Purtzki, Johansen + Associates


Why you would need a Family Trust

Here is a summary of the benefits you can enjoy by setting up a family trust.

  1. Maintain control. As the trustee, you have full control over the trust assets within the scope of the trust document. The trustee also controls the allocation of income and distribution of funds to the beneficiaries. If your family members own the shares in your corporation directly, then you do not have any control over the shares once the children reach the age of majority.
  2. Flexibility. The typical trust document gives the trustee full discretion in the management of the trust. The trustee can, for instance, add or delete beneficiaries, and has the discretion to allocate income to the beneficiaries to maximize after tax income.
  3. Protection against creditors. While the beneficiaries are the owners of the trust assets, a beneficiary’s interest in a discretionary trust has no commercial value, preventing creditors from gaining access to the trust assets. This may be challenged in some jurisdictions.
  4. Multiply the capital gains exemption. Any gain on the sale of shares in a corporation carrying on an active business can be sheltered by the capital gains exemption of up to $866,900 per individual shareholder. The family trust allows you to multiply the entitlement for the exemption, as each beneficiary in a discretionary trust is eligible for a separate $866,900 capital gains exemption.
  5. Maintain confidentiality. The ownership of a corporation is transparent because a company search will reveal its directors and officers to any member of the public. However, there is no public access to trust information. Even CRA only requires that you file the trust document and the income statement of the trust. There is no requirement to disclose the assets held inside the trust.
  6. Shift income to another province. The trust allows you to shop for a low rate jurisdiction to shelter your income. Because of Alberta’s low tax rates, many trusts were set up as residents in this province. In order to have a trust reside in a jurisdiction, the majority of the trustees must also reside there and the administration of the trust must be carried on where the trustees reside. To illustrate the tax benefits: a $1 million capital gain taxed in an Alberta trust saves about $28,000 of income taxes compared with a trust resident in Ontario.
  7. Avoid probate fees. If you transfer assets to a trust, these trust assets are not part of your estate and are no longer subject to probate fees. Keep in mind that a transfer of assets to a family trust must be at fair market value, which means that a capital gain can result on the disposition.
  8. Reduce Estate Tax Liability. Assets held inside a family trust do not form part of your estate and therefore do not increase your estate tax liability. This allows the potential to shift the tax burden on death to other family members. An “estate freeze” is a common technique that can involve implementing a family trust in order to limit an owner’s future estate taxes.
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