Getting Money and Assets out of a Trust part 1

Ultimately the Trustee is in control of what happens with the assets of a trust. We’ve already discussed assets and money going into a trust. A trust may retain the assets or the income or it may distribute the assets and income to beneficiaries at the trustee’s discretion. Many people use family trusts to flow through income to beneficiaries while holding assets such as shares or real estate.

A trust is very effective in flowing income through to beneficiaries. When income is distributed to beneficiaries it can typically retain the characteristics of the way it came in. For example if the trust receives dividend income, then the trust may flow dividends to the beneficiaries. If the trust receives capital gains income, it could also flow capital gains to the beneficiaries. Since this income is not retained by the trust the trust will not be taxed on the income. The income distribution is reported on a T3 Slip and the tax is calculated on the tax return of the beneficiary. This is of course very beneficial for tax planning!

A trust may also give loans. In many cases a trust would not loan to a trustee or beneficiary of the trust, as always consult with professionals when considering major transactions. Loaning funds to and from a trust can be an effective strategy. A trust that has capital may provide a mortgage to a corporation to buy a property. A trust that has capital may provide a loan to another entity to make an investment. There are many effective examples of trusts providing loans to build more Wealth.

If a trustee wanted money from the trust they may charge a Trustee’s Fee for overseeing the affairs of the trust. This, as with everything else the trustee does, should be in the best interest of the beneficiaries as the trustee has the fiduciary responsibility to the beneficiaries. A trust may also pay for tuition and education for the benefit of a beneficiary who is a minor and it will be considered a payment from the trust to the beneficiary.

In my next blog we will look at more ways to get money and assets out of a trust.

Getting Assets into and funding your Family Trust – Part 3

We have been discussing the 4 main ways that you can get assets or funds into a trust and each of them are dealt with differently for tax purposes:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

We’ve now gone deeper into #1 and #2, so let’s now discuss the other 2.

Similarly to gifting to a trust, when the trust is purchasing an asset in an arm’s length transaction it should purchase the asset at Fair Market Value. We’ve already discussed Fair Market Value in a prior blog, however “arm’s length” is another term we must become familiar with. Some examples of an arm’s length purchase by the trust would include purchasing assets from the Trustee, the beneficiaries, the settler or a corporation that the trust has ownership of. If the asset is purchased by the trust in a non arm’s length transaction then the Fair Market Value is not important and we can just deal with the asset at the actual purchase price.

When you are selling assets to a trust, similarly to other sales, cash is not the only form of payment that can be used. For example the trust could give a promissory note, another asset such as shares, or a combination of assets and promissory note. The same rules for the promissory note that we discussed in prior blogs would apply when it comes to interest and payments. As always with specific transactions of your trust it is best to seek Professional advice, Kustom Design is here to work with you for all your financial, accounting, tax and structuring needs.

The other main way to get assets into a trust is to simply receive income from business and/or investments. Typically the businesses and investments that the trust is receiving income from are owned by the trust. Trusts would typically receive non active income, such as dividends, interest or capital gains from these businesses and or investments.

Benefits of a Family Trust - Part 4

As we are learning there are many benefits to setting up a Family Trust. Today we will wrap up the benefits of a family trust, however we will continue this blog series on the Family Trust, including areas such as drawbacks of a family trust, how to get funds and/or assets into a trust and how to get funds/assets out of a trust. As we wrap up this section on the benefits of a Family Trust, please keep in mind that there are even more benefits than what we’ve discussed here and you should consult with us further in regards to your needs.

Another benefit of using a Family Trust is that you can multiply the Capital Gains Exemption. Currently in Canada we all have a Lifetime Capital Gains Exemption of $750,000. This lifetime Capital Gains Exemption does not have to be used at once, but is cumulative throughout your lifetime. Although we discuss this in another blog, the Capital Gains Exemption means you are exempt on the sale of qualified small business shares, qualified farm property and qualified fishing property. Each beneficiary of the trust has a Lifetime Capital Gains Exemption of $750,000. The Family Trust also has its own $750,000 Capital Gains Exemption. So if you were to sell the shares of a corporation that is owned by the Family Trust, it may be possible to make millions of dollars in gains and pay little to no tax by splitting the Capital Gain amongst the beneficiaries and leaving some in the trust. Many people build a company and sell it, the Family Trust is very beneficial in the tax planning for the building and selling your Corporation.

Yet another benefit of having a Family Trust is that you can own shares of multiple Corporations, and if structured properly you may be able to make it so your Corporations are structured in a way that they are not associated corporations. Corporations can make up to $500,000 in net income before paying very much tax (currently 14% total in Alberta), this is due to the small business deduction. When you own multiple Corporations with the same ownership you may only be able to make up to $500,000 in net income amongst all the Corporations before paying a higher tax rate as they can be deemed “Associated Corporations” However, with proper structuring it may be possible for each of the corporations to not be associated, thus allowing each of them to make up to $500,000 net paying low tax.

One more benefit I’ll share with you is that a Family Trust is a great way to pass on the use of assets to the next generation tax free. Because a Family Trust stays “Living” there is no deemed disposition upon death of the settler, trustee or beneficiaries. The reason why people are taxed so high when they pass away is due to deemed disposition. This means that all gains and income on your assets is all taxed together the day you pass away. Because a Trust stays “Living” the assets remain in the trust. To allow the next generation to have access to and use the assets in the trust you can simply make them the next trustee of the trust. You may also set up specific clauses in the trust agreement (deed or amendments) that make up rules for the next generation.

If you want to know more about how a family trust can help you, please contact us!

Benefits of a Family Trust - Part 3

As you are starting to realize from this blog series on Family Trusts, there are some great benefits to setting up a Family Trust! We will continue to discuss more benefits of a family trust, however these benefits can be tailored to meet your needs so do come and consult with us for further clarification on family trusts.

Another Benefit of having a family trust is the privacy factor. The assets of a trust are typically described as being owned by the trust. For example, the records of a Corporation will state that its shares are owned by a trust, as opposed to being owned/held by an individual. Further, the trustee of a trust can be a numbered corporation. Also, the trust can have any name such as “The Rock” instead of “X Family Trust”

You can also use a Family Trust as an alternative to a will. A will should still be done, however none of the assets owned by the trust will have to be included in the will, thus avoiding probate! The more assets you can get into the trust, the less that will have to be dealt with through the will and probate when you pass away. By using a trust, there is a reduced risk of legal challenges that are often faced by wills. Some examples include undue influence, lack of capacity and “greedy relatives”. Because the assets of the trust would not be subject to the will of anyone, those assets will not be listed or described in any court document. A will, to some extent, becomes a public document when it becomes a court document during and after the proceedings for probating a will.

A Family Trust may also be used as an alternative to Power of Attorney. In the unforeseen event that the trustee becomes incapable of dealing with the trust property, a replacement trustee could take over the role of trustee. This alternative provides more administrative ease and dignity to the trustee in the event of incapacity than would someone else obtaining a power of attorney that would be needed to deal with the property of the trustee during his lifetime (absent a trust). A Family Trust makes asset transition much more private and tax advantageous. A Family Trust allows us to plan as a family and plan generationally!

An Introduction to the Family Trust, Part 3

Now that we have a basic understanding of what a trust is, who is involved and why you may want to set up a trust, let’s now look at actually setting one up. To set up a trust you will typically deal with a tax lawyer who understands Trust law well. We use Squire Law Firm to handle all of our clients Trust set ups. The typical requirements that you will have to have the answers for setting up a trust are:

1. Who will be the beneficiaries of the trust?
2. Who will be the initial trustee(s) of the trust?
3. The home address of each trustee.
4. The name of the trust.
5. The name and home address of the settler.
6. The name of an individual or two who will appoint a trustee in the event that a sole trustee dies.
7. The legal name of your favorite national or international charity.
8. Do you currently have Corporations and/or other assets that you would like the trust to own?

One of the other things that may come up is if you want to have the trust set up as a discretionary trust or a non-discretionary trust. A discretionary trust gives the trustee full discretion to allocate income and assets among the beneficiaries. In a non-discretionary trust the parameters for income and asset distribution are typically laid out in the trust deed. For example you may have it written in the trust deed that the income from the trust should always be split evenly between the beneficiaries. Discretionary trusts are what most people should set up, unless there is a particular reason to set up a non- discretionary trust.

Once you have all of this information you are ready to have the trust set up. The cost to setting up the trust is typically anywhere between $3,000 and $7,000. The average cost is $5,000 so that is a number that you can look at for budgeting purposes. When you have submitted all the details for the trust, a trust deed will be set up. The trust deed governs the trust, which, as we stated in the first lesson, is a contractual relationship between the Settlor, Trustee(s) and beneficiaries. Once the Trust is setup, the annual maintenance of it, which is mostly just the T3 Trust Tax Return, is typically around $350 to $500 per year. So, although it may be expensive to set up, it is quite inexpensive to maintain.

On my next blogs I will begin to discuss some of the benefits of having a family trust!

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.