Family trusts are a cost-effective tool to meet multiple tax, legal and business objectives for real estate investors, and are therefore becoming a more prevalent tool for real estate investors. Let’s explore why family trusts merit your consideration.
What is a trust?
In simple terms, a trust is a relationship where at least one person holds title to property for the benefit of another. Typically, in family trusts we deal with, the “property” is either real estate or shares of a corporation which in turn owns real estate.
While investors must exercise caution in establishing a family trust – some very serious tax implications can result from improper preparation—when you structure a family trust appropriately, investors can realize many benefits.
Flexibility of family trusts
As many of my readers know, I am a huge fan of flexibility in structuring investments. A family trust allows the trustees the ability to decide at a later period in time who will receive what amount of assets. Typically, this is within 21 years due to rules which deem that a trust must sell all of its assets at fair market value and thus trigger taxes. These assets can be distributed tax free to the beneficiaries. Yes…tax free. Beneficiaries may include spouses, children, grandchildren, nieces, nephews, parents,siblings or the neighbour’s dog.
Essentially this allows the trustees to decide which beneficiaries will receive which assets from the trust. This may be an equal split, or practically any other distribution, assuming that the trust agreement provides full discretion to the trustees. Practically, this can also allow trustees to observe younger beneficiaries grow up to see who may be best able to run the family business or who may deserve this opportunity through whatever criteria, if any, are established under the trust. Some beneficiaries could receive voting control of a company, for example, while others receive income rights from the same company. Many possibilities exist for deciding who receives what and how it’s determined.
Potential benefits of a trust
- Various estate planning objectives and savings
- Income splitting and thus tax savings among family members
- Protection of assets from some creditors
- Avoiding probate fees
- Succession planning arrangements which can be adjusted in the future
- Maintaining the privacy of a family’s wealth and dealings from public eyes which can otherwise be observed following someone’s death through court records
- Control of assets beyond the grave and beyond a period of ownership
- Providing for those who may not be able to provide fully for themselves (children, some disabled or elderly people)
- Savings vehicle
In part 2 and 3 of this series, I’ll explore an example of how real estate investors can use family trusts to do things like fund a child’s education via real estate, and 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.
