Protecting your farm’s assets is an important step in ensuring the livelihood of your children’s future.
Many tax planning opportunities are available when determining the fate of business assets.
A family trust is one such option.
Used by some as a way to transfer large amounts of money to successors, trusts can also be useful in succession and estate planning.
What is a trust?
It is a contractual arrangement in which a person called the trustee holds legal title to specific property for the benefit of other people, known as the beneficiaries. The person who creates and puts assets into the trust is the settlor.
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Several types of trusts are available, each with their own characteristics and guidelines. When determining which type of trust is appropriate for your situation, consider all succession planning requirements and obtain assistance from a professional.
Considerations
You can use a trust to transfer shares of a farm corporation to your children with few tax consequences, but other assets can also be transferred through a trust, including farmland. This makes trusts applicable to many operations and families.
When assets are in a trust, they are considered separate from the children’s personal assets. In certain circumstances, they may be excluded in claims against children through creditors or divorce, which ensures assets stay within the family.
As well, trusts can allow you to set up restrictions on the use of assets placed in the trust. Children who do not have the capacity to take care of themselves can be protected through asset restrictions, giving you peace of mind about their future.
However, loss of flexibility is a potential downfall associated with trusts. Because they include terms that trustees must follow throughout the life of the trust, changing the terms is not simple. Be careful when setting the terms to ensure all potential transactions and uses of the assets have been considered.
Tax implications
Taxation of trusts is complicated and depends on the type of trust and activity within the trust. However, there are some important tax considerations to remember:
- Trusts are considered a separate legal entity and are taxed as such, requiring additional tax filings.
- Trusts allow for the potential to split income, which can lead to an overall reduction in taxes payable for your family. However, specific tax rules mitigate the ability of splitting income, and families must carefully consider these rules when making decisions.
- Trusts may provide opportunities to access the $750,000 capital gains exemption of multiple family members on the sale of qualified farm property, which could significantly reduce the overall taxes paid on dispositions.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. His opinions do not necessarily reflect the views of The Western Producer. He can be reached at 403-380–5707 or by e-mail at colinmiller@kpmg.ca.
