When I was much younger, my mother said something to me that has resonated with me to this day. I was stressed out about something teen-drama related and she said, “Dian, we can’t continuously control what’s happening around us, but we can always control how we react” (it sounded much better in Arabic, but you get the idea).

 

I’ve since noticed that these wise words can be applied to almost anything. I could be having the worst day, but I can control my mood – so I choose to be happy. I could be complaining about how hot (or cold) it is outside - or I could be doing something to enjoy the circumstances.

 

An even better suited example is the market. It is absolutely going to do what it wants on a day to day basis (as we’ve been drastically experiencing so far this year) but it’s how we react to the market volatility that remains in our control…

 

You can choose to panic and sell. You can choose to be optimistic and buy more. You can choose to be patient and wait it out. You can choose to not even pay attention. Or you could choose to focus on areas of your wealth planning that you can control – such as financial planning. The various tax, risk, and estate planning elements of your financial plan can have lasting impacts on the long term value of your wealth if you are keeping more of what you are earning by having the right strategies working in place for you, your family and your business.

 

One area of wealth planning that always gets clients intrigued is the notion of family trusts. If you have a large portion of non-registered assets and live within a household of varying marginal tax rates, a family trust could be a great way for your family to pay less taxes overall by strategically income splitting through the trust.

 

Where did trusts come from?
Personal trust law originated in England, during the 12th and 13th centuries. Landowners leaving England for extended periods of time, to fight in the Crusades, would convey legal title to their property to a third party to manage the property and enforce the rights of the owner in their absence. The arrangement was made on the understanding that legal title to the property would be conveyed back to the landowner when they returned.

 

Trusts Today
You may have come across the concept of a trust in the context of preparing your Will. This kind of trust, known as a ‘testamentary’ trust, takes effect on your death and is often used to provide assets to beneficiaries of an estate where you do not intend them to receive the assets immediately. You might consider this if you have minor beneficiaries and you want them to receive assets, or income from those assets, only on attaining a certain age – for example.. You may not, however, be as familiar with the concept of an ‘inter vivos’ trust, also known as a ‘living’ or ‘family’ trust. This is a trust you establish during your lifetime.

 

To understand how a trust works, you need to understand who does what. In brief, a trust is a separate taxpayer but it is not a separate legal entity, like a corporation. A trust is a common law relationship and there are a number of parties to that relationship. The ‘settlor’ creates the terms of the trust, according to their wishes and contributes the asset which brings the trust into being. This is frequently a nominal sum, a $20 bill, for example. The ‘contributor’ to the trust is the person who transfers property to the trust for the benefit of the beneficiaries. The ‘trustee’ holds legal title to the property transferred to the trust and mustact in the best interests of the beneficiaries. The ‘beneficiary’ is entitled to benefit from the trust assets and can be entitled to receive income from the trust, capital or both.

 

Ok, now that you get it, how could it benefit you?

• Income Splitting with your Family - You can do this by funding your family trust (either by a gift or a loan at an interest rate equal to or greater than CRA’s prescribed rate). Using a prescribed rate loan, the investment income (interest, dividends and/or capital gains) earned within the trust may be taxable to the beneficiaries (instead of you) so that every child or grandchild, who has no other income, can earn up to a certain amount of investment income tax free, every year.
• Privacy & Avoiding Probate - Assets within a family trust fall “outside of your estate” meaning that they remain private (since Wills become a document of public record when probated) and are not included in calculating probate fees.
• Planning Flexibility - A family trust can give you the flexibility to make planning decisions during your lifetime, choose the assets which are to fund the trust and know that the trust assets will continue to be managed according to the terms of the trust, even after your death.
• Charitable Intentions - A Charitable Remainder Trust is a trust you set up during your lifetime, naming yourself as income beneficiary and the charity of your choice as capital beneficiary. As long as the trustee isn’t entitled to encroach on capital to benefit the income beneficiary, you can get a tax receipt for the capital you contributed when you set up the trust. This can be a tax-effective way to set aside funds to fulfill your charitable giving intentions while receiving income from your capital during your lifetime. It may be particularly advantageous if you are in a high tax-bracket.
• Business Succession Planning - If you’re a business owner and expect your business to significantly increase in value over the coming years, you may want to consider implementing an estate freeze to defer tax on the gain you anticipate realizing on the value of your shares. A family trust can be a component part of this kind of planning in certain circumstances.