A discretionary family trust can be a useful tool in many family situations. It can help reduce tax by shifting income to lower tax brackets and provide for the less fortunate in your family.
However, there are some pitfalls to be aware of. For example, it is important to understand the attribution rule for Canadian resident beneficiaries.
Discretion is Key
Discretion is key to a Discretionary Family Trust Canada, which gives the trustee the authority to decide who will receive income and capital from the trust. The trust can be established to help families who need additional support with managing their wealth.
Unlike a fixed trust, no beneficiaries obtain income or capital distributions until the trustee exercises their discretion in favour of them. The trustee can choose to distribute a small amount of funds, or a significant amount of money.
The discretion of the trustee to allocate assets in this way also allows the trustee to reduce the tax that would otherwise be paid by the trust. This can be particularly helpful if a beneficiary has an existing company structure, as these structures typically have to pay income tax every year.
Another benefit is that a discretionary trust can qualify for the lifetime capital gains exemption. This means that a discretionary family trust can dispose of capital assets without paying any income tax on their value, up to a maximum of $913,630 in 2022.
Many Canadian families with moderate levels of wealth have discretionary family trusts set up to help them manage their assets. These trusts allow a parent or a child to name other people as beneficiaries.
These family members can then share in the income and capital of the trust, reducing their own tax burdens. They can also decide when and how to distribute the trust assets, as well as how to use their own money within the trust.
Discretionary family trusts are a good option for many families because they can help ensure that the trust’s assets are not used in ways that would negatively affect the beneficiary. This is especially useful in cases where the family has a high degree of trust in each other.
However, the flexibility of a discretionary trust could also cause mistrust in some family members. This can happen if the trustee doesn’t take into account the individual needs of a potential beneficiary.
Generally, this mistrust can be resolved by adding an extra layer of protection to the discretionary trust: an appointer. This person can remove a trustee who isn’t acting in the best interests of the trust or its beneficiaries, and can appoint a new one.
A discretionary family trust is a good way to reduce taxes and make the most of tax breaks, particularly for families with many assets. It also gives a family flexibility in deciding how to distribute money and property.
Discretionary trusts can be set up under a will or deceased estate and are often used to provide for vulnerable beneficiaries such as children with disabilities. However, they can also be useful in helping to provide for older generations of family members who may need help with their finances in retirement.
The main advantage of a discretionary trust is that it allows you to choose who receives the income and capital of the trust. This makes it possible to distribute money in a way that best suits the needs of each beneficiary, and ensures that everyone is treated equally.
This type of trust is also one of the most effective forms of asset protection, as it separates ownership from control. This means that if you are sued for a debt, the trustee of the trust can take steps to protect the property held by the trust from any claims against the individual who holds it.
Another important aspect of a discretionary trust is that it can allow you to shelter income and capital gains in the hands of your family. For example, if you have a share in a company and there is a capital gain, you can allocate the gains to your trust so that they can be taxed at lower rates. This is called income splitting and is a great way to reduce your overall tax liability.
It is also possible to use a discretionary family trust to avoid taxation on assets that are sold by the trust, as long as the asset is deemed to have been sold at fair market value. For example, if you own shares in a farming corporation and they are sold, you can opt to have the cost base of the shares based on fair market value when they are distributed to your trust beneficiaries, which will eliminate any CGT liability on the sale.
Relatives Can Be Beneficiaries
When creating a family trust, it is important to consider who can benefit from it. This includes your children and your spouse, but it can also include additional family members or friends that you would like to be beneficiaries of the trust.
You should consult with a notary, lawyer or tax specialist to ensure the trust is properly established and is in compliance with Canada Revenue Agency (“CanRev”) regulations. If you plan on contributing property to your trust, make sure it is an irrevocable gift to avoid triggering the attribution rules under the Income Tax Act (Canada).
One of the most popular ways to use a family trust for tax planning purposes is to shift some of the income earned by the trust to lower-income family members. This is because in Canada, the higher your income, the higher your tax rate.
This is called income splitting and is a successful tax strategy, although attribution rules have made it less effective in recent years.
Generally, a trustee may distribute the capital of a trust to a Canadian-resident beneficiary in satisfaction of that beneficiary’s capital interest in the trust and at its then-FMV. This can result in a significant amount of income-tax savings for the beneficiary.
However, if the trust is not a resident of Canada at the time it distributes capital to a non-resident beneficiary, that distribution could trigger capital gains taxes on any increase in the value of the trust’s assets. In this case, the non-resident beneficiary can make an election to have the trust’s distributions not be subject to the remittance basis of tax and not triggered by the tax-deferred rollout.
In some cases, a family trust can be an effective tool to help farmers take advantage of the beneficial “tax rollover” and capital gains exemption rules in the Income Tax Act. This can help to reduce a farmer’s tax burden, particularly when the shares in the farm corporation are transferred to a child or a third party.
LegalVision’s Corporate Lawyers Can Help
Discretionary family trusts, also known as discretionary trusts, are a type of trust that allows a person (the trustee) to hold assets and property on behalf of others (the beneficiaries). This can help manage and protect your family’s assets.
A discretionary family trust is a great option for many families, as it can provide a number of benefits. These include family asset protection and tax planning.
If you are interested in setting up a discretionary family trust, it is important to understand the process of establishing one. The first step is deciding whether you want to use a corporate or an individual trustee.
The choice is often a personal one, but there are several advantages to choosing a corporate trustee. For starters, it allows you to keep control of your assets while still allowing a non-resident child to benefit from the trust.
Another advantage is that a corporate trust does not cease to be effective upon the death of an individual trustee, allowing for easy succession. This can be particularly useful if you have children who are still at school and may want to receive their education funds through a trust.
In most cases, a trust is established by the Settlor gifting an amount of money or property to the Trust. This gift amount is usually segregated from the trust’s other assets and must never be used to purchase investments or property.
A legal document known as a trust deed is required to set out the terms and conditions of a discretionary family trust. It will list the objectives of the trust and identify the beneficiaries. It will also detail how much money or other assets are to be distributed each year and how the funds are to be spent.
You can learn more about the benefits of using a discretionary trust by speaking to a qualified legal professional. LegalVision’s corporate lawyers are available to discuss how a trust could work for you and your family.
As an award-winning online legal service, LegalVision is part of a new wave of companies that are disrupting the way we get legal advice. They aim to offer a more affordable and efficient alternative to traditional bricks and mortar law firms while still providing clients with unlimited consultations and legal templates. Their model has been hailed as the “Netflix of legal advice”.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.