TAXATION - FAMILY TRUSTS

A family trust is simply one or more persons ("trustees" - usually the parents) holding title to certain assets for the benefit of other persons ("beneficiaries").
A beneficiary's interest in trust assets may be a fixed percentage or be discretionary.
A discretionary trust provides trustees full discretion as to distributions of income and capital to the beneficiaries. This release focuses on a discretionary trust for family members, referred to as a Family Trust.

Assets commonly held by family trusts include real estate, marketable securities, cash and shares in family businesses.

Benefits of a Family Trust

1. Flexibility and control,
   the trust allows for the transfer of assets to children at some future date on a tax-free rollover basis. The trustees have full discretion as to the allocation and timing of income or capital asset distributions among the children.
2. Creditor protection,
   the discretionary nature of the beneficiaries' interest in the trust may protect family wealth from beneficiaries' possible creditors or claims arising on a marriage break-up. This "protection" aspect of the trust should always be confirmed with legal advice.
3. Estate planning,
   a trust can be used in an "estate freeze" to reduce the capital gains tax otherwise arising on death. This involves "freezing" the value of certain assets and allowing all or a portion of the future growth to accrue to a family trust.
   In carrying out an estate freeze, many individuals are concerned that the value they have frozen at may not be sufficient for them in later years when they may have to rely on income from the assets for retirement. The discretionary nature of a trust can relieve this concern by including the individual and/or spouse as a beneficiary of the trust.
4. Reduce probate fees
   by holding certain assets in a trust, probate fees otherwise arising on death may be avoided.
5. Income splitting ,
   the trust facilitates income splitting by allowing income to be distributed (in cash or via direct payment of expenses) to beneficiaries and taxed in their hands at presumably low marginal tax rates. For example, an individual with no other income can receive up to $30,000 of dividends without triggering tax. This income splitting opportunity is not available in respect of minor children
6. Enhanced capital gains exemption ,
   a $500,000 enhanced capital gains exemption is available on the disposition of qualifying small business corporation shares (generally a corporation engaged in an active business and not earning passive investment income). By having the trust participate in the equity of a corporation, the $500,000 capital gains exemption of the beneficiaries can be used, thereby multiplying access to the exemption.

When should one consider a family trust? Some typical profiles include:

• incorporated family business or professional seeking current tax savings on current family income,
• individuals considering freezing their estate to reduce the capital gains tax arising on death, and
• individuals wishing to transfer wealth to family members while maintaining control over the assets.

Establishing a family trust can assist in achieving estate planning objectives and reduce current income tax. However, the information contained herein is of a general nature and a number of tax consequences must be considered.

Specific situations should be discussed with a professional advisor.
For a free half hour consultation, contact our tax partner, Ron W. Batty, C.A.