A family trust is a useful place to hold your family wealth for protection from outsiders and to transfer it to the next generation with potentially less tax. Moving your wealth to a family trust has multiple benefits, some of which are highlighted in this article.
Avoiding Probate Fees
In BC, a probate fee of roughly 1.4% applies to the transfer of assets from a deceased to beneficiaries. When wealth is held by a family trust, this fee is avoided altogether.
Avoiding Capital Gain Taxes
Across Canada, when someone dies, their properties are assumed to have been sold at their fair market value. This may result in a capital gain tax that can be a substantial burden on your loved ones. The benefit of a family trust is that such capital gain is not triggered upon your death for the wealth that is held in a family trust.
Protection in Divorce Cases
If the family trust is set up and administered properly as a discretionary family trust, then the wealth in the family trust is not subject to division of property laws in cases of a family breakdown. This can maximize assurances that your wealth remains in your family, and cannot as easily be taken by your children’s future spouse.
Benefits for Incompetent Member
If you have a beneficiary who is handicapped or financially incompetent, you can set up a family trust to ensure that the individual gets the benefit of the wealth while someone else, the trustee, manages the wealth. You may leave control to the trustee forever or until the beneficiary reaches a certain age.
Multiplication of Life-time Capital Gain Exemptions
You may be eligible to sell qualified shares of a business without paying taxes for up to a certain amount (for 2022, it was $913,630.00). So, if you have an operating company whose shares qualify, this can result in substantial tax-free money to you. However, the limit is a life-time limit, and once used in full, the person cannot use it again. If you have a properly set up family trust, you may be able to multiply this benefit across other people that are related to you, so if your business sells for potentially multiple million dollars, you and your relatives may be able to take out a much larger portion of that on a tax-free basis.
Creditor Protection
Within limits, you can protect the assets that are in a family trust against the reach of creditors. For example, subject to certain exceptions, if you operate a company that may be sued and become liable, you may be able to transfer the excess revenue of the operating company into a holding company that is linked to the family trust, and thereby keeping that excess revenue out of the reach of potential creditors.
Bijan Ahmadian
Practical Business & Tax Lawyer
About the Autor
Bijan Ahmadian is a lawyer in British Columbia with more than ten years of experience practicing in several areas, including tax and estate planning. He is known to be the only Farsi speaking lawyer in BC with a Master of Laws in Tax. Bijan is currently Senior Counsel at Wiebe Wittmann Robertson LLP in downtown Vancouver.
Not Legal Advice
This article is intended for information only. It is not legal advice. Tax and estate planning are complicated matters and vary in everyone’s case. You should seek legal advice before considering any such planning.