Benefits of Family Trusts

May 9, 2013
by Jared Cross, C.P.A, C.G.A
What is a family trust? 
A family trust is usually an inter vivos discretionary trust established during your lifetime. It may also be a testamentary trust which is established upon your death within the terms of your Will.  

Family trusts allow owners to share the prosperity and growth of their company with their families while still maintaining control over the operations.  It is the responsibility of one person to hold property for the benefit of another person(s).  

Testamentary trusts are subject to graduated tax rates applicable to ordinary individuals,and inter vivos trusts are taxed at the top marginal rate on any income notdispersed to the beneficiaries. The distributions would then be reported on the tax return of the individual beneficiary and taxed at their applicable marginal tax rate.  

 
What does discretionary mean?
 
When a trust is discretionary, the Trustee has the discretion to determine how, when, and in what amount income distributions and capital distributions are made to each beneficiary. The Trustee will exercise his or her discretion based on the changing circumstances, as guided by the terms of the “Trust Deed”.  
 
Why use a family trust?

A family trust allows the owner of a company flexibility for tax planning opportunities both in the present and the future.  

An owner of a company can set up a discretionary trust whereby the Trustee will hold the voting shares of the Corporation, for the benefit of the beneficiary. The Trustee can also decide on appropriate distributions to the beneficiary in the future.  

In this way, a family trust can be beneficial in circumstances where it would be inappropriate to give control of the business to a minor child, or to a person not able to make decisions regarding the business at this point in time. A family trust can aid in estate planning because any property that is transmitted through a trust can avoid the payment of probate fees.  

There are minimal attribution rules with Trusts so the Trustee can distribute income earned by the Trust to any beneficiary that he/she sees fit, this allows for income splitting to any adult beneficiary. Keep in mind, all income from the Trust must be distributed to beneficiaries in the year that it is earned as any remaining income not distributed will be taxed at the highest marginal rate.  

How does a family trust work?
1. First a Settlor is determined to establish the Trust  

The settlor is the person who creates or “settles” the trust. This will typically be a close family friend or relative and can not be a beneficiary of the Trust; they must also be a legal adult. It is the settlor who lays out in the trust deed who will be responsible for the assets of the Trust (Trustee) and who will be eligible to receive any benefit from the trust (Beneficiaries).  

2. Next the settlor appoints the Trustee  

The Trustee is usually the shareholder of the corporation before the trust is established. Once theTrust is established as “Trustee” he or she remains as legal title holder of the shares of the Corporations.  

3. Finally income is distributed to the Beneficiaries  

Typically the beneficiaries of the Trust include the trustee, their spouse and their dependents. The Trustee then decides to distribute the income of the trust to each beneficiary based on the current circumstances as guided by the terms of the “Trust Deed”.

 
Our trust services can help you ensure that your trust account is compliant with Canadian tax law and regulations. For more information on Family Trusts or to discuss setting up a new Family Trust, please do not hesitate to contact our office.