Is establishing a Family Trust the right wealth strategy for you? At Allan Bush Investment Team CIBC Private Wealth Wood Gundy Waterloo, we know changes took place in 2024 that could impact how trusts are managed and utilized. This will impact the use of trusts in a number of areas of financial planning, and we wanted to share that with you.

 

1. New reporting rules have been implemented to increase transparency and compliance in trust management[i]. Most trusts will now be required to file a T3 return every year regardless of whether taxes are payable or if there have been assets sold.[ii]
2. The change to Capital Gains taxation set out in the 2024 federal budget was enacted in June 2024. This change increases the inclusion rate and the lifetime capital gains exemption amount. This includes changes to the capital gains inclusion rate for trusts and corporations.[iii]
3. Legislation changes for inter-generational business transfers and employee ownership trusts have been designed to enable smoother transitions of family businesses.[iv]

 

These trust changes could make them more attractive for estate planning and wealth management. And when our team is asked, a family trust is typically the type asked most about, so let's review the potential benefits of using a family trust and what circumstances might make its creation worthwhile.

 

The benefits of a family trust fall into three primary categories:

· Taxation

· Estate planning

· Wealth preservation

 

Taxation

Reducing taxation is often a primary driver of setting up a family trust. Income splitting among the family trust's beneficiaries can effectively reduce the overall tax paid, as some of the beneficiaries may be in lower tax brackets.

 

While the family trust does not qualify for its own lifetime capital gains exemption when selling a farm property or the shares of a qualifying small business, its beneficiaries can claim their share of the exemption limit. This means that the capital gains realized on qualifying property held in the family trust can be taxed in the beneficiary's hands as if they had sold the qualifying property themselves. This exercise can maximize the use of the beneficiary's available lifetime exemption and minimize the family's overall tax burden on selling the asset(s).

 

A family trust can provide opportunities for tax deferral. The trustees can decide when to allocate income to beneficiaries, potentially deferring distributions to years when beneficiaries are in lower tax brackets or have other deductions to offset the income. If the property is held within a trust, the death of a trust beneficiary won't trigger the crystallization of that property as it would if that beneficiary owned the property outside of a trust. This last point is critical when it comes to transferring inter-generational wealth.

 

Estate Planning

The majority of our clients always try to minimize or avoid Probate fees. Assets held within a family trust do not form part of the estate upon death, thus avoiding probate fees and the public probate process.

Trustees have control and flexibility over how and when beneficiaries receive their inheritance. A family trust ensures that assets are managed and distributed according to the settlor's wishes, even after their death, providing continuity and stability for beneficiaries.

 

For business owners, family trusts can be used for succession planning. The trust can hold shares of a family business, ensuring that control and ownership of the company are transferred smoothly from one generation to the next without triggering immediate tax liabilities.

 

Wealth Preservation

A family trust can protect assets from creditors, lawsuits, and potential matrimonial disputes. By transferring assets into a trust, the settlor can shield these assets from claims against individual beneficiaries.

 

Trust assets are generally not considered matrimonial property, which can protect the family's wealth if a beneficiary divorces or separates.

 

If some family members are prone to poor financial decisions, trusts can include provisions to protect beneficiaries who may not be financially savvy or are at risk of making poor financial decisions. This ensures that the wealth is preserved and used in a manner that aligns with the settlor's intentions.

 

Who are family trusts for?

Now that we have examined some of the benefits of family trusts, we can consider which families are most likely to use them. Given the cost of setting up a family trust, families with higher net worth, business interests, minor children or dependents with special needs, blended families, and those with complex financial situations stand to gain the most from them. The trust can help manage and protect these assets effectively, reducing the risk of mismanagement and ensuring continuity.

 

Families with high net worth can leverage the trust for tax savings and wealth preservation, ensuring the structured and protected distribution of assets according to their wishes.

 

Individuals facing sizable estate taxes may establish a family trust to help minimize the eventual taxation of their assets. By moving their holdings into a family trust, they can reduce the amount of probate fees and maintain the privacy of their holdings.[v]

 

Business owners may find family trusts useful for several reasons. They can use a family trust to plan for the smooth transition of their business to the next generation, ensuring that the company remains operational and under family control. Depending on the business, the ability to control the timing of asset liquidations can more easily be accomplished inside a trust.

 

Families with minor children or dependents with special needs can ensure that they are financially secure and that their needs are met according to the settlor's wishes, even if the settlor passes on. A trust can also allocate funds for education, healthcare, and other essential needs, providing peace of mind for the settlor.

 

Not all families get along, especially when money is involved. This can be exacerbated in blended family situations. A family trust can clearly define asset management and distribution terms, preventing beneficiary disputes. It can ensure that assets are distributed according to specific wishes, protecting the interests of children from previous marriages and ensuring that all family members are cared for.

 

If you believe that a family trust may benefit your situation, the Allan Bush Investment Team is happy to discuss the merits of this strategy. We also have extensive resources within our integrated team at CIBC Trust to discuss, plan and execute the establishment of your family trust. CIBC Trust also offers trustees services to manage the trust and act as an independent and unbiased resource that can consistently execute this role over the years without fearing a named trustee's death. For this, and more, we're always here to help.

 

 

[i] https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/related-businesses/trusts.html

[ii]https://www.ontario.ca/page/estate-administration-tax

[iii] 2024 Capital Gains Changes: Trusts & Corporations | CIBC Private Wealth

[iv] Tax rules for family and employee business transfers released for 2024 onwards - CPA Canada

[v] Using family trusts for tax and estate planning | BDO Canada