What are the benefits of setting up a trust?
Firstly, the beneficiaries of the trust may be able to take advantage of the lifetime capital gains exemption, presently (2020) at around $883,000. 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 second 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. The downside is that there is a deemed disposition of all of the trust assets every 21 years.
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 adult beneficiaries under certain circumstances. Prior to the changes to the income tax act in the 2018 budget trusts were used to split income. At this time, the only dividends that a beneficiary may receive, with favorable tax consequences, are those dividends he or she could receive if he or she owned the shares directly. 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.