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

Wills - How are they validated? Can I hand write my own?

I made my own hand-written will few years ago. I believe it’s valid and truly reflects my wishes, however my financial advisor told me I should get a proper will drafted by a Lawyer. Why should I do that?

‍Wills are legal documents that will dictate the distribution of assets after one’s passing and there are many reasons why wills should be prepared by a Lawyer specializing in this area of law.

‍Formal validity For wills to be valid and legally binding they have to be executed (signed) according to legal requirements. A Lawyer preparing your will would ensure that the document is executed properly and therefore legally valid and binding.

‍Comprehensiveness A Lawyer can make sure your will deals with all important matters, such as appointment of executor(s) and alternate executor(s), distribution of your assets, appointment of custodians and guardians for your children and setting up trusts for minor beneficiaries. Your Lawyer will also ensure your will gives executors enough powers to properly and efficiently administer your estate and follow your testamentary wishes.

‍Reflecting all your legal obligation

‍Under the law you are obliged to provide for your spouse and your dependents. Your Lawyer can advise you of your obligations to such persons.

‍Clarity of language

‍A properly drafted will should use language that is clear and precise in order to prevent any issues with interpreting your instructions contained in the document. Your Lawyer will make sure that proper language is being used to avoid any ambiguities and clearly reflect your intentions.

‍Preventing future challenges to your will

‍Having a Lawyer draft your will significantly reduces any risk of future legal challenge to its validity based on your legal capacity or any undue influence. When your legal capacity might be an issue, your Lawyer will gather and keep all the required evidence to prove you had the necessary legal capacity to make a will. He or she will also ensure there is no undue influence from any individuals, including family members that would affect any of the provisions of your will.

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.

Can a person with dementia participate in a lawsuit?

“I recently learned that my elderly Aunt is a victim of Fraud. The police have advised me that some victims of the fraud are considering a lawsuit and that someone may wish to speak to a Lawyer on my Aunt’s behalf. My Aunt suffers from dementia and I hold power of attorney. Can my Aunt participate in a lawsuit?"

Special rules apply to lawsuits involving people, like your aunt, who suffer from a mental illness and therefore lack capacity at law.

Generally, children under the age of 18 and people who suffer from mental illness, including those who suffer from dementia, must be represented by a litigation guardian within legal proceedings. There are also special rules which apply to how limitation periods apply to persons who lack capacity at law.

Litigation Guardians assume responsibility for litigation on behalf of a litigant who lacks capacity. Litigation Guardians serve an important role and are saddled with significant responsibilities. They assume the responsibilities of retaining and instructing Lawyers on behalf of the incapable litigant, and litigation guardians assume personal responsibility for any costs liability incurred as a result of a lawsuit.

However, the litigation guardian plays an essential role in ensuring access to justice for some of society’s most vulnerable people. Without people agreeing to stand as Litigation Guardian people who suffer losses could be left without recourse to the courts.

Generally a Lawyer works very closely with a litigation guardian to ensure that risks are properly understood. Lawyers also put in place measures to ensure the risk of personal exposure to the guardian is minimized.

If you are asked to stand as a litigation guardian you should consult with a Lawyer before deciding whether or not to stand.