Should You Have a Family Trust?

| Published on
October 28, 2015
| Updated on
September 17, 2021
By Jeffrey (JP) McAvoy
| Published on
October 28, 2015
| Updated on
September 17, 2021

If you have assets and intend to share them with family at some point, you should consider the use of a family trust.

It is key to consider the assets that you are choosing to transfer to your family trust.  The first reason is that once they are transferred, the assets will now be owned by the trust and held for the benefits of the beneficiaries.  In addition, the trustees of the family trust will have a fiduciary obligation to preserve the assets.  Also, once the assets are disposed of for tax purposes any accrued capital gain must be paid.

One of the advantages of a family trust is that it is completely private. Unlike a corporation, there is no formal registration and therefore no public registry.  A family trust is created when it is settled by the settlor.  The settlor is the person who first contributes property to the trust and signs the trust deed.  It is quite common for the involvement to cease there.  Often times the trust is settled with a silver coin or $10 bill. The reasons for this are quite well documented.

One reason is that CRA has an attribution rule (s. 75(2)) which states that any income from property settled in the trust is attributed to the settlor.  A silver coin does not create income. A trust ceases to exist when it has no property therefore you’d better keep the coin, CRA may want to see it.

Flow-through trusts allow trust income to be allocated to a beneficiary in the same manner that it was received: For example, dividends can be allocated as dividends and capital gains can be allocated as capital gains and in the right circumstances the beneficiary can claim a capital gain exemption. The personal trust acts as a flow-through meaning trust income can be allocated to beneficiaries thus taking advantages of multiple key personal exemptions. A common strategy is to have a trust purchase small business growth shares after a freeze.  It is important to ensure the trust has to get the money to buy the shares by way of a legitimate loan so that income will not be attributed back to a person who ‘contributes’ the money to buy the shares.  Where growth shares are purchased by a trust there numerous tax planning benefits.  For example, dividends can be allocated to adult beneficiaries and retain the character of dividends on the return of the beneficiary so as to provide an effective tool for income splitting and reducing individual tax burdens.

If you’d like to talk about setting up a family trust feel free to contact J.P. McAvoy of ConductLaw at our Ottawa office.

ConductLaw is an Ottawa based business law firm with locations in Ottawa, Barrhaven and Kanata.  Feel free to call or write one of our professionals for all of your business and estate planning needs.

Our professionals are experienced business lawyers who can help implement tax structures that manage tax obligations, whether as a spousal trust, family trust, testamentary trust, or any other type of legal entity such as a holding corporation.

ConductLaw is an Ottawa based business law firm with three locations in the Ottawa area to serve clients.  Feel free to call or write one of our professionals at info@conductlaw.com or 613.440.4888 for all of your business and estate planning needs.

About the Author

JP McAvoy
JP is the Managing Partner of Conduct Law, a Business Law Firm with Offices in Ottawa, Ontario and Orlando, Florida. His legal practice is focused on business and business owners.  Called to the bar in 2001, he received his LL.B and JD from Queen’s University in 1999. He represents a diverse range of clients throughout Canada, the United States, and Eastern Asia. In addition to practicing law, JP is a College Professor, Best-Selling Author and Host of the top rated podcast The Millionaire's Lawyer.  JP's accomplishments earned him an Ottawa Business Journal Forty Under Forty Award. Read JP's full profile.