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  • Matthew Sharp

Protect & Allocate Assets with a Trust

Updated: Dec 3, 2019

Trust Basics

  • A Trust is an arrangement that can allow for separation of control and beneficial ownership of assets.

  • A Trust can hold property, which is managed by Trustees for the benefit of the Trust’s Beneficiaries.

  • In family situations, the Trustees are also ordinarily beneficiaries of the Trust which allows for a measure of control over the assets while still benefiting from income distributions paid from the Trust. These Trusts are often referred to as “Family Trusts”.

From a practical perspective, a Trust can be used to manage the overall tax obligation of a family. A Trust can allocate income to Beneficiaries of the Trust and help manage estate taxes. A Trust can also be used to protect the family’s assets because the property is managed by the Trustees of the Trust instead of the individual family members. If there are concerns that certain family members shouldn’t have full control of certain assets, a Trust can allow Beneficiaries of the Trust the ability to benefit from the property without having control over that property.


Note that in certain circumstances, property can be distributed from a Trust and transferred to certain Beneficiaries of the Trust at any time without incurring tax in the Trust or for the Beneficiaries.



Income Allocation with Family Members

If an individual is at or near the highest marginal tax rate, a Trust could be used to reduce their taxes by taking advantage of the marginal tax rate of individuals who are beneficiaries of the Trust, including minor children (so long as certain conditions are met).

Where funds are expended to finance activities or purchases for children that are above their basic necessities, a Trust can allocate income earned to those children and take advantage of their marginal tax rate.


This strategy is beneficial when a family has children who are attending private schools or post-secondary institutions, as it allows the children to use their marginal tax rates. This can reduce the family’s aggregate tax bill significantly.


The allocation of income from a Trust is not limited to just children, as parents and grandparents could also be Beneficiaries of a Trust and could also receive payments from the Trust. The Trust adds flexibility to a family unit’s wealth distribution. Income distributions for tax purposes must be carefully analyzed to ensure that the income does not attribute back to another family member or the Trust.


Estate Planning and Probate

Upon the death of a taxpayer, there is a deeming event whereby the individual is considered to have disposed of all their capital property at its fair market value. While no property is actually disposed of, the deeming event can create capital gains tax in the taxpayer’s final tax return if the fair market value of their property is higher than the cost of the property.


Property owned by Trusts does not typically form part of the estate of an individual; therefore, holding investments (securities, real estate, shares of private companies, etc.) in a Trust can help you manage the capital gains tax on the death of a taxpayer. A Trust’s property is also not subject to probate. Holding property in a Trust can also help manage probate fees if you live in a jurisdiction that charges large probate fees.


Managing a Trust can be complicated due to recent amendments to the Income Tax Act, so it is best to seek advice from legal and tax professionals if you have questions. If you would like more details on the varying types and benefits of Trusts, or if you are contemplating setting up a Trust for the first time, please contact our office and we will be happy to provide guidance.


Contact us

info@ggtcpa.com

403-475-8033

The information in this publication is current as of November 28, 2019.


This publication has been carefully prepared; however, it was written in general terms and should not be seen as legal or tax advice. This publication should not take the place of professional advice specific to your own family circumstance. GGT Chartered Professional Accountants, its partners and employees do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken based on a decision made in relation to the concepts discussed in this publication.


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