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Estate Planning 101 : What is a Family Trust?

Most of us dream of generational wealth of some form or another.  If one generation is able to amass a higher net worth, with the right tools that can then become generational wealth. This may be a smaller pool of money, or it may become a pool large enough to outlast several generations. In any event, the money is structured and set up in a way to support subsequent generations moving forward. 

Depending on how much wealth you’re looking to divide amongst your family, a family trust can be a smart way to arrange your affairs.  A family trusts allows you and the people you trust to serve as trustees, who are the ones responsible for administering the assets of the trust and making strategic decisions to grow wealth. When the time comes to pass that wealth on, your beneficiaries named in the trust benefit from your smart decisions and do so in a way that may reduce the taxes owed by your estate.

How do family trusts work in Canada? Here’s a quick overview. 

How do family trusts operate?

In any trust, an asset is held for someone’s benefit. In a family trust, the settlor – the person who sets up the trust – can place a certain amount of their assets (i.e., money, real estate holdings, etc.) into the trust that has been set up, and then, if they wish, can step back entirely.

The family trust is run by its trustees, of which the settlor can be one, who operate the trusts. The trustees are responsible for maintaining and growing the trust, as well as disbursing funds to the beneficiaries. For example, if there are investments within the trust’s assets, they’re the ones who help ensure those investments are sound. Trustees should be responsible individuals, and while they can be family members, they can also include an external accountant or financial planner. 

The trustees have additional administrative responsibilities as well. They not only manage and make decisions but are also responsible for record keeping and any tax filings. They may also be required to update the beneficiaries regularly on the status of the assets, and they’re responsible for filing the trust’s annual tax returns. 

Lastly there are the beneficiaries of the family trust. The beneficiaries need to be listed at the time that the trust is set up, and they are ultimately the ones who will benefit from the trust’s assets and growth. The trustees have a duty to act in the beneficiaries’ best interests, so those best interests need to be considered in every decision made about the trust’s assets.

The benefit of family trusts

If you only have a small estate to leave to your descendants, or if you intend on spending all your money within your lifetime, a family trust won’t be of much benefit. However, if you have assets that you would like to pass along, then a family trust can help ensure that those assets are passed on smoothly without getting eaten up by taxes. 

Family trusts mean the assets are controlled by the trust, and so it’s the trust that earns any capital gains on its assets. As the assets are not owned by any person, this insulates them from both Capital Gains Tax and Estate Administration Tax that would be owed upon the settlor’s death. Family trusts can also be used to hold assets, which means they cannot be claimed by creditors in case there is a judgment against the settlor. 

Most notably, though, these trusts are used for the benefit of children, grandchildren, and even great grandchildren. Instead of leaving wealth to these descendants all at once and placing the burden on them to figure things out, a family trust can pass down assets at set intervals with absolute precision. 

When are family trusts helpful?

Family trusts can be a key element of estate planning. Along with crafting a will and powers of attorney, trusts can take things a step beyond, and ensure that you’re planning not just for your immediate survivors but for generations to come. It can also be a way to allocate assets to those who may be in need.

Family trusts are usually used as a tax planning method, because while the trust itself may pay taxes at the top marginal tax rates, the trustee’s beneficiaries are taxed on whatever they receive at their respective marginal tax rates, which can be significantly lower. There are other taxation benefits as well, such as relying on Lifetime Capital Gains Exemptions and corporate tax rates (if a corporation is a beneficiary) to help lower the tax burden. 

You may not be familiar with family trusts, but it may just be the best thing to care for your family. Thankfully, we know them well, and regularly support our clients throughout the Cambridge, Kitchener, and Waterloo regions in setting up family trusts and advising trustees on their critical steps. We work hand in hand with your accountants or financial planner to help ensure that any trust meets yours and your defendant’s needs. 

Managing a trust can be a sizable task, but the benefits of those trusts can run deep. The right lawyers can help you not only draft the key trust documents, but also advise on administration, annual filing requirements, tax issues, disputes, and anything else that might arise. Contact us today to set up a consultation.