What Are Family Trusts, and Why Are They Useful to Business Owners in Canada?
family trusts and business
What Are Family Trusts, and Why Are They Useful to Business Owners in Canada?
DISCLAIMER
This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision.
IN THIS ARTICLE, WE’LL COVER THE FOLLOWING TOPICS:
What is a family trust?
How does a family trust work?
Why are family trusts useful?
When are family trusts needed for a family-held corporation?
What is an “estate freeze”?
What happens to a family trust if the family-held corporation gets sued or a dispute arises within the corporation?
What is a family trust?
A family trust has a “settlor” who creates the trust, a trustee(s) who manage the trust, and beneficiaries who may receive trust distributions, generally at the discretion of the trustee(s).
A family trust is a structure that facilitates the distribution of wealth to the beneficiaries that are named inside of a trust agreement. So, typically this is going to be your children, your grandchildren, your spouse, and other persons that you name as beneficiaries. This could also include a holding corporation.
How does a family trust work?
A trust agreement is established whereby a trustee is given the power to manage and then distribute the funds that are contained within the trusts to the beneficiaries.
The trustee is responsible for distributing the assets that are contained within their trusts and typically will have wide or even absolute discretion over who receives what amount, and when.
If you have more money than you need to use during your lifetime and you would like to distribute your wealth to the next generation, a family trust (also known as an inter vivos trust) can be a useful mechanism for achieving that outcome.
When are family trusts useful?
A family trust can be a useful mechanism for drawing out excess capital from an operating company in order to retain the operating company’s eligibility for the lifetime capital gains exemption (LCGE).
Without a family trust, entrepreneurs are often stuck with stripping out gains to a holding company through dividends. Operating companies that are owned by holding companies are not eligible for the LCGE.
Additionally, there may be opportunities for multiplying the lifetime capital gains exemption (LCGE) through the use of a family trust.
Establishing a trust can be particularly useful if you have children or grandchildren that perhaps you have a strained relationship with. Maybe you don’t fully trust your children or grandchildren to have a good relationship with money or they have other disabilities that prevent them from being appropriate stewards of the funds.
When are family trusts needed for a family corporation?
A family trust can be used to hold shares of a privately held family corporation.
So instead of having children or grandchildren be shareholders of the family corporation, a family trust can be used to hold the shares in the corporation.
This would permit income that comes from the family corporation to be held within the family trust.
That income is then distributed to the children or the grandchildren per the terms of the trust agreement (or namely the trustees).
Typically the trustee is going to be the same person who built the family corporation themselves, this can be a much more advantageous way of retaining more control over the family assets because the family corporation when you introduce new shareholders then,
of course, the shareholders will often have some say in the management and day to day operations of the corporation.
Additionally, shareholders of a privately held corporation are also gonna be receiving dividends and dividends have to be paid out per the by-laws or the articles of the corporation.
Using the family trust structure instead allows the trustee to retain absolute discretion over who receives what and when.
What is an estate freeze?
A family trust can be brought in as a shareholder of a privately held corporation through something called an estate freeze.
Estate freezes allow you to transfer your business to the next generation without incurring any capital gains taxes, all while retaining control of the business and maintaining a steady stream of income for your retirement.
What happens to a family trust if the family corporation gets sued or separated?
In the event that a creditor or another person sues a beneficiary, they are not going to be able to come after the assets that are held in the family trust for the benefit of the beneficiary.
This may also be helpful in the event of a marital breakdown as the assets are held for the benefit of the beneficiaries.
The beneficiaries do not legally own the assets that are held within the family trusts so, in the event of a separation, the assets that are held within the trust may not become subject to a division under a separation agreement provided that the trustee has full discretion over how to distribute the assets.
If the beneficiaries have any degree of power over how the trustee distributes the assets, then those amounts can be drawn out by creditors or be deemed family property.
What are the tax benefits of a family trust?
There may be other significant tax benefits to having a family trust.
First, the assets that are held within a family trust do not form a part of your estate which means they are not going to be subject to probate fees.
Probate fees amount to 1.4 percent of the total assets.
Secondly, the multiplication of the lifetime capital gains exemption can be used through a family trust structure.
A family trust lawyer can provide invaluable assistance to those who are looking to manage and protect their assets. Through the creation of trusts, our lawyers can help individuals safeguard their wealth and maintain financial security for generations to come. With the right advice and guidance, setting up a trust with the help of one of our family trust lawyers can be a great way to protect the assets that you have built up over your lifetime.
Want to learn more about family trusts? Our family trust lawyers are here to guide you. It is one of the many services we provide. CONTACT US
