The Benefits Of A Family Trust And How They Can Help Minimize Tax

Your business has now grown, as well as your immediate family. You’ve set up a holding company, but you’re wondering what to do to transition your hard work to the next generation. A wise man once said: “Family Trusts are the most flexible vehicle you can insert into your corporate structure” -  and here are some of the reasons why:

What are the benefits of a Family Trust?

Income Splitting

One benefit to a Family Trust is income splitting. A Trust can subscribe for common shares of your operating company or holding company and you can flow dividends through the Family Trust and to any beneficiaries. One scenario is if you have children in university that you wish to help. In general, university students are in the lowest income bracket, whereas, if you are assisting them, you are likely in a higher if not the highest income bracket. By moving some money directly into their hands, it provides tax dollars at a lower rate.

Family Succession

Congratulations, you’ve built yourself a mini-empire and have accumulated enough wealth that you no longer need to work. Now what? Well, your children are interested in the family business, but you’re not quite ready to pass the torch until they’ve learnt the ropes for a few more years. A Family Trust allows you to freeze out your current value in the company, with all future value accruing to your Family Trust aka the next generation. The benefit of using this method, is that you still have all control over the Family Trust (for the next 21 years), ensuring that your children have plenty of time to learn the ways of the family business.

Flexibility

The last major benefit of the Family Trust is the flexibility that it provides. If you have many children, at many different stages of their lives, there may be points where you would like to help, and possibly, some more than others. Unlike a corporation, where you are required to justify the amount of a salary paid to a child or spouse, a Family Trust allows you to allocate income as you see fit. There are no rules over whether a child “earned” the income as it simply comes in the form of a dividend. Also, you can allocate a child all the income one year, and then allocate them nothing the next year as you have complete discretion over the Family Trust.

Final Thoughts…

There are several benefits to a Family Trust, we’ve just highlighted the major points that are used most often in practice. As always, ensure that you are speaking with your accountant to determine what best suits your business and long-term personal goals.