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.

Benefits of a Family Trust - Part 1

Over the next series of blogs we will begin to talk about some of the benefits of a family trust. Everyone’s family situation is different and although we will talk about the majority of the benefits of a family trust, there are specific benefits that are only used in specific situations. For example we will not be discussing the fact that a trust, when set up properly, can shelter assets for marital purposes in the case that one spouse does not want to bring specific assets into a marriage relationship. This can be done in place of a prenuptial agreement. There are many uses and benefits of a family trust and it is always best to consult with us for your needs.

One of the biggest benefits of a family trust is Asset Protection. By growing assets in a trust, those assets can be protected from claims against the trustees and beneficiaries who will not be considered to be the owners of property in the trust, because the trust will be discretionary such that creditors of the trustees and beneficiaries possibly may not be able to seize, garnishee or otherwise attack such property.

This protection is from future creditors and claims, not pre-existing ones. For example, the transferring of assets into a discretionary trust prior to insolvency or bankruptcy will likely be subject to attack, depending upon the timing of the transfer.

When a trust is holding the assets, they are usually safe if the trustee or beneficiaries are sued for any reason. What you are doing by putting your assets into the trust and becoming the trustee is to “Control the assets without owning them” Typically the only way that someone can put a claim against the trust is if the trust has broken contract or caused damage to someone (an individual or a company). If you don’t use the trust for business purposes or contracts then this should eliminate the possibility of the trust being attacked successfully.

The Trust will hold assets such as:

• Shares of private corporations (ones that you run, or just own shares in)
• Shares of public companies (stocks)
• Real Estate
• Precious Metals (Bullion, etc)
• Investments
• Other valuable assets, or assets that you want to protect

The real key is to set up a trust and get the assets into the trust before a liability arises. It’s like when you buy fire insurance, you need to buy it before the fire…not after! Asset Protection is a major benefit of a family trust, however there are many more benefits that we will discuss in my next blogs!

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.