A family trust is an important tool to help Canadians reduce taxes, plan for death, manage assets and protect their beneficiaries. But it’s also a complex process that requires the assistance of a legal professional.
There are three key individuals involved in a family trust: the settlor, trustee and beneficiary. The validity of the trust depends on several actions by all parties after it’s created.
The Settlor
A family trust is a legal agreement that allows one person, known as the Settlor, to transfer property to another person, known as the Trustee, who holds that property for the benefit of other people, known as the Beneficiaries. This is done to help ensure that the property is used for the beneficiaries’ best interests and to avoid a loss of control over it.
The Settlor is usually someone who has a close relationship with the family that wishes to create the trust. This person can be a relative or friend of the family.
In Canada, the Settlor of a Trust must be a Canadian resident and meet certain requirements in order to establish a Trust. This means that the Settlor must be a Canadian citizen, a permanent resident or a naturalized citizen who is at least 18 years of age and has the legal capacity to enter into a trust.
This person is also typically the Trustee of the trust and can appoint someone else to act as their successor trustee. The Successor Trustee has the right to take over the management of the trust if the Settlor becomes incapacitated and cannot handle the trust.
There are several different types of Trusts that a settlor can choose from in Canada, depending on their goals and objectives. These can range from splitting income with relatives to helping people with disabilities.
The settlor may also decide to donate a residual interest in the trust to charity, as well as receive income for their lifetime and have the capital pass on to charity at death. This is a tax-advantaged strategy that is often used for older individuals in high tax brackets.
Alternatively, a Settlor can put the property in a discretionary trust and give the trustees a lot of flexibility in how to use the trust’s assets for their beneficiaries. This type of Trust is often used in situations where there are children who have been diagnosed with a terminal illness or an elderly family member who needs financial assistance.
Lastly, the Settlor can also put the property into an inter vivos Trust (inter vivos means that it is not subject to probate when the Settlor passes away). This is a common tax planning strategy for families with children who are spending their inheritance before they have reached adulthood or if the Settlor has minor or spendthrift grandchildren.
The Trustee
Family trusts are a way to manage assets on behalf of family members while limiting their access to the assets. A trust can be revocable or irrevocable and can be set up in Canada as part of a will or as an inter vivos trust (set up while the trustee is still living).
In Canada, family trusts are used for many different reasons, from tax planning to succession planning. For example, a family trust can be used to split income with children or spouses, defer taxes with corporate beneficiaries, and even pay for the needs of a disabled person who is eligible for provincial disability benefits.
Setting up a family trust involves a gift of property to the trustee and a document that provides the terms under which the property is held. It also includes details about the duties of the trustee and the requirements for distributions and receipts from the trustee.
The trustee has a number of legal enforceable duties that they must fulfil, including duty of loyalty, not personally profiting from decisions made on behalf of the trust, and following the powers given to the trustee in the trust agreement. If the trustee fails to comply with these duties, they can be found liable for negligence.
There are a number of other factors to consider when establishing a trust in Canada. The most important thing is to ensure that the trust documents are properly completed and complies with all relevant laws.
Another consideration is whether the beneficiaries of a family trust are Canadian residents or non-residents. If the beneficiaries are non-residents, they may be required to disclose their ownership of the trust and their Canadian income to the tax authorities.
A family trust can be a very useful tool in tax planning and can be particularly effective when combined with other tax strategies such as estate freezes. Using an estate freeze, owners of a business can convert their shareholdings into preferred stock and sell new common shares to a family trust that captures the growth of the business over time.
The Beneficiaries
A family trust is a legal tool used to settle family property. It can protect a family’s assets from creditors and also allow the owner to manage their estate after death.
The beneficiaries of a family trust are the people who receive the income and capital from the trust. They are usually vested or contingent beneficiaries.
These are named either in the deed of the property or the trust agreement. They can be a spouse or children.
Often, a parent or grandparent will establish a family trust to benefit low-income family members. The income and capital gains earned by the trust are then allocated to these family members who are in lower tax brackets.
In Canada, a trust is a legal entity and is treated as a separate taxpayer for income tax purposes. Hence, it must file an annual tax return and report its income.
A family trust can be a great planning tool to minimize taxes. For example, the settlor can transfer property to the trust and then gift or loan it to a family member.
However, it is important to consider the attribution rules that apply in Canada. In some circumstances, a trustee may not be allowed to income split with a beneficiary because the income or capital gains that is allocated to them may be attributed back to the person who transferred the property.
This is especially true if the trust owns shares of an operating company that is not tax-exempt. Upon the death of a beneficiary, the share value of these shares may be taxable in their estate.
Therefore, it is important to understand the attribution rules before establishing a family trust to avoid tax consequences.
For instance, if the family trust owns a vacation property that is owned by a relative, it is important to know the attribution rules so that the income or capital gains that are distributed to a related child may not be attributed back to the parents or grandparents who owned the property.
A well-crafted family trust can be a powerful tool to ensure that a loved one’s wishes are met, and that your family has a brighter future. Moreover, it can help you reduce your estate taxes and maintain your privacy.
The Agreement
A family trust is a legal tool used to protect family members, reduce taxes and probate fees, minimize conflict between family members and ensure that property is distributed in the way you would like it to be. It is often used to manage assets such as a vacation home or cabin that can be shared by several family members for generations to come.
A trust is set up when a person transfers their property to a trustee. The trustee is an individual or entity who is responsible for administering the trust and distributing the trust’s income and capital to the beneficiaries according to the terms of the trust.
The trustees may be independent, or they could be family members. In Quebec, a family member may be both the trustee and the settlor. In the rest of Canada, a family member and a non-family member can be trustees; however, it is best to have an independent trustee who is not a member of the same family as the settlor.
Trustees are appointed in accordance with the terms of the trust document and must act in the best interests of the beneficiaries. It is a good idea to include provisions in the trust deed that specify what compensation a trustee should receive.
When setting up a family trust, it is important to consider tax attribution rules. This is because assets transferred to a trust are no longer part of the settlor’s patrimony, and they can be allocated to the beneficiaries for inclusion in their tax returns. This is known as income splitting and can be beneficial for low-income families.
It is also possible to create a trust for the benefit of a family business. This is an excellent strategy for a business owner who wants to transfer ownership to a spouse or other family member without incurring estate taxes or probate fees.
It is also possible to use a family trust to distribute property to grandchildren and other relatives who might not have much money to contribute to the maintenance of property. It is a good idea to name all potential beneficiaries and to give the trustees the discretion to exclude beneficiaries as necessary in the future.
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.