Preserve Wealth and Reduce Taxes with a Family Trust

High-net-worth families want to protect their wealth, and one proven way to achieve that goal is through a family trust. And while high-net-worth families may reap the greatest benefits from trusts, other families – especially those who own a business – can make good use of family trusts as well.

A family trust is a legal entity that allows family members to protect assets, control the distribution of assets, transfer wealth among family members and split income in a tax-efficient manner. Before we look at these benefits in more detail, it’s important to understand the three key parties involved in family trusts: settlors, trustees and beneficiaries.

The settlor is typically a family member or close friend who establishes and funds the family trust on behalf of the trustees and beneficiaries. Trustees are the people who manage and administer the trust, and are often parents or a reliable business advisor. Beneficiaries are the people who will receive financial benefit from the trust, and can be children, grandchildren, siblings, nieces, nephews, etc.

Family trusts may set up as either testamentary (e.g., arising after the death of a trustee) or inter vivos (e.g., implemented while the trustee is alive).

Why create a family trust?

Now that we know who’s involved in a family trust, let’s look at four of the most common reasons for creating one:

1. Protect assets. A family trust can protect the beneficiaries from claims for payment made by creditors. Assets held in the trust typically cannot be seized in the event of a lawsuit or bankruptcy.
2. Control the distribution of assets. Trustees decide which beneficiary receives what – and when – based on the factors they have documented. Also, let’s say a child is disabled or not careful with money. The family trust can distribute assets in a way that ensures the child has enough money to help meet their lifetime needs.
3. Transfer wealth among family members. An estate freeze is a strategy that allows a business owner to lock in the value of their business at its current valuation as part of the family trust. Any future growth of the business
   is considered a capital gain and the beneficiaries can use their lifetime capital gains exemption to help shelter these gains from income tax. Estate freezes are also used in other tax-mitigation strategies and for certain estate planning and business succession purposes.
4. Split income in a tax-efficient manner. A family trust allows trustees to distribute earned income to family members who are in a lower income tax bracket, so the income (e.g., capital gains, dividends) is taxed at a lower rate. By sharing income, the overall family tax burden is reduced, leaving more wealth available.

Family trusts offer many benefits, but may also be costly and complicated. We can help you determine if establishing a family trust is suitable for your family’s unique financial situation.

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