Please note that there are significant tax changes being introduced by the government which might make much of what is set out below inaccurate. This page will be revised in due course based on the legislation being introduced.
Can trusts be used to pay for a child’s education?
Yes, by having the trust own shares in the family company and having your children as beneficiaries of the trust it is possible to fund as much as $35,000.00 to each child over the age of eighteen (actually, the year in which he or she turns 18) at a tax rate of approximately 15.5% through the trust as opposed to funding your child’s education from your personal funds which are usually taxed at a substantially higher rate.
Your children may also receive a tax free capital gain. There is not enough space to deal with capital gains in this article but a well planned portfolio can take advantage of this tax provision.
The third reason is that a family trust can be used for estate planning. It will allow certain growth in the family company, depending on the amount of ownership held by the trust, to accumulate white not attracting any tax on the death of the parents. All of the growth from the time the trust was established until the death of the principal of the family company will pass to the surviving beneficiaries on a tax deferred basis. If one of the parents is a beneficiary together with the children then the parents can still enjoy income from the family company by way of dividends while not affecting the value of the company. The downside is that there is a deemed disposition of all of the trust assets every 21 years.
Are there any tax benefits in setting up a Trust?
In addition to funding your child’s education, the Trust may be used for income splitting when the beneficiaries are not able to actually work in the business. A corporation pays a reduced tax of 15.5% on the first $500,000 of income (2014). When dividends are flowed out of the trust (in the same calendar year) then the beneficiaries can receive dividend income which is taxed lower than the rate for income. If there is no other source of income the amount could be as high as $35,000 with no additional tax. If he or she is unable to be on payroll i.e. off on maternity leave, in school, or out of the City, etc., then income can quite properly be paid to him or her by way of dividend.
In addition, if the trust owns the family business and the shares are sold, each personal beneficiary may be eligible for $800,000 (as indexed) of capital gains exemption on the sale.
Is there is difference between capital and income?
The Capital assets are the property the trust owns. It could be shares in a family business, real property etc. The income that flows from the capital asset i.e. dividend income from shares or rent from property can be paid out to the beneficiaries. The Trust could distinguish between income beneficiaries (who are only entitled to receive the income produced from the assets) or capital beneficiaries (who are only entitled to receive the property (or cash value if the asset is sold). A person can be both an income and capital beneficiary.
Are there different type of Trusts?
There are a number of different types of trust. The most common is the distinction between an inter vivos trust, created when the settlor (person who settles the asset(s) on the trust) is alive, and a testamentary trust, created by will on the death of the settlor.
In addition, there is the alter ego trust used for a person over 65 where some or all of the persons assets are put into an inter vivos trust where only the settlor may receive any of the income or capital during his or her life time. On his or her death there is no probate as the trust determines who receives what.
There is the Hensen trust which allows for a mentally challenged person to receive the benefit of funding in a manner that preserves his or her entitlement to benefits.
There are a number of other types of trusts too numerous and complex to be dealt with here.
What kind of powers does a Trustee have?
There are certain Statutory requirements but those within the trust document can provide for the trustee(s) to have a virtual complete discretion, to a detailed set of rules the Trustee(s) must follow. It depends on the type of trust, who the beneficiaries are, and their relationship to the settlor which will determine what powers and discretion the Trustee(s) are given.
Can a beneficiary be excluded from a Trust?
Yes, by including a protectionary provision, a named beneficiary may be disqualified from receiving any benefit from the trust under certain events. If the principal of the family company is a beneficiary of the trust (or both parents where applicable) then by the use of a discretionary protective trust it is possible to protect the principal from any liability while still having access to funds from the company as long as all the i’s are dotted and t’s crossed.