A family trust is a structure that facilitates the distribution of wealth to the beneficiaries named in the trust. Typically, your children, grandchildren, spouses are named as beneficiaries.
How does it work?
A trust agreement will set out a trustee and name one or more beneficiaries of the trust. A trustee is responsible for distributing the assets held within the trust, and typically has wide and even absolute discretion to determine who receives what, and when. A beneficiary may receive distributions from the trust, but they do not have a legal entitlement to those funds, which shores up the level of control that can be exercised over the trust funds.
If you have more money than you need to live on during your lifetime, then you can give the funds to your children outright as a gift – but then you wouldn’t have any control over what they do with the funds. That’s ok for some people, but if you want to retain control over when those funds are used, a family trust can allow you to put aside funds for them and allow you to control when those funds are actually distributed to them – if at all. This can be helpful if you have, for example, a disabled child or a child that you don’t trust to use the funds wisely.
Using a family trust to hold shares of a corporation will allow future generations who are beneficiaries of the trust to benefit from the growth of the corporation without requiring them to be shareholders of the corporation. Additionally, the trustee retains a much higher degree of control over the income from the corporation than he or she would if the future generations were shareholders of the corporation. Unlike shares in a corporation which produce distribute dividends to its shareholders, a trust has no obligation to pay out dividends equally to its beneficiaries, or even at all. This method also simplifies corporate governance.
A family trust can be brought in as a shareholder of a corporation through a relatively simple transaction called an estate freeze which can you discuss with your accountant.
Because a trust holds assets on behalf of a beneficiary, it provide san added level of protection against creditors, as the asset is not owned directly by the beneficiaries. This can also be helpful in the event of a marital breakdown, as any property held by the trust would generally not be under the control of the beneficiary and therefore could not be transferred to their spouse as part of a separation settlement.
Holding assets within a trust means that on death, those assets are not subject to probate fees. Probate fees are 1.4% of the value of the estate, so depending on the size of the assets held within the trust, this can create a large savings for the estate.
Additionally, there are other significant tax benefits that can be derived from using a family trust and a holding company structure that may be beneficial for your situation, such as the multiplication of the lifetime capital gains exemption on the sale of company shares, and the use of the prescribed interest rate loan strategy, which you can learn more about in subsequent videos.