Family Trusts are used by business operators for both income splitting in families and to hold growth assets for that family.
Basics of a Family Trust
Most often these trusts are set up to purchase nominal value shares in an active business being run through a company. These shares would have dividend entitlements which could result in some of the company's profits being paid over to the Family Trust as a dividend and then paid to some or all of the named beneficiaries for their use. The Trustee of the trust (the person who makes decisions for the Family Trust), is normally the business operator and the beneficiaries are normally their children and/or grandchildren, and possibly their spouse. These beneficiaries would report the income as a dividend and pay income tax at their personal rates, which are hopefully lower than the business operator's personal rates.
The Federal Government introduced some rules a few years ago that virtually eliminated a business operator from income splitting with his or her under 18 children, as any dividends received by those children under this scenario are taxed at the highest rate. A lower income spouse could still receive these dividends and pay tax at their marginal rates, as could your 18 and older children, which could be helpful if they are attending college.
DuMoulin Boskovich LLP services include:
• Set up the Family Trust: this is usually done in consultation with your accountant as they are intimately familiar with your family's personal marginal tax rates. This involves a Trust Agreement, a Settlor (the person who starts the trust by purchasing and giving something of value to the Trustee), and organizing a loan to enable the Family Trust to purchase non-voting shares in the operating company. These shares may represent some or all of the future growth of the business depending on your desired results.
• Assist with dividend resolutions and trust minutes: again in consultation with your accountant, we prepare company resolutions and/or trust minutes to set out what was done for tax purposes.
• Roll out of assets from the Family Trust to the beneficiaries: a Family Trust generally has a 21 year life span because the Federal Government deems a trust to dispose of its capital assets every 21 years. This means that if it holds growth shares which have appreciated in value, the Family Trust will be taxed on the capital gains. To avoid this we can assist you with rolling the shares out to one or more of the named beneficiaries. This roll out is at the trust's cost base, so no income tax would be payable. The only disadvantage to this is that the shares are now in the family member's name and they now belong to them absolutely.
Objectives
Our aim in assisting you with the set-up and operation of a Family Trust generally involves one or both of the following:
• lowering the amount of income tax paid by you and your family through income splitting; and
• passing on some or all of the future growth of your business to your chosen trust beneficiaries (which could reduce the amount of capital gains tax payable on your death).
Please click on the Estate and Tax Planning practice area for more information. |
