Are Family Trusts Useful for Businesses?

A friend tells me that he used a family trust to multiply the use of the lifetime capital gains exemption and saved a lot of tax on the sale of his business. Is a family trust useful for my business?

‍There are many types and uses of trusts. In essence, a trust is a contractual relationship in which one or more persons (trustees) hold property on behalf of another group of persons (beneficiaries). Family trusts, also known as discretionary family trusts, are a particular type of trust widely used to hold shares of private business corporations.

Discretionary Family Trust

In the typical discretionary family trust, the trustees are the parents (and often one additional trusted friend or relative) and the income and capital beneficiaries are the parents, their children, grandchildren and remoter relatives, if desired. The trust acquires shares of the active business corporation pursuant to a corporate re-organization, resulting in income to the trust out of dividends from the corporation, and capital gains on disposition of the shares of the corporation. Since income and capital gains retain their character for tax purposes when distributed through a trust, significant tax savings may be realized when proceeds are distributed among family members whose marginal tax rates are lower, or to family members who have not previously used their lifetime capital gains exemption.

Discretionary family trusts also serve other purposes, including business succession and asset protection. If properly set up, a discretionary family trust may also be “unwound” simply and without adverse tax consequence. Under the Income Tax Act, a discretionary family trust is deemed to have disposed of its property every 21 years. This deemed disposition gives rise to a taxable capital gain within the trust, if the property has appreciated in value. Typically a discretionary family trust is wound up before 21 years to avoid the application of the deeming provision.

There are significant tax and legal complexities and traps associated with setting up and using discretionary family trusts. Legal and accounting advice should be obtained.

Frequently Asked Questions

I'm married without children, do I need a will?

We have been married for the last 25 years but don’t have any children. Do we need a will, or would everything just go to the surviving spouse anyway?

‍Yes, you do need a will. Whenever you don’t have any children, under the statutory distribution scheme for individuals that die without a will, your spouse would receive your entire estate. However, you should still have a will for at least two reasons:

Appointing an executor of your estate; and
Making instructions for the distribution of your estate in the event that you’re predeceased by your spouse.

Appointment of an executor of your estate.‍

The executor named in a will has the legal authority to take possession of all your assets, do your final income tax returns, and deal with banks and government institutions. If you don’t have a will, a court would have to appoint an executor of your estate to deal with any assets that were not jointly owned, as well as any registered investments that did not have a named beneficiary. The process of appointing an executor usually takes few months, so in addition to incurring unnecessary costs, there will be an extended delay during which your spouse will not have access to the assets in your estate. In my experience, some financial institutions will waive a probate requirement if your spouse is the named executor and the only beneficiary of your estate, which could provide your spouse with ready access to some assets shortly after your death.

‍Distribution of your estate if you survive your spouse.

‍By having a will in place, you will make sure that your estate is distributed the way you want it to be in the event that your spouse passes away shortly before you, or in the event that you are unable to make a will after your spouse’s death. Under the statutory distribution scheme, if you don’t have a spouse nor children, your estate would go to your parents. Alternatively, if your parents are deceased, your estate would go to your siblings. This may not be your wish. For example you might want to leave part of your estate to your spouse’s family, or you may wish to skip your parents and siblings and distribute the estate among your and your spouse’s nieces and nephews, or make gifts to a charity or charities. No matter which option you choose, having a will can provide the peace of mind of knowing that your estate will be distributed according to your wishes.

Do I need a will?

We have been married for the last 25 years but don’t have any children. Do we need a will, or would everything just go to the surviving spouse anyway?

Appointing an executor of your estate; and
Making instructions for the distribution of your estate in the event that you’re predeceased by your spouse.

Appointment of an executor of your estate.

‍The executor named in a will has the legal authority to take possession of all your assets, do your final income tax returns, and deal with banks and government institutions. If you don’t have a will, a court would have to appoint an executor of your estate to deal with any assets that were not jointly owned, as well as any registered investments that did not have a named beneficiary. The process of appointing an executor usually takes few months, so in addition to incurring unnecessary costs, there will be an extended delay during which your spouse will not have access to the assets in your estate. In my experience, some financial institutions will waive a probate requirement if your spouse is the named executor and the only beneficiary of your estate, which could provide your spouse with ready access to some assets shortly after your death.

‍Distribution of your estate if you survive your spouse.

Do I need a lawyer to get a will and powers of attorney?

Your last will does not have to be drafted or signed by a Lawyer. However, a will is a legal document that will determine who will have control of your estate and how it is going to be distributed. There are certain legal requirements that have to be met for the will to be valid. As such it is very important that your will is drafted, signed and witnessed properly.

‍How can a Lawyer help?

‍A Lawyer will ask you right questions to help you determine how to distribute your estate while taking into consideration various contingencies and scenarios that might be in place at the time of your passing. She will discuss with you legal clauses that you might want to include in your will, such as a beneficiary designation for your RRSP and insurance policies, expressing your wishes in regards to the custody of your minor children or confirming compensation for the executor. Your Lawyer will also talk to you about the powers that you want to give to your executor in addition to the powers he would have under current legal framework or limits that you want put on such powers. She will properly draft your will and will try to help you understand all the legal clauses and legalities contained in a will. Your Lawyer will also make sure that your new will revokes all your previous wills or other testamentary documents. Most importantly, your Lawyer will also make sure that your will is properly signed and witnessed.

Your last will is an important legal document and you should retain a professional to help you with its preparation and execution. Seeking and using such help will give you peace of mind knowing that your affairs are in order and make sure that your will reflects all your wishes.