Now, I know I usually sprinkle rainbows and lollipops about setting up family trusts, but let’s dive into the real talk about the three family trust disadvantages for real estate investor”. Buckle up, because it’s time to save you from potential headaches in my latest YouTube video, which you can watch below, or read the full transcript. First up, the cost. Setting up a family trust can hit your wallet a bit harder than just opting for a regular corporation – although it’s one-time. Setting up a family trust isn’t a sprint – I call it “bottle of wine time” – a three-month process involving reflection on the part of real estate investors. Who are the beneficiaries? Who are the trustees? It’s like setting up the perfect dinner party guest list – takes time, but it’s worth it. Finally, the 21-year rule is a real disadvantage – after 21 years, your family trust assets are deemed to have been sold for fair market value. Cue the potential tax disaster! But there absolutely are solutions to prevent a messy tax scenario. So, are these disadvantages deal-breakers? Not in my book! The advantages still more than make up for them.
Video Transcript: Three family trust disadvantages for real estate investors
What are the three disadvantages, or at least in my mind, of setting up a family trust. So I’ve gone through and I’ve described a lot of the rainbows and lollipops, and there are some fantastic things with family trusts. That being said, there’s also some disadvantages.
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Cost to set up: Family trust disadvantage one
So first, it costs a fair bit more to set up a family trust in contrast to just setting up a corporation. But it’s a one-time cost and it quickly pays for itself in the vast majority of cases where if you weren’t going to have it pay for itself, you’re probably focused on legal or other aspects of why you’re creating that trust.
Time and complexity of set-up: Family trust disadvantage two
Secondly is more that trust is a bit of a pain in the rear end to set up. It takes time. I, I generally advise clients it’s probably a three-month process to set up that family trust. Not that it’s intensive work, but often I call it bottle of wine time. For example, where I want mom and dad to be giving some thought to who the beneficiaries are going to be, who are the trustees going to be, these types of things, as well as some others just require some reflection. Some moms and dads will get together and they practically know instantly what the answers are. Others, it just takes some time as well.
There’s a handful of things that if done incorrectly with that family trust, that trust is forever tainted. It’s useless. So in working with my team and I, we’re gonna go through my checklist. We’re gonna go slowly, methodically through that because I do not want to have to explain to somebody after the fact, I’m really sorry I messed it all up, but I did save two weeks time. That won’t fly.
21-year rule: Family trust disadvantage three
Third disadvantage is there’s something called, or paraphrased, a 21-year rule. After 21 years, all of the assets within a family trust are deemed to have been sold for fair market value, essentially, in the vast majority of cases, that would be a complete tax disaster. So instead, your advisors two, three years, for example, before that anniversary date, should be working on a plan of how we’re gonna take the assets out of the family trust on a tax deferred basis so we don’t have to trigger taxes.
And now what are next steps? And that may be creating a new family trust. Certain conditions have to be met, but regardless of what we’re doing, something has to happen every 21 years.
Now normally I would suggest if you’ve got a bit of a corporate structure, you are gonna change that structure every 10 ish 15 years anyway because there’re going to be changes to your family situation, business situation, investments, financing rules, tax rules, legal rules, et cetera. The family trust locks in the fact that every 21 years we must deal with that.
So each of these disadvantages, while not perfect, I think you can quickly see are really relatively easy to overcome. I would suggest it’s not so much if I should set up a family trust. It’s when to begin those discussions.
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Resources
For additional resources related to family trusts:
- When should you set up a family trust in Canada?
- Family trusts: Ultimate FAQ for real estate investors
More questions?
Still have questions on family trust disadvantages for real estate investors, or anything else? I want to help you Do Wonderful Things™, so please contact me today.
Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax and accounting advisor about your specific situation.
