What is a Family Trust and How Does it Benefit Business Owners?

Setting up a family trust as part of your corporate structure can provide benefits, including asset protection, succession and estate planning, and tax savings. Let’s get into how powerful of a tool a trust can be for business owners.

What is a Trust? 

A trust is a legal arrangement used to transfer the management and control of assets from one party to another. The trust is created through a trust agreement or a trust deed, which outlines the terms and conditions of the trust. 

Trusts are commonly used for various purposes, such as estate planning, asset protection, charitable giving, and managing assets on behalf of minors or individuals who cannot manage their own affairs. In certain circumstances, trust can also offer flexibility, privacy, and potential tax benefits.

Key parties in a trust

There are three key parties involved in a trust agreement: 

  • A trustor or settler
  • A trustee
  • A beneficiary

The trustor creates the trust and can transfer assets to the trustee, including money, property, investments, or other valuable assets. 

The trustee then manages and administers the assets according to the instructions provided in the trust agreement. The trustee has a fiduciary duty to act in the beneficiary’s best interests and carry out the trustor’s wishes.

The beneficiary is the individual or group who will receive the distributions from the trust, including income generated by the trust’s assets, specific gifts, or other forms of support as outlined in the trust agreement.

Types of Trusts

There are many kinds of trusts, each serving a different purpose. 

The two main types of trusts are living trusts and testamentary trusts. 

A living trust is created and effective when the trustor is still alive. It’s primarily used to manage and transfer assets to beneficiaries during the trustor’s lifetime while avoiding probate. A living trust can be revocable or irrevocable. When a living trust is revocable, the trustor can alter the trust. When it’s irrevocable, you cannot modify the trust.

A testamentary trust is created through a will and becomes effective upon the trustor’s death. It allows for the distribution of assets to beneficiaries according to specific instructions outlined in the will. Testamentary trusts are often irrevocable.

In this blog, we’ll focus on a type of living trust known as family trust and explore how it benefits business owners.

(Learn about the difference between an operating company vs. holding company vs. family trust)

Everything You Need to Know About a Family Trust

What is a family trust? 

A family trust, also known as a family business trust or a family investment trust, is established by a family to hold and manage the family’s business interests. It allows for the seamless transfer of ownership and control of the operating company from one generation to the next. Family trusts often have provisions for distributing profits and management responsibilities among family members.

A family trust can be set up when the business is established or added to the corporate structure later. If a family trust is added after the company has been operating, there could be tax implications and fees to alter the corporate structure. To set up a family trust, you’ll need to consult a lawyer and an accountant with experience dealing with family trusts. It may not be obvious from the onset of a business if you’ll benefit from a family trust, so you may be unable to decide from the get-go.

(Curious about how to invest inside your holding company? Here are some investment options and strategies if you’re looking to invest inside your holding company)

The benefits of a family trust

Here are four ways a family trust can benefit business owners. 

1. Succession planning: If you intend to pass down ownership of your business to future generations, a family trust can ensure a smooth transition by protecting the interests of family members and providing a framework for managing and distributing business assets.

2. Asset protection: A family trust can protect assets by separating personal and business assets. It protects the company from risks, creditors, or legal claims, adding a layer of security for your business assets.

3. Estate planning: If you have significant assets tied to your business, a Family Trust can be part of your comprehensive estate plan. It can help minimize estate taxes, facilitate the distribution of assets, and provide financial security to your family members.

4. Selling your business: Having a family trust set up can offer major tax benefits when selling your business.

Here’s an example of how we helped a client save tax through a family trust: Kate and John own a clothing company valued at $12,000,000 and plan to sell it in 3-5 years. They each own 50% of their company. If John and Kate sold their company for $12,000,000, they would each be eligible to use their Lifetime Capital Gains Exemption, saving them approximately $1,000,000 each in taxable income. They would still have to pay tax on $10,000,000. 

We recommended they restructure their corporate setup with a family trust owning 100% of the business shares with themselves and their three children as the beneficiaries of the trust. We also advised them to create a holding company and have that as an additional beneficiary of the trust.

The new corporate structure will help John and Kate accomplish several things. The family trust with John, Kate, and their three children will allow them now to have five Lifetime Capital Gains Exemptions instead of two. This will decrease their taxable income when selling the business by a total of $5,000,000. 

Having a holding company as a beneficiary of the trust will allow them to funnel any presale profits up through the trust and invest it outside of the operating company, helping protect the assets from creditors, creating a more seamless sale in the future and helping grow John and Kate’s wealth.

(Should you make your spouse a shareholder of your corporation? Here are some important considerations)

Watch the video on this topic

Having a financial planner who specializes in working with business owners and a knowledgeable lawyer who specializes in trust law is crucial to ensure that the trust is set up correctly to help achieve your goals. Book a call today to find out how a trust can fit into your financial plan and goals.

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