Greetings, Canadian medical professionals! It’s your trusty bow tie tax guide, George Dube, here to shed light on a topic that could be a game-changer for your financial future: family trusts for medical professionals. In this video, I dive into the world of family trusts and exploring how they can empower you to save taxes and protect your wealth. Whether you’re just starting your medical career or have been practicing for years, the insights I’m about to share could be the key to maximizing your wealth and securing a brighter financial legacy. So, let’s discover how family trusts can help you achieve your financial goals.
Video Transcript: Family trusts for medical professionals: Saving taxes, building wealth
Let’s talk family trusts for medical professionals.
I’m George Dube, saving the world from tax, one bow tie at a time™.
What is a family trust for a medical professional?
So why would a medical professional want a family trust? And maybe even more importantly, what is a family trust?
So initially, that family trust I’d like to describe as a relationship. And it’s defining who is eligible to receive, not required to receive, assets or income down the road, and who is going to control those assets. So in a stereotypical situation, it’s often mom and dad who are controlling assets. But they don’t own the assets.
(For more details, see What is a family trust?)
Family trusts and your medical professional company
For many medical professionals, the family trust will not be allowed to own a professional company. But, that family trust can be instrumental in saving taxes and creating a legacy with respect to the profits over time from that professional company.
So in terms of why that medical professional, you, and your family may be looking for a family trust, let’s remember: most of the professional bodies across the country, the different provinces and territories, will have separate rules as to who can own shares of your professional company. Often it may include a spouse. But rarely does it include the children owning common shares of the company. Having the ability to put investments in a separate investment company, which in turn is owned by the family trust, starts to let the tax savings slowly trickle and accumulate and accelerate as time progresses.
Using a separate investment company with a family trust
So why do we want a separate investment company from the professional company, assuming it’s PC, or some other form of operating company with restrictions on the shareholding. In a long-term perspective, it’s to say: when the second of the spouses passes away, assuming that all of the assets from the first spouse to pass away, through the will, will go to the surviving spouse. When that surviving spouse passes away, from a tax perspective, all of the assets of an estate are deemed to have been sold for fair market value. So now where there’s been investments at the corporate level, those shares are deemed to have been sold. And taxes may be payable. Often that tax rate as a real, real, real rough number, may be approximately 25% of the value of the company.
On the other hand, if we were able to begin transferring the investments to a separate investment company owned by a family trust, nobody owns the shares of the family trust. In other words, when the second of mom or dad passes away, there was nothing to dispose of, nothing Revenue Canada deemed to have been sold. Therefore, more assets are able to get transferred to the next generation. In effect, a supercharged RRSP in many ways, without a lot of the negatives associated with RRSPs.
Further, this isn’t just something that we’re doing, waiting for mom and dad to pass away. During the lifetime of the shareholders, or the trustees, or the beneficiaries of the trust, depending on which group we’re referring to, additional tax savings may be available. Additional savings are available when we combine this strategy with some of what I will call using Other People’s Money to pay for taxes. And using something, I’ll call it a TOSI Trust, with a bow tie. But we have separate videos for those as well. Let’s focus on the family trust right now.
When to set up a family trust for a medical professional
So a good question is when should we set up a family trust for healthcare practitioners?
And the answer, in my mind, is probably sooner rather than later if we’re trying to get as many benefits as possible, over a longer period of time.
So, as an example, someone just starting off. I appreciate initially, there’s not necessarily a whole lot of investing going on. But if we’re allowed to have those investments percolate over time, appreciate in value, again spitting off some investment income, it’s going to be faster, and more tax efficient to do initially.
In many cases, someone may have already been practicing, 10, 20 years, maybe longer. And it still makes sense to set up the family trust. But now we have some additional transfer costs that are applicable. And we’ve had a lot of that percolation time, of course, now made unavailable to us. Not the end of the world. We just missed a little bit of the opportunity.
It’s like a common question, when should you invest? Yesterday is always, typically the best answer. But today is the next best choice. And I would suggest the same with family trusts.
Children and family trusts
Yes, it makes more sense where there’s children involved. But quite a number of our clients don’t have or don’t expect to have children. Maybe they’re more concerned at that point: Nieces, nephews, church, cancer, society, whatever it may be. It’s fairly unlikely, though. that your primary thought process, as you accumulate some net worth, look after your retirement needs, which the trust helps with as well, particularly in combination with the professional company. But unlikely you’re looking to give more money to Revenue Canada.
So, to emphasize, while I think most people should start that family trust very early in the process, from that tax savings investment percolation idea, and there can also be potentially some legal advantages to doing so.
How many assets does a medical professional need before setting up a family trust?
One of the common tax questions out of that from a mathematical perspective that I’ll receive. It’s something to the effect of: “How much in assets should I have before it makes sense?”
And let me go back to an earlier comment. Where upon death of typically speaking, the second spouse, if roughly speaking, we’re now going to have to give away 25% of our estate in relation to the investments, that’s a big number or a big percentage. So it doesn’t take much of a number before saving 25% of that makes the trust more than worthwhile, ignoring all the other benefits of the family trust.
So let’s get a more precise example. You have, or expect to have in the future, $1million, whether that’s traditional investments, alternative investments, real estate, whatever. It could be a hula hoop factory. But, saving 25% of that $1,000,000, to the best of my knowledge, 1/4 of $1,000,000. To me, that’s pretty easy math to say I want to save $250,000.
Three disadvantages of a family trust
I’ve painted a lot of rainbows and lollipops with respect to the use of a family trust. There are three primary disadvantages I will suggest.
Cost to set up
First is the cost in setting up a family trust. Not that it’s exorbitant, but it’s certainly more than just setting up a corporation.
Complexity to set up
Second disadvantage – it’s a bit of a pain in the rear end to set up. It takes some extra time. It’s generally at least a three-month process. And there’s certain hoops and hurdles that we need to go through to make sure it’s done properly. There’s about half a dozen things that if we do incorrectly, it will forever taint that trust. Make it useless. So we’re going to slowly, methodically, go through our checklist, make sure it’s done correctly. I do not want to be in a scenario 10, 20 years from now where we’re having a discussion, something to the effect of. “Gee George, you messed up this. And I have to reply, “Yes, but we saved two weeks time getting it ready for you.”
21-year rule
Third disadvantage is that the family trust is good for 21 years. It’s a long time from an investment and a business perspective. But a short time frame from an intergenerational perspective.
So what happens at the 21 year anniversary if we do nothing with the trust? All of the assets within the trust are deemed to have been sold for fair market value. In most cases, a tax disaster.
So instead, typically, we will remove the shares of the company owning the investment holding company, effectively, to one or more of the beneficiaries of the trust. And when properly done, this can be done without paying any income tax, as if that beneficiary was the original owner of the shares. Then in many cases, we will do something I’ll call “refreeze” the company. Essentially meaning, we’re going to set up a new family trust. Start again. So every 20ish years, we’re going to go through the process again. And some people may not be thrilled with that. And again, I’m not pretending it’s perfect.
But. I would suggest to you that in most corporate situations, every 10, 15 years, anyway, there was going to be a change in tax rules, legal rules, family situation, investment situation. Something was going to generate a required change. This just locks us into every 20ish years. Not the end of the world. But let’s not pretend it’s perfect.
Setting up the family trust for medical professionals
There are a number of aspects of the family trust we’ll have to discuss as we go through the creation process. So, we like to be able to quarterback that process working with your legal team. And help you decide, for example, who are going to be the beneficiaries. Most of the time, we’ll see mom and dad, kids, grandkids whether they’re born or not. In some cases, and maybe expanding beyond that. Perhaps for example you practically speaking raise the neighbor’s kid as your own. And so there can be other scenarios.
But we want to be able to define that because once we’ve set that trust up, it’s really challenging to change anything of significance to it.
We’re also going to go through who the trustee should be. And different positions within that trust, a settlor and an advisor. But these are things we can hold your hand through, talk about the pros and cons, and allow you some time to figure out, based on those pros and cons, who you think would be the right person so we can tailor that trust to your specific situation.
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
