by Lisa Collins, QC, TEP | April 15, 2015
“Do I need a family trust?” A business owner recently asked me that question in an initial meeting. My response was, “That depends”. I was not trying to be evasive. It is just that whether a business family should use a family trust depends upon their financial circumstances and the family situation, and of course, what is important to them.
A family trust is one of the great “tools of the trade”. It is not a solution or plan in itself. However, as part of an over all plan a family trust can be a great facilitator, playing a critical role in helping a family:
- minimize tax
- transition the ownership of a business or other wealth to the next generation; and
- protect their family wealth.
No two cases are the same. After reviewing the situation in detail and weighing the pros and cons, a family I have been working with recently has decided that they will not go ahead with the family trust at this time. They are younger and they are not yet ready (psychologically or otherwise) for the transition to the next generation. They also don’t have an appetite for the complexity of a family trust at this time. (There is still a restructuring to be done to correct a tax problem; it just won’t include a family trust.) They intend to revisit the decision regarding the family trust in two years.
In another case, the family has put in place two family trusts in a structure involving a number of corporations and businesses. In that case, the spouse is a beneficiary of one of the trusts but not the other. This was necessary to avoid a technical tax problem, but still be a position to dividend business profits to the spouse (taking advantage of her lower tax brackets).
Here are some of the reasons you might want to use a family trust:
- You want to cap the taxes you will have to pay on your shares of your business on your death, but you are not sure yet which family members should be new shareholders. This is accomplished by “freezing” your interest and having a family trust own new common shares. (You can also be a beneficiary of the trust so that if you want to keep open the option of getting the shares yourself some day, you can!)
- You want to be able to pay dividends to family members to provide them with financial support and use their lower tax brackets, but you are not ready for them to directly own shares of your business. You could use a family trust to flow dividends to them. (Now we are at tax time, you might be experiencing some of that pain of financially supporting young adult family members with your after tax dollars!)
- You want to be able to park excess profits of the business in another corporation, without paying the shareholder level of tax, but yet preserve your $800,000+ capital gains exemption for your shares of the business. A family trust with a corporate beneficiary can facilitate this. (This is preferable to the situation where the holding corporation directly owns shares of the operating corporation.)
- A sale of the business is possible some day and you want to have the opportunity to multiply the capital gains exemption (using other family members’ exemption, via a family trust).
- You want to protect the shares or other property by having the trust own it and having trustees who will manage and look after it for family members.
So back to the question: “Do I need a family trust?” In many cases it is a great tool that will play an important role in a business family’s planning. Let’s talk!
Stay tuned for a future article: “I have a Family Trust, Now What?” It will explore how to make sure your family trust is still working for you and remind you about some important milestones.