Many people have heard of family trusts, but are unsure of their purpose. They are a legal entity that can achieve a variety of goals.
The trust may own assets that are held for the beneficiaries of the trust, and the trust is managed by the trustee.
Family trusts can be used for in-come tax purposes to facilitate income-splitting among family members of the revenue generated by an asset.
They can be used to take advantage of the capital gains exemptions of multiple family members, which can be useful when selling a valuable asset.
They can also be used to succession plan a family business.
The trust, rather than the individual, is holding assets so they do not form part of the estate and probate fees can be avoided.
Another advantage to trusts is privacy. If they do not form part of the estate, then the contents do not need to become public information when the will is granted probate.
To take advantage of income splitting between family members, the family trust is often set up as the owner of an income-producing asset. This asset can be a family business, real estate, a large sum of invested money or other asset.
Any income generated by that asset is then apportioned to the beneficiaries of the trust by the trustee.
With planning, income from the asset can be apportioned to the family member with the lowest marginal tax rate, reducing the overall tax bill.
There are also ways to take advantage of the capital gains exemptions of multiple family members, a useful mechanism in the disposition of assets whose value has dramatically increased since acquisition.
Speak to an accountant or financial planner to determine if a family trust is an appropriate tool for you. The makeup of your assets, your future financial plans, and even the makeup of your family are factors that will help determine the appropriateness of this tool.
You will also want to examine the possible usefulness of trusts in your will, as part of your broader estate plan.
The costs of operating a family trust include an annual tax return because it counts as its own entity for income tax purposes, as well as the initial legal and accounting work to establish it.
There are also rules governing the “deemed disposition” of the asset every 21 years, making the tax owing on its increase in value due at that time. Those income tax rules should be kept in mind at the time of setting up the trust.
If you decide to proceed with setting up a family trust, have your accountant or financial adviser contact your lawyer with the appropriate suggestions and necessary instructions.