How does a discretionary family trust work

This can be useful for estate planning, and save assets from being depleted unnecessarily. Our solicitors are experienced at setting up and administering discretionary trusts. A discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. All capital and income is distributed completely at their discretion.

Discretionary trusts by their very nature place a lot of power in the hands of the trustees. Discretionary trusts can be very useful in a number of circumstances. They can be tailored to suit the needs of you and your family, and benefit your estate as a whole. These might be:. The trustees can make changes to what the beneficiaries get from the trust, as and when it becomes appropriate.

Discretionary trusts can sometimes be used to keep assets away from business creditors or a divorcing spouse. Discretionary trusts can be a tax-efficient solution when passing on wealth to your beneficiaries, ensuring that:. Discretionary trusts are also valuable when considering how to pass on property. They can help you:. You can set it up during your lifetime, or write it into your Will to come into effect after your death.

Read more about creating a trust in your Will. We have considerable experience in both creating and administering trusts. The services we offer include:. We can also help with the drafting or rewriting of your Will, and your general wealth planning for the next generation. We have a dedicated trust administration team who have considerable experience both setting up and managing trusts.

As well as solicitors who are experts in all aspects of estate planning, we also have tax specialists and financial advisers, meaning we have everything you need in-house. If a beneficiary is being sued in a divorce situation then the spouse may have trouble convincing the judge to use estate assets to settle their claim for a division of matrimonial property however the trust may be regarded as a financial resource of the beneficiary.

Tax effectiveness - being a discretionary trust the trustee will have a discretion as to which beneficiaries receive income, and in what proportions. The income of the trust is taxed in the hands of the beneficiaries who receive it. This means that the trustee may be able to direct income to the members of your family that have the lowest incomes, and by that means the trust income distributed to them should be taxed at their lower marginal tax rates.

Control - eventually you will die or become too frail to manage your assets. Trust assets will not form part of your estate, but if you have a corporate trustee then any shares that you hold in the corporate trustee can be gifted in your will. This allows you to pass control of the trust to those of your family who will be good money managers and, as long as they are of good character, they can use that control to assist those of your family that are not good money managers.

If you have family members who are spendthrifts, have gambling addiction, have substance abuse issues, mental health issues, overbearing spouses or partners, or friends who will prey on them or easily defraud them, or otherwise likely to be bankrupted, then you will keep control of your family discretionary trust out of their hands while still have them receive the benefits. It is important that this property, knows as the "settlement instrument" be properly held on to by the trustees as CanRev has also been known to ask for proof of the initial instrument's existence — one tip might be to tape or attach the settlement instrument to the original trust agreement so it doesn't get lost.

But the settlor's role is not as simple as handing over a gold coin. He or she must actually intend to form the trust and should understand the terms of the trust agreement. The settlor cannot be a beneficiary of the trust, or else the attribution rule discussed above will kick in. However, he or she should be the person who instructs the advisor preparing the trust deed, or at the very least as that may not always be practical , review and confirm the terms of the trust prior to its finalization and execution.

The settlor's role also includes the confirmation of the trustees. So, the Settlor should not always be a choice of convenience. Once the Settlor has formally formed the trust deed, his or her role is generally done, as the Settlor has no ongoing duties in respect of the Trust.

That is the Trustees' duty. The various roles discussed above are not the only considerations when establishing a family trust. Tax planning is very important when drafting the trust agreement. In addition to the attribution rule discussed above, there are some additional attribution rules which may apply in certain circumstances.

There are exceptions to the application of these attribution rules, such as the prescribed loan strategy that I have written about before, or ensuring that the trust agreement contains the appropriate anti-attribution clause, which would prevent distributions of income to your spouse or minor child. It is important to speak to your tax advisor to ensure that the proper steps are taken or included in the trust agreement at the time that the trust is formed.

I would highly stress that you speak to your advisor before you finalize the trust agreement as it is very difficult to amend a trust agreement. And in some instances, simply fixing the problem after the fact won't save you from a tax problem. Lastly, an important tax rule to remember with a discretionary family trust is that they only have a tax shelf life of 21 years. That's because under the Tax Act, a discretionary family trust is deemed to have sold all of its assets on its 21st anniversary and every 21st anniversary thereafter.

So, if the discretionary trust owns assets with a large pregnant gain, it could be stuck with a huge tax bill if nothing is done. So, the rule of thumb with discretionary family trusts is to ensure that the trustees distribute the trust capital to the beneficiaries just prior to the trust's 21st birthday. There are many potential answers to this question.

For tax purposes, a family trust can allow for income splitting with minors. If you were to simply gift funds to your minor children, any interest income would be taxed in your hands. However, if you were to lend the funds at the prescribed rate currently 2 per cent as of April 1, , then such income can be taxed in your minor children's hands at low rates. However, legally, a minor child cannot borrow funds. Hence, a family trust can provide the vehicle by which a loan at the prescribed rate can be made for the benefit of your minor children.

Another benefit of a trust is that if you are not yet sure how certain property is to be held among your family members, then having a family trust hold such property in the meantime gives you the ability to control how the property is managed, and at least 21 years before you need to decide how the assets get hold by your family members. Again, as noted above, there are many more reasons why a family trust can provide some benefit to you and your family.

So, I would suggest that the next time you speak to your financial, estate or tax advisor. You just might be interested in one of the answers that might be relevant to your particular situation. The content of this article is intended to provide a general guide to the subject matter.

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