A family trust, like all trusts, is a legal entity that holds assets or property on behalf of third-party beneficiaries rather than those assets belonging to the person who transferred them.
Trusts are flexible options that can be established in many ways. The one thing that all family trusts share is that they protect the interests of family members – though the term “family trust” does not have any legal meaning.
Who are the main stakeholders in a family trust?
The main stakeholders in a family trust are the same as in any trust:
The settler – the person who creates the trust by transferring assets (usually no relation to the beneficiary).
The trustee(s) – representatives who are the legal owners of the trust’s assets, managing considerable responsibilities including allocating assets to beneficiaries according to the trust agreement.
Beneficiary/beneficiaries – those who receive the assets from the trust (income/capital) – for instance, family members holding shares in a family business.
Is a family trust the same as a company?
A family trust operates like a company or management firm – and has some similar tax benefits.
However, an important difference is that assets held in a family trust cannot legally be seized as part of a lawsuit or bankruptcy unlike company shares – unless the trust was set up fraudulently.
Also, trustees in family trusts remain in their position until the trust is wound up. The position is not reviewed annually like with management firms.
What are the main benefits of starting a family trust in Alberta?
Family trusts are an attractive option for many entrepreneurs, due largely to the following benefits:
Effective transfer of wealth for children
A family trust set up in the right way is an effective wealth-transfer tool for family members after a business owner passes away.
The trust agreement can specify exactly what the beneficiaries are entitled to and when.
This is an effective way to ensure that your children or grandchildren end up with the financial assistance you intend without having to transfer the assets directly to them immediately.
It is also an effective way to look after the ongoing financial needs of a disabled child or a child with special needs.
A key reason for starting a family trust is the potential tax benefits.
Trust property is not considered part of the settlor’s estate. Beneficiaries pay lower estate taxes upon the death of the settlor than if the property was simply transferred in a will.
Capital gain taxes can often be shared amongst multiple shareholders in a family trust. Some families may want to consider establishing a trust in another province to take advantage of lower tax rates than in Alberta.
Lower taxes can also be achieved by income-splitting within a family trust. This is commonly done when there is a family business and the company shares are transferred to the trust.
The trust can be used to allocate taxable income to multiple beneficiaries, thereby reducing the overall amount of tax to be paid.
Assets held in trusts are not subject to claims for payments from creditors in a lawsuit or during bankruptcy proceedings for a beneficiary.
If a beneficiary’s interest is threatened by creditors of the beneficiary, the trustee can simply refuse to make any distributions to that beneficiary, blocking the claim.
Note, however, that you cannot create a trust immediately before you file for bankruptcy or otherwise for fraudulent purposes. A judge is likely to overrule any block to a claim, removing protection for your assets.
Family trust information generally remains private and confidential and there is no requirement for the stakeholders to acknowledge their relationships with each other.
The contents of a will, on the other hand, may become public during the probate process in the Calgary courts.
The exception to the confidentiality of family trusts is when a dispute arises and requires a litigated resolution.
In most cases, there are very few disadvantages to setting up a family trust.
Some people are put off by the fact that a family trust must “dispose” of its assets on the twenty-first anniversary of its settlement and every 21 years thereafter. This is mandated to force a distribution of trust property to the beneficiaries or have taxes triggered.
Capital gains tax may be payable because of this. However, by giving the assets to beneficiaries, taxes can be legally avoided.
With careful planning, a family trust can be an extremely tax-effective way to manage and transfer assets but it must be carefully administered by the trustee. Tax returns must be filed and taxes must be paid on income generated by the fund. Minutes of meetings must be taken and financial statements produced.
This is why the selection of an individual for the role of trustee is so important.
How do you establish a family trust in Alberta?
A family trust is a living trust (also known as an inter vivos trust) as opposed to a testamentary trust, which is established upon death.
It is established by a trust agreement or deed signed by the settlor and the trustee. This becomes the main document of the trust, specifying the identity of the trustee and the beneficiaries, and guiding the trustee in his or her rights and obligations. It also provides instructions regarding the trust property and the beneficiaries.
While the process of establishing a family trust is quite straightforward, many of the decisions you will need to make before establishing the trust and when setting it up are not. You need to consider your options carefully before creating a trust.
What is the process for creating a family trust in Alberta?
Create the trust agreement with the relevant clauses
Bring the trust into legal existence with an irrevocable donation of property – often a gold or silver bar
Register the donation
Open a bank account in the trust’s name
Transfer assets into the trust
Ensure that the trustee performs administrative duties such as annual tax returns and the preparation of financial statements, taking minutes after each decision is made
The family trust experts at Vest Estate Lawyers in Calgary can assist with each step in establishing your trust.
Are you considering a family trust?
Because of the complexities involved in formulating trust agreements that accurately reflect your goals, it is best to take legal counsel before establishing a family trust.
We can advise and help you set up your trust in the right way.
Start with a free consultation with one of our family trust layers. We will analyze your situation before advising you on the type of family trust that can best achieve your goals.
It is never too early to start estate planning – and most people need more than a simple will to cover their needs. A few essential documents can help you ensure that assets end up where you intend and that your children, spouse, or other loved ones are properly cared for. Our firm focuses on a wide range of Estate Planning services to suit all your needs.
Call 403-226-9757 or contact us through the form below to book a meet and greet with one of our estate lawyers. You don’t need to be wealthy to want the peace of mind that an estate plan brings. It is too late to make decisions if you lose the capacity to do so. Whatever your estate planning needs, contact us now for a free case evaluation.