I would like to understand how a family trust works. Is it worth it?
– Chantal Fournier
The more cynical will respond that trusts are used to protect malicious entrepreneurs from dubious financial maneuvers, or to help the rich and famous find ways to pay less tax.
True, trusts sometimes have a bad reputation, but this is based on myths that are fairly easy to debunk, financial planner, notary and trust manager Caroline Marion of Desjardins easily demonstrates. “We are wary of it,” she says, “because what we don’t know is always frightening. »
Let’s be clear: generally, when you create a trust, you transfer your assets to this new entity which becomes the owner. It is administered by a trustee and has beneficiaries.
If the person who established this trust wants to be its administrator, great good to him. But she cannot be alone, she must have one or more co-trustees, since there must be at least one administrator who is neither settlor nor beneficiary.
There are two main types of trust – and it may seem a bit brutal, but they are those for the living and for the dead: the testamentary trust, which manages the assets of the deceased person, and the family trust .
Several ramifications exist, but let’s stay in these two branches for the purposes of the cause: understanding the reason for trusts.
And what is it, in fact?
“The trust is essentially a vehicle for protection and/or control,” says Caroline Marion, from the outset.
For example ?
“Protect assets against creditors, beneficiaries against themselves; protect beneficiaries against abuse committed by people around them, protect family assets against seizures or financial difficulties of beneficiaries…”, lists the financial planner.
We must carefully plan the creation of this independent entity for which it will be necessary to file a tax return, open a bank account and manage the accounting, specifies Caroline Marion. Another prejudice to put in the trash: you cannot create a trust on the corner of a table when business goes sour.
But its creation is well worth the effort (and the costs!) when the trust is a protection tool for the beneficiary, according to Caroline Marion.
“If I have a beneficiary who really needs protection, such as a minor child, a disabled child or a disabled spouse, if we are talking about intellectual disability. In these moments, the trust is the vehicle of choice, explains Caroline Marion. Because it will allow this person to benefit from the advantages of a legacy or a donation without us being obliged to put in place forced protection by the Civil Code which would be much less pleasant. Like guardianship. »
As for this idea that you have to be very rich to turn to a trust, the notary explains that this is not the case. Yes, you have to pay the creation costs, but it can be relatively reasonable (between $1500 and $2000) for a simple structure.
For the administration, the cost varies greatly.
A trust company will charge higher fees, but if a loved one manages the family trust, it is even possible that it will be done voluntarily.
“The creation and maintenance costs are not exorbitant,” says Caroline Marion. I could have $50,000 in a trust to manage this money which belongs to my great-nephew who inherited it from his father. So no, it’s not just for the rich and famous. »
Why a testamentary trust rather than a will?
“I’m going to do one because I have a beneficiary who I want to protect against themselves,” replies Caroline Marion, who cites cases of people who mismanage their finances, in particular.
The planner also sees cases of beneficiaries who could be prey for vultures that would circle around them, once they have their inheritance in hand. In this case, the trustee would have the responsibility to respect the wishes of the settlor. For better or for worse, because if it is to continue its post-mortem control, this will be the case, since it is the trust which inherits the property.
It remains to be seen whether the person administering the trust has discretionary power or not, which is determined at creation.
Good to know: a trust can only be set up for part of future legacies. The family chalet, for example, if an owner wants it to belong to everyone, for generations to come, and to be protected from the financial problems of an heir.
In the case of entrepreneurs who set up family trusts, it is certainly a tax tool, maintains Audrey Gibeault, tax partner at Lavery, who specifies that there are three uses for the family trust.
The first is that it multiplies the capital gains exemption, given that each of the beneficiaries will be entitled to it.
However, you should know that this exemption applies only once in the life of an entrepreneur.
A serial entrepreneur will not have this exemption every time she makes a capital gain. “But it is an amount that is indexable,” specifies Audrey Gibeault. So it is possible to benefit from this enhancement, says the tax specialist, who mentions several subtleties in the application of these rules.
“The second advantage is the limitation of tax in the event of death,” she explains. And the third concerns transfers of family businesses.
“Essentially, this means that when shares are held by the trust, it can decide to generally allocate the shares, for example, to the next generation, without tax impact,” explains Audrey Gibeault, according to whom this becomes a very interesting tool for integrating the next generation.
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