Tax and Estate Planning with a Family Trust

Although trusts have been around hundreds of years, family trusts have become enormously popular in the last 10 years. Once considered something to be used exclusively for the very rich, trusts are now relatively common and are set up by families who hardly consider themselves rich. Why is this?
 
The main reason is that tax rates have grown so high for so many people, that it is worthwhile to spend more energy trying to minimize taxes. Trusts are a tremendously powerful vehicle for tax planning strategies, and are surprisingly affordable, especially if you think of them as being paid for with part of your tax savings.
 
The other reason is due to the considerable flexibility that trusts provide for tax and estate planning purposes. If we can be certain of one thing, it is that things will change. And nothing handles change better than a trust.
 
WHAT IS A FAMILY TRUST?
 
A family trust is a term used to describe a type of trust that usually has family members as its beneficiaries. However, nonfamily members can also be included in the trust.
 
A trust is a means by which property is held by one person for the benefit of another. This property can include any type of property interest including investments, shares of private companies, principal residences, bare land, vacation homes, and family heirlooms.
 
A trust is established when a person contributes property to a trust. The contributor is referred to as the "settlor". The person who receives the property and manages the trust is referred to as the trustee. The trustee can be a family member or a trusted relative or friend. It can also be a trust company or any combination of persons. Although it is most common to have only one trustee, it is not unusual to have trusts with two or more trustees.
 
The trustee holds the property in trust for one or more beneficiaries. These beneficiaries can consist of any person, a company, a charity and even unborn children. For example, you can set up a trust today that includes all future grandchildren as beneficiaries even though you have no grandchildren right now.
 
Add to this flexibility the fact that you can be the settlor, the trustee and a beneficiary of your family trust. There is virtually unlimited potential to design a trust that meets your particular needs.
 
One of the most popular forms of family trust is the discretionary trust. In a fully discretionary trust, the trustees make all decisions regarding the administration of the trust fund and distribution of the trusts fund among the beneficiaries. They decide who gets what, how much they get and when they get it. In a fully discretionary trust, being named a beneficiary does not necessarily translate into receiving anything. You as a trustee can make your own decisions and can completely exclude one or more of the beneficiaries if you so choose. Your replacement Trustees can do the same.
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HOW YOU CAN USE A FAMILY TRUST
 
One of the most popular uses of the family trust is income splitting. This is where income earned by the trust is paid to low income beneficiaries who pay tax at a very low rate. This works particularly well with children who have reached 18 years of age who have no other source of income. However, there are a number of tax rules which restrict income splitting when spouses and minor children are involved. Good legal advice is recommended here.
 
Another popular use of the family trust is to avoid probate proceedings on death and probate fees. In British Columbia, probate fees are levied at the time of death and are based on the total value of all assets in your name (excluding jointly owned assets and out of Province assets). The rate of probate fees is 1.4%. This means that if you own assets (including your home) in your name worth $1 million at the time of your death, the probate fees would be $14,000. A family trust avoids probate and probate fees because assets that you transfer to your family trust during your lifetime are not deemed to be owned by you on your death for probate purposes.
 
A valuable use of a family trust is to avoid a legal challenge of your Will. Many people dont realize that even if they do have a legally drawn Will, after their death a spouse or child may apply to change the terms of their Will. This typically happens when a family member feels that their inheritance is too small. One good technique for avoiding such a challenge is to transfer certain parts of your assets to a family trust while you are alive. Since it is not part of your estate on death, the property does not pass under your Will and therefore is not affected by a challenge of your Will.
 
Many people use the family trust to hold investments and other property for family members who are mentally disabled or incapacitated. This can be particularly valuable to provide the disabled person with an additional source of income and if structured properly, will not reduce their eligibility for social assistance such as GAIN.
 
Family trusts are being used as a savings vehicle for children and grandchildren for their future educational expenses. The family trust is often more flexible than the Registered Education Savings Plan (RESP) as the money can be spent on the beneficiary whether or not they actually attend university. 

Another use of a family trust is to make sure that money, property or investments are protected for beneficiaries who may not be able to properly manage the money if given to them in a lump sum. A family trust can be designed so that trustees manage the property and investments for the long term wellbeing of the beneficiaries. The trust can be designed so that if the trustees are satisfied that the beneficiaries have proven that they can handle the money themselves, the trust can be collapsed and the funds can be distributed out to the beneficiaries.
 
The family trust works very well in the succession process for a familyowned business. For tax planning reasons, a family trust can become a shareholder of the familyowned business. This provides great flexibility to the business owner who may not be sure which of his or her children might be the appropriate ones
to take over the business when he or she retires. Essentially, the discretionary family trust allows the business owner a substantial period of time to "wait and see" before deciding how to pass on the shares of a family business.
 
The key to the value of a family trust is in its flexibility. A family trust can be tailored to the needs of that particular family and can adapt to changing circumstances like no other vehicle. Its unique nature provides the tax and estate planning professional with virtually unlimited scope for creativity and originality in meeting your tax and estate planning objectives.
 
Family Trusts may seem confusing or too much trouble, but when you stop to add up the benefits and reduced taxes available, family trusts deserve a second look. Using professionals to create and assist in managing your trust can make a Family trust a smart move.

This article is not legal advice and a lawyer should be consulted on any specific case.