Family Trust explained.

A family trust is a legal document created to hold the family assets and pass it on to the beneficiaries after death. It is also known as a revocable living trust. Revocable means that the person who creates it can change anything as desired or even cancel the trust. Living establishes the fact that the trust survives death. A family trust must have three main individuals: the settler, the trustees and the beneficiaries.  The settler is the person who transfers their assets to the family trust and then chooses a trustee to oversee it. The beneficiary is the person who benefits from the trust. 

The settler is also known as the grantor. The settler, with the help of an advisor, dictates the terms of the trust. John owned four properties and, to save on estate taxes, opened a family trust. The trust stipulates that upon John’s death, two properties go to each of his two children; the first property will be transferred on their fortieth birthday and the second on their sixtieth. John elects to be the trustee of the family trust and upon his death, his lawyer, for a pre-arranged fee, will act as the secondary trustee. Transferring investment properties to a family trust triggers capital gains. As such, John transferred one property each year to avoid paying all the taxes at once. In order to facilitate the transfer, John signed a “quit claim deed”, where he relinquishes his claim of the property to the trustee. 

A name should be given to the family trust so that it can be easily identified. Most people choose a family name, for example, “Ali Family Trust”. The trust details must have the name of the trustee and the one next in line. The last part of the document has the names of the beneficiaries and their relation to the settler. It stipulates what the beneficiaries share and what happens if the beneficiaries die before the settler. For example, Ali has two children, Rafie and Fazie—each would inherit 50% of his estate. The trust agreement states that Fazie is the beneficiary of 50 % “by representation”, meaning that 50 % would go to the children. If the beneficiaries were addressed as “a class that closes”, then if one dies, their portion goes to the other. For the family trust to be valid, it must be dated. It is a legal binding document between the settler and the trustee and as such, both parties should have the trust notarized.  

When a family trust is created, some assets such as Real Estate, stocks and bonds, investment and saving accounts and life insurance proceeds are transferred. The family trust becomes a living organism where the investments grow and produce profits. It is being taxed as a corporation. There are two types of beneficiaries, income and capital beneficiary. Income beneficiaries are entitled to receive income from the trust and capital beneficiaries receive capital either during the life of the trust or when the trust is closed. A family trust, once established with the correct terms, can pay for senior living and funeral expenses as well. The details can be reviewed and changed anytime when both the settler and trustee agree. 

Emma and Olivia established a family trust where upon retirement, they can both receive an income. They adopted a little special needs child, Aliya. Since they are the settlers as well as the trustees of the family trust, they added Aliya as an income beneficiary when she becomes 18 years and if they exit before Aliya 18th birthday, the income will go to her caretaker. They added this clause under the beneficiary’s detail, and both initialed it. 

Family trust has many benefits. The assets are protected from creditors because they now belong to the trust. The family home can be transferred to the trust, but the owner can still live there. A significant difference between a family trust and a will is that the trust can act once created and a will only after death. A will disposes the assets upon death to the beneficiaries but must undergo probate through the court and in the process becomes public records.  Family trusts are private affairs. Upon death, the executor of the will must obtain permission to do so and requires “a grant of probate”. A grant of probate confirms that the person has died, the will is credible, and the executor is not an imposter.  In Ontario, the time to grant probate can be between four to six months and in some cases can extend over a year. It is an expensive process that involves lawyer fees, court fees, executor cost, accounting, appraisal for properties and probate tax. The total cost can be about two percent of the value of the estate. For investment properties, upon death, for tax purpose, it is deemed as disposed and triggers capital gains to the estate. 

Family trust has many benefits and can protect our hard earn assets for our loved ones. It is living and still dictates how your assets can be used way into the future, from giving to charities or paying for your great grand child’s university. It’s the way to go.