Discretionary family trusts are commonly used by business owners and professionals to facilitate participation by family members in private family corporations or other family investments and properties. Trusts are also used in corporate restructurings to implement estate freezes in order to transfer income and future wealth to family.
Although the advantages of a discretionary family trust can be significant, it is crucial that proper documentation is in place and that due process is used for implementing trust transactions. At NKPG, we can help you determine if a family trust is beneficial for your situation and if so, ensure that it is set up properly and operated effectively.
The benefits provided by a discretionary trust include:
The trustees maintain full control over trust assets and the distribution of trust income. Circumstances may change within a family, requiring the trust structure to be changed, but when structured properly, such changes can be implemented with little incremental complication or cost.
Income received by a trust (typically dividend income) may be distributed by the trustees to beneficiaries of their choice, who would then report the income on their personal income tax returns, allowing for income splitting between eligible family members and trust beneficiaries.
The characterization of certain types of income is retained when distributed to recipients. A beneficiary with no independent sources of income may receive dividends from a trust of $30,000 to $40,000 with little or no incremental personal income taxes. Capital gains similarly retain their character when distributed to beneficiaries, including capital gains eligible for the $750,000 small business capital gains deduction. Although payments made for salaries, wages or fees must be reasonable for the services provided (in order to be tax-deductible), there are no upper limits to amounts paid as dividends to trust beneficiaries.
It is not necessary to advise beneficiaries that they have an interest in the trust.
Matrimonial Property Protection
Although matrimonial property laws can be complex, it is generally understood that the interest in a discretionary family trust provides more distance between the beneficiary and the underlying trust asset, which should make it more difficult for a separated or divorced spouse of a beneficiary to enforce matrimonial property rights.