Getting Assets into and Funding your Family Trust – Part 1

If you’ve been reading the series of blogs on Family Trusts, you should now have a good understanding of the how to set up a trust, the basics of using it, and the benefits and drawbacks associated with having the trust. We will now begin to discuss some of the different ways to get assets into your trust, as well as how to get funds into your 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.

Drawbacks of a Family Trust part 2

Another issue to look at with Family Trusts is the potential attribution that could happen. The trust must use its own funds to acquire property. That is, the trustee and any other beneficiary of the trust must not ever give property to the trust. If such a person does give property to the trust, then all future growth of the trust’s property could be attributable to that person for income tax purposes. It is important that all professional fees incurred on the creation of the trust be borne by the trust itself. Fees paid by persons other than the trust could cause unintended attribution. There are ways to loan funds to the trust which we will talk about in later blogs.

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!