The Family Trust: What Exactly Does It Allow?

A trust is an independent patrimony created by a settlor and managed by one or several trustees for the benefit of the beneficiaries. The beneficiaries have no right of ownership over the property held in trust, which is instead within the trust’s separate patrimony. There are several types of trusts, but this article will focus on the discretionary family trust.

A family trust is of interest to the businessperson who:

1. envisions the eventual transfer of his business;
2. wishes to split his business’ income with his spouse and/or children of full age;
3. wants to protect his assets; and
4. wishes to minimize the taxes payable by his estate.

Essentially, when a family trust is created, the businessperson will freeze the value of his business accumulated in his common shares. He then exchanges these shares with his business’ preferred shares, redeemable for a value equal to that of the business’ value. The business’ value is therefore isolated (i.e. frozen) in these preferred shared, hence the term “freeze.”

The operating company will then issue participating shares to the trust and the businessperson will usually retain control over his business through control shares.

The company’s dividends may thereafter be paid to the trust (now a shareholder of the company), which then proceeds, at the trustees’ discretion, to the distribution of dividends to one or several trustees, such as the businessperson, his holding company, his spouse or children of full age, hence the term “discretionary family trust.” Additionally, the business’ future value increases normally in the new shares held by the trust.

The family trust provides significant benefits, notably:

• Income splitting: The income of the trust from the business may be distributed to certain family members who are beneficiaries in order to take advantage of their lower tax rates. As our tax system is based on progressive tax rates, these distributions allow for a reduction of the overall tax burden for the family.
• Multiplying the capital gains exemption of $824,176 (this amount is up to date as of March 24, 2016): When a company’s shares constitute qualified small business corporation shares, the trust’s sale of these shares may allow for the capital gains deduction to be multiplied by allocating the capital gains to the trust’s beneficiaries. Proceeding in this manner allows for tax savings of up to $200,000 for each $824,176 in capital gains allocated to a different beneficiary.
• Asset Protection: The trust generally allows for the assets it holds to be sheltered from the beneficiaries’ creditors and potential lawsuits.
• Business Transfer: The trust is a flexible holding tool that allows for the implementation of business succession plans, for example, the gradual participation of children in the business’ capital.
• Reducing Taxes upon Death: As the businessperson is merely a beneficiary of the trust at the time of his death, there is usually no deemed disposition of his shares upon his death, as the trust continues to hold the company’s shares. The value of the business at the time of the freeze is, however, taxed upon death if the businessperson still holds shares received from the company during the freeze.

While a very interesting tool for tax savings, the trust is not suitable for all situations. Its rules of operation and taxation are numerous and complex. To learn more about trusts, contact one of our lawyers.