In Part 1 of this series on family trusts, I discussed what a family trust is and how their potential benefits for real estate investors. Now, I’d like to explore my favourite example of how you can potentially use a family trust, which relates to funding a young child’s or grandchild’s post-secondary education, apprenticeship, new business venture, etc.
The trust, or a corporation owned by a trust, can acquire a highly leveraged condo at $200,000, using bank financing and a loan from a parent (or funded from a line of credit, alternative loan, 2nd mortgage, etc.). Over time, if the property is held for say 21 years, a child could have—with some reasonable success—an inflation adjusted asset of $200,000 almost fully paid for. For most people, this represents a fully paid education, acquired almost free of charge, or at least heavily discounted, assuming the property cash flows. It is difficult to find a better scholarship or education program.
This cash, whether raised by selling the condo in the hands of the young beneficiary when they have a low level of income, or by remortgaging the condo to keep the investment, or simply choosing to live in an almost fully paid-for condo, would be received at or near the completion of post secondary studies—a most opportune time.
In most cases, this compares much more favourably than having a parent in a higher tax bracket sell the property, pay taxes at much higher rates, and then provide what is leftover after taxes to the child. If you have more than one child, or expect that they’ll be going to an expensive institution, simply add a couple more properties and you’re on your way!
In part 3 of this series, I’ll discuss how to stay on the right side of Canada Revenue Agency when setting up and handling family trusts.
Portions of this article appeared in Canadian Real Estate Magazine.
