption. On top of this, the trust also has its own Capital Gains Exemption of $750,000. So if you had sold the qualifying shares of your Corporation, qualifying farming property, or qualifying fishing property then you could receive Millions of dollars in tax free Capital Gains!

So as you can see tax planning with a family trust gives you a major advantage in income splitting. Remember that tax planning should be done throughout the year so please do come in to plan with us at Kustom Design. Our goal is to save you more than you pay us in accounting and/or tax preparation fees, and we typically save you a lot more! Watch for my next blogs as we continue to discuss the benefits of a family trust.