Getting Assets into and Funding your Family Trust - Part 1

If you’ve been reading the series of blogs on Family Trusts, you should now have a good understanding of the how to set up a trust, the basics of using it, and the benefits and drawbacks associated with having the trust. We will now begin to discuss some of the different ways to get assets into your trust, as well as how to get funds into your trust.

As already discussed, when you are setting up a Family Trust it is best to have someone else settle the trust with a small asset, such as a silver ingot. This is the initial property of the trust and should be the only asset given to the trust without consideration. Typically when assets or funds are put into a trust there should be consideration for the asset or funds. For example if we’re going to put real estate into the trust, there must be consideration to acquire the real estate, such as currency or another form of asset in consideration for the real estate. This is a general rule although there are some small exceptions which are very specific and will not be covered in this blog series.

When putting assets into the trust we must consider the tax consequences. First of all we must understand that all assets going into a trust should be at Fair market Value. Fair Market Value is the current price that the asset would sell for on the open market. For example if it is real estate, you can look at a Market Assessment by a licensed realtor, an appraisal from a licensed appraiser, or sometimes the value on the Property Tax Assessment of the property. This means that if you own the asset that is going to be put into the trust, you will most likely have a disposition that could result in a Capital Gain. Before transactions are made that add property into a trust or take property out of a trust, you must plan for the potential tax consequence. Kustom Design can help you with the planning, but it is up to you to ensure you take the time and book the consultation.

There are 4 main ways that you can get assets or funds into a trust:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Each of these methods are dealt with differently for tax purposes. In the next blogs we will begin to look at each of these ways to get assets and funds into a trust.

Utilizing Shareholder Loans

Shareholder Loans are a powerful tool when you have a private corporation. You may loan your Corporation excess funds that you have and receive it back at anytime tax free. You may also take short term loans out during a fiscal year as long as you pay it back within the year. Another way to use a shareholder loan is to put assets into your corporation. This works similar to selling an asset to the corporation. When an asset is sold to the Corporation, you do not have to take the money right away. In fact the Corporation may need the asset now, but not have the money to purchase it outright. You many sell the asset to the corporation without the corporation paying now, but instead owing you the money later down the road, when it has the money and/or when you need the money. Many people take Shareholder “Draws” out of their Corporation throughout the year and then at the end of the year determine if this shareholder draws are in fact dividends or wages.