1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Let’s start with lending to a trust. You can lend money or assets to a trust, by simply taking back a Promissory Note. This means that the Trust is taking a loan from you and is going to pay interest no less than once a year and intents to one day pay back the principal. When lending to a trust the current prescribed interest rate must be used as the minimum interest rate for the loan. You can go higher if there is a purpose for doing so. Currently the prescribed interest rate is quite low at 1% (as of the date of this blog) and has been that low for over a year now. This is extremely beneficial for loaning to a trust or Corporation as well as for spousal loans. If you have any such loans that are still at a higher interest rate, now would be the time to reissue the loan at the lower interest rate. Interest on loans must be paid within 30 days after the trust’s year end. A Family Trust has a year end date of December 31^st, so the interest must be paid by January 31^st of the following year.

Let’s now talk about gifting to a trust. Gifting to a trust is not used in many circumstances as there are many issues around gifting to a trust. As discussed in the last blog, when assets are put into a trust they must be put in at Fair Market Value. This is of course true if a gift is coming to the trust, meaning that the person gifting the assets may have a capital gain on the “deemed disposition” of the asset. If there is no gain on the asset then this would be irrelevant, however it is something that must be considered before the gifting happens. We also must look at attribution when an asset is being gifted to a trust. For example if someone gifted the trust some stocks, then the income from the stocks may be attributable back to the person who gifted the stocks. There are many considerations when looking at gifting to a trust, and in fact it may not be the best option to get assets into a trust. Typically the settlor and trustees would not want to make gifts after the set up of the trust.

Again, it is best to consult with a professional before making any movement of assets and/or funds into and out of a trust. Kustom Design is here to help you. In my next blog we will discuss the other 2 ways to get assets and funds into a trust.

As already discussed, when you are setting up a Family Trust it is best to have someone else settle the trust with a small asset, such as a silver ingot. This is the initial property of the trust and should be the only asset given to the trust without consideration. Typically when assets or funds are put into a trust there should be consideration for the asset or funds. For example if we’re going to put real estate into the trust, there must be consideration to acquire the real estate, such as currency or another form of asset in consideration for the real estate. This is a general rule although there are some small exceptions which are very specific and will not be covered in this blog series.

When putting assets into the trust we must consider the tax consequences. First of all we must understand that all assets going into a trust should be at Fair market Value. Fair Market Value is the current price that the asset would sell for on the open market. For example if it is real estate, you can look at a Market Assessment by a licensed realtor, an appraisal from a licensed appraiser, or sometimes the value on the Property Tax Assessment of the property. This means that if you own the asset that is going to be put into the trust, you will most likely have a disposition that could result in a Capital Gain. Before transactions are made that add property into a trust or take property out of a trust, you must plan for the potential tax consequence. Kustom Design can help you with the planning, but it is up to you to ensure you take the time and book the consultation.

There are 4 main ways that you can get assets or funds into a trust:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Each of these methods are dealt with differently for tax purposes. In the next blogs we will begin to look at each of these ways to get assets and funds into a trust.

This issue can also be big if you are trying to get real estate into the trust that has a lot of equity. The trust must have the capital to acquire the property. If you are the trustee, you may be able to co sign a mortgage for a trust, however you have to be careful in how you construct this transaction. What you may want to do instead, is have someone else acquire the real estate, and then have the trust acquire it from that person/entity.

One other drawback that I want to mention is in regards to non-resident beneficiaries. If you do have beneficiaries of your trust that are non-resident to Canada, you may have to take withholding tax on any distributions to these beneficiaries.

As you can now clearly from the last series of blogs, the benefits of a family trust far outweigh the drawbacks. Over the next blogs we will get into how to get assets into a trust, and then we will discuss how to get income and assets out of a trust. If you have any further questions in regards to trusts do not hesitate to contact us!

One of the main drawbacks of a family trust is the cost associated with setting up the family trust. Setting up a family trust requires legal documentation being drafted, thus the majority of the cost is the legal fees to set up the trust. Fees to set up the Family Trust can range anywhere from $2,500 to $8,000, with the average cost being around $5,000 for set up. The fees vary depending on your situation. For example do you need to set up a corporation, set up a holding company, or do you have existing corporations that you want to have the trust own. Although this is costly, keep in mind it is a one time fee. Once it is set up it is quite simple to maintain annually with the major annual cost being the T3 Return filing, which Kustom Design’s T3 prices start at $350 per year. In comparison to the value you get for you and the next generations the price is minimal.

Another drawback of the Family Trust is that CRA has a 21 Year Deemed Disposition Rule. This rule states that a Trust has a Deemed Disposition on assets 21 years after they are acquired, and every 21 years thereafter. The 21 Year Deemed Disposition Rule can be avoided by distributing property to the Beneficiaries before the 21st year or by providing in the Trust that the property will indefeasibly vest in the beneficiaries prior to the deemed disposition.

Another potential issue with Family Trusts is If income is left inside a Trust, the highest marginal tax rate is paid. (Unless it is a Testamentary Trust) Also, in most cases Losses cannot be flowed through like income and gains, however losses can be claimed against Trust Income. Trusts take tax planning to maximize, when used properly they are extremely beneficial and will save you a lot of tax, however if you do not plan properly you may pay more tax.

Another benefit of using a Family Trust is that you can multiply the Capital Gains Exemption. Currently in Canada we all have a Lifetime Capital Gains Exemption of $750,000. This lifetime Capital Gains Exemption does not have to be used at once, but is cumulative throughout your lifetime. Although we discuss this in another blog, the Capital Gains Exemption means you are exempt on the sale of qualified small business shares, qualified farm property and qualified fishing property. Each beneficiary of the trust has a Lifetime Capital Gains Exemption of $750,000. The Family Trust also has its own $750,000 Capital Gains Exemption. So if you were to sell the shares of a corporation that is owned by the Family Trust, it may be possible to make millions of dollars in gains and pay little to no tax by splitting the Capital Gain amongst the beneficiaries and leaving some in the trust. Many people build a company and sell it, the Family Trust is very beneficial in the tax planning for the building and selling your Corporation.

Yet another benefit of having a Family Trust is that you can own shares of multiple Corporations, and if structured properly you may be able to make it so your Corporations are structured in a way that they are not associated corporations. Corporations can make up to $500,000 in net income before paying very much tax (currently 14% total in Alberta), this is due to the small business deduction. When you own multiple Corporations with the same ownership you may only be able to make up to $500,000 in net income amongst all the Corporations before paying a higher tax rate as they can be deemed “Associated Corporations” However, with proper structuring it may be possible for each of the corporations to not be associated, thus allowing each of them to make up to $500,000 net paying low tax.

One more benefit I’ll share with you is that a Family Trust is a great way to pass on the use of assets to the next generation tax free. Because a Family Trust stays “Living” there is no deemed disposition upon death of the settler, trustee or beneficiaries. The reason why people are taxed so high when they pass away is due to deemed disposition. This means that all gains and income on your assets is all taxed together the day you pass away. Because a Trust stays “Living” the assets remain in the trust. To allow the next generation to have access to and use the assets in the trust you can simply make them the next trustee of the trust. You may also set up specific clauses in the trust agreement (deed or amendments) that make up rules for the next generation.

If you want to know more about how a family trust can help you, please contact us!

Another Benefit of having a family trust is the privacy factor. The assets of a trust are typically described as being owned by the trust. For example, the records of a Corporation will state that its shares are owned by a trust, as opposed to being owned/held by an individual. Further, the trustee of a trust can be a numbered corporation. Also, the trust can have any name such as “The Rock” instead of “X Family Trust”

You can also use a Family Trust as an alternative to a will. A will should still be done, however none of the assets owned by the trust will have to be included in the will, thus avoiding probate! The more assets you can get into the trust, the less that will have to be dealt with through the will and probate when you pass away. By using a trust, there is a reduced risk of legal challenges that are often faced by wills. Some examples include undue influence, lack of capacity and “greedy relatives”. Because the assets of the trust would not be subject to the will of anyone, those assets will not be listed or described in any court document. A will, to some extent, becomes a public document when it becomes a court document during and after the proceedings for probating a will.

A Family Trust may also be used as an alternative to Power of Attorney. In the unforeseen event that the trustee becomes incapable of dealing with the trust property, a replacement trustee could take over the role of trustee. This alternative provides more administrative ease and dignity to the trustee in the event of incapacity than would someone else obtaining a power of attorney that would be needed to deal with the property of the trustee during his lifetime (absent a trust). A Family Trust makes asset transition much more private and tax advantageous. A Family Trust allows us to plan as a family and plan generationally!

The other type of passive income that a trust may receive is Capital Gains, and typically they cannot split between spouses and family members after the fact. To split Capital Gains without a trust the individuals that want to split the gain in the end have to jointly purchase the asset. This can be an issue in tax planning as you don’t always know what income brackets the joint individuals will be in when they sell the asset, or one of the individuals may not have the funds to acquire the asset. However, with a trust you can split the Capital Gain amongst the beneficiaries after the sale of an asset. This is key in tax planning as Capital Gains can be large and are typically claimed by individuals who are in higher income brackets as they originally purchased the asset.

Not only can you split the Capital Gain among the beneficiaries of a trust, but if the Capital Gain is eligible for the Capital Gains Exemption (currently $750,000 lifetime exemption) you may also utilize any or all of the trusts’ beneficiaries Capital Gains Exemption. On top of this, the trust also has its own Capital Gains Exemption of $750,000. So if you had sold the qualifying shares of your Corporation, qualifying farming property, or qualifying fishing property then you could receive Millions of dollars in tax free Capital Gains!

So as you can see tax planning with a family trust gives you a major advantage in income splitting. Remember that tax planning should be done throughout the year so please do come in to plan with us at Kustom Design. Our goal is to save you more than you pay us in accounting and/or tax preparation fees, and we typically save you a lot more! Watch for my next blogs as we continue to discuss the benefits of a family trust.

One of the biggest benefits of a family trust is Asset Protection. By growing assets in a trust, those assets can be protected from claims against the trustees and beneficiaries who will not be considered to be the owners of property in the trust, because the trust will be discretionary such that creditors of the trustees and beneficiaries possibly may not be able to seize, garnishee or otherwise attack such property.

This protection is from future creditors and claims, not pre-existing ones. For example, the transferring of assets into a discretionary trust prior to insolvency or bankruptcy will likely be subject to attack, depending upon the timing of the transfer.

When a trust is holding the assets, they are usually safe if the trustee or beneficiaries are sued for any reason. What you are doing by putting your assets into the trust and becoming the trustee is to “Control the assets without owning them” Typically the only way that someone can put a claim against the trust is if the trust has broken contract or caused damage to someone (an individual or a company). If you don’t use the trust for business purposes or contracts then this should eliminate the possibility of the trust being attacked successfully.

The Trust will hold assets such as:

• Shares of private corporations (ones that you run, or just own shares in)
• Shares of public companies (stocks)
• Real Estate
• Precious Metals (Bullion, etc)
• Investments
• Other valuable assets, or assets that you want to protect

The real key is to set up a trust and get the assets into the trust before a liability arises. It’s like when you buy fire insurance, you need to buy it before the fire…not after! Asset Protection is a major benefit of a family trust, however there are many more benefits that we will discuss in my next blogs!

1. Who will be the beneficiaries of the trust?
2. Who will be the initial trustee(s) of the trust?
3. The home address of each trustee.
4. The name of the trust.
5. The name and home address of the settler.
6. The name of an individual or two who will appoint a trustee in the event that a sole trustee dies.
7. The legal name of your favorite national or international charity.
8. Do you currently have Corporations and/or other assets that you would like the trust to own?

One of the other things that may come up is if you want to have the trust set up as a discretionary trust or a non-discretionary trust. A discretionary trust gives the trustee full discretion to allocate income and assets among the beneficiaries. In a non-discretionary trust the parameters for income and asset distribution are typically laid out in the trust deed. For example you may have it written in the trust deed that the income from the trust should always be split evenly between the beneficiaries. Discretionary trusts are what most people should set up, unless there is a particular reason to set up a non- discretionary trust.

Once you have all of this information you are ready to have the trust set up. The cost to setting up the trust is typically anywhere between $3,000 and $7,000. The average cost is $5,000 so that is a number that you can look at for budgeting purposes. When you have submitted all the details for the trust, a trust deed will be set up. The trust deed governs the trust, which, as we stated in the first lesson, is a contractual relationship between the Settlor, Trustee(s) and beneficiaries. Once the Trust is setup, the annual maintenance of it, which is mostly just the T3 Trust Tax Return, is typically around $350 to $500 per year. So, although it may be expensive to set up, it is quite inexpensive to maintain.

On my next blogs I will begin to discuss some of the benefits of having a family trust!

1. Who will be the beneficiaries of the trust?
2. Who will be the initial trustee(s) of the trust?
3. The home address of each trustee.
4. The name of the trust.
5. The name and home address of the settler.
6. The name of an individual or two who will appoint a trustee in the event that a sole trustee dies.
7. The legal name of your favorite national or international charity.
8. Do you currently have Corporations and/or other assets that you would like the trust to own?

One of the other things that may come up is if you want to have the trust set up as a discretionary trust or a non-discretionary trust. A discretionary trust gives the trustee full discretion to allocate income and assets among the beneficiaries. In a non-discretionary trust the parameters for income and asset distribution are typically laid out in the trust deed. For example you may have it written in the trust deed that the income from the trust should always be split evenly between the beneficiaries. Discretionary trusts are what most people should set up, unless there is a particular reason to set up a non- discretionary trust.

Once you have all of this information you are ready to have the trust set up. The cost to setting up the trust is typically anywhere between $3,000 and $7,000. The average cost is $5,000 so that is a number that you can look at for budgeting purposes. When you have submitted all the details for the trust, a trust deed will be set up. The trust deed governs the trust, which, as we stated in the first lesson, is a contractual relationship between the Settlor, Trustee(s) and beneficiaries. Once the Trust is setup, the annual maintenance of it, which is mostly just the T3 Trust Tax Return, is typically around $350 to $500 per year. So, although it may be expensive to set up, it is quite inexpensive to maintain.

On my next blogs I will begin to discuss some of the benefits of having a family trust!