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.

Dementia - What to do with regards to her will and powers of attorney?

My elderly mother was diagnosed with dementia a few months ago. She is rapidly deteriorating. She does not have signed powers of attorney documents. I have three other siblings. We need to sell her house and get access to her finances to pay her bills. What do we have to do?

Lawyer under power of attorney

‍Depending on your mother’s current mental capacity she might still be able to appoint an Lawyer under power of attorney for property or personal care. In order to determine whether you mother still has a mental capacity to execute power of attorney documents she will have to undergo a capacity assessment performed by a specially trained health care professional. If the capacity assessment finds that your mother has capacity to appoint an Lawyer under powers of attorney, she can visit a Lawyer to help her prepare and sign powers of attorney documents.

‍Guardianship

‍If your mother does not have the mental capacity to appoint an Lawyer, you and your siblings can apply to be appointed Guardians of Property for your mother. There are two ways this can be achieved: by applying to the Office of the Public Guardian and Trustee or making an application to the Court. The less costly and simpler way is to apply to the Office of the Public Guardian and Trustee. The process of applying and the application forms can be found on their website. In order to be able to apply to the Office of the Public Guardian and Trustee, you and your siblings would have to agree on whom to appoint as Guardian. In the event you and your siblings cannot agree on the appointment, someone will have to apply to the Court to be appointed Guardian for your mother.

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.