Are you looking for a way to lower taxes, keep your financial affairs private or provide for a beneficiary after you pass away? A family trust could be your answer. Since setting up a family trust in Ottawa involves complex legal and financial considerations, consulting a lawyer, accountant, and certified financial planner is essential to ensure it aligns with your goals.

Family Trusts

A family trust can help you protect your wealth, reduce taxes, plan your estate, and provide for beneficiaries. However, they do have drawbacks. You relinquish control of assets transferred to the trust, the fees to set them up can be high, taxes are complicated, and they require ongoing administration. Understanding the pros and cons will help you decide if a family trust is right for you.

Family trusts

Knowing the different trust types can help high-net-worth families feel more confident and reassured about choosing the right planning option for their goals.

Benefits of family trusts

You can use a family trust to:

• Protect assets
• Reduce income taxes
• Expand the lifetime capital gains tax on the sale of shares from a qualifying small business corporation
• Reduce or avoid probate 
• Take care of a beneficiary

Protect Assets: The family trust owns the assets within it, not the person who transferred them. Trusts are also private, meaning their details aren’t part of the public record like a will. As a result, creditors can’t lay claim to the assets, the assets are shielded from marital disputes, and your financial affairs remain private.

Reduce income taxes: Trusts are taxed at the highest marginal tax rate. However, the trust can distribute its income to its beneficiaries. The beneficiaries are taxed at their marginal tax rate. You can realize tax savings on the income if the marginal tax rates of the beneficiaries are lower than the trust’s.

Expand the lifetime capital gains exemption: Transferring shares from a qualified small business corporation can allow the lifetime capital gains exemption (LCGE) to be spread out among beneficiaries. A trust can allow the beneficiaries to reduce taxes payable on the sale of qualifying assets. This strategy is complicated and requires the advice of an accountant or a tax lawyer.

Avoid probate: Some provinces require probate to process a will. Probate is essentially an estate administration tax, and the cost of probate can be high. When you transfer assets to a living trust, the trust property is not subject to probate when you pass away.

Caring for a beneficiary: If you have someone who may need ongoing care after you pass away, a testamentary trust can provide that care. Some examples are setting up a monthly allowance for a beneficiary for care or to manage spending, or specifying how the money is to be used, such as for a down payment or post-secondary education.

Disadvantages of a family trust

Family trusts have drawbacks you need to be aware of if you decide to proceed with one. You lose control of your assets once they are transferred into the trust, as the trustee manages them according to the trust agreement. There are also costs, complicated tax rules, and ongoing reporting to consider. 

Control of your assets: Any property you transfer into the trust belongs to the trust and not to you. The trustee is responsible for administering the trust’s assets.

Costs: You’ll need the services of a lawyer and possibly an accountant to set up a trust. Depending on the level of complexity, the fees can be substantial.

Tax rules: The rules governing trusts are highly complex, making the services of an accountant essential. One prominent rule is the 21-year rule, which treats the trust as having disposed of its assets at fair market value every 21 years, resulting in potential capital gains taxes.

The intention is to prevent people from using trusts to defer paying taxes on their capital gains indefinitely. There are ways to minimize taxes arising from this rule; however, navigating it effectively requires professional advice to minimize tax liabilities. 

Ongoing reporting: Tax laws require annual reporting for trusts. Each year, a T3 must be completed and submitted to the Canada Revenue Agency. Due to the complex nature of the tax issues that apply to family trusts, you may need to engage the services of an accountant to complete the tax forms correctly.

How to set up a family trust

Trusts have three participants: the settlor, the trustee and the beneficiary. The settlor is the person who creates the trust and transfers the assets to it. The trustee administers the trust on behalf of the beneficiaries in accordance with the trust document’s guidelines. The beneficiaries are the recipients of the trust’s capital and income.

Before setting up a trust, you must determine the trust’s goals, the trustee, and the beneficiaries. Once that is complete, the following steps are:

• Create a trust agreement that details the trust’s goals and beneficiaries
• The settlor makes an irrevocable gift to the trust to avoid future attribution rules
• Open bank accounts for the trust.
• Transfer property to the trust.
• Register your trust with your province if required.

Understanding your personal goals is essential for high-net-worth families to feel in control and confident when deciding if a family trust is the right choice for estate planning.

Where to Get More Information

The benefits of family trusts for high-net-worth individuals can be invaluable. However, it’s essential to know what you want to accomplish with it and how to navigate the rules. For more information on family trusts, Ontario residents can contact a lawyer, accountant, or certified financial planner.

At MDL Financial Group, our certified financial planners simplify the process of setting up a family trust in Ottawa. We have more than 30 years of experience helping high-net-worth individuals reach their goals and plan their future. Book an appointment with us today online or by calling 613-416-9649. We look forward to helping you achieve your dreams!

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