Trust: family, asset protection or testamentary ?

by François St-Arnaud, attorney

January 2014

 

The trust is a very useful vehicle increasingly used by business people. The reason is simple: it is the ideal tool to achieve several objectives such as reducing the family's payable tax, or to protect its assets from creditors in case of misfortune.

 

Establishing a trust essentially involves creating a separate vehicle from its constituent (creator) to transfer assets (e,g. shares of a company, investments or real estate) to beneficiaries. The trust then has its own assets distinct from that of the grantor as well as its own tax rate.

 

There are several types of trusts such as the Family Trust, the Asset Protection Trust and the Testamentary Trust.

 

The Asset Protection Trust

 

The primary purpose of an asset protection trust is to protect its assets from potential prosecution. For example, the founder of a profitable company may want to put its assets at risk from business incidents. It will then create a trust to which it will transfer some or all of its assets. As the trust enjoys its own assets, the potential bankruptcy of the business founder would not affect the assets held by the trust.

 

The Family Trust

 

The trust is also often used to enable tax planning that is beneficial to the family. For example, by creating a trust for the benefit of his or her spouse and children, a person can split income from his business and thus reduce the total tax paid.

 

The trust also allows the capital gain exemption of $ 750,000 ($ 800,000 as of 2014) to be multiplied in the event of a sale of its business, for example. Whereas a taxpayer can normally claim only after this exemption, the trust may allow the exemption to be multiplied by the number of beneficiaries. We can then talk about very important tax savings.

 

The Testamentary Trust

 

Trusts can also be a very useful tool for preparing their succession and ensuring a better future for their spouse and children while reducing taxes payable on death.

 

Control of assets transferred to the Trust

 

Our clients often ask us if they will lose control of the assets they transfer to the trust. The answer is no. Although the transferred assets are removed from the estate of the founder of the trust, they become under the exclusive control of the trustees of the trust. Typically, we designate 3 trustees: the founder and two other trusted persons. It is these trustees who then make decisions with respect to the assets of the trust.

 

As well, we generally set up discretionary trusts. These trust indentures provide that the Trustees have full discretion as to the distribution of the Trust's income among the beneficiaries of the Trust. You decide, with the other two trustees, to whom, when and how the income of the trust will be distributed. For example, you may decide that income will be distributed to your children when they reach a certain age only. These decisions are at your sole discretion.

 

Conclusion

 

It is not for nothing that the use of the trust is increasingly widespread. This tool is so flexible and useful and can save so much tax, that you must certainly discuss it with a practitioner specializing in the subject. If you do not know one, do not hesitate to contact us.

 

François St-Arnaud, avocat
(450) 641-8861 poste 222