For those who have built some measure of wealth over a lifetime, there will likely come a time to consider the best way to pass some of it along to loved ones. Often, the subject comes up when a will or estate plan is being written. While not right for everybody or for every situation, it may make sense to set up a family trust.
A trust can be an effective way to move taxable income out of the hands of a high-income earner and into the hands of lower-taxed family members. Trusts have long been a necessary tool for those who have a beneficiary with a disability, in order to ensure that the beneficiary's needs continue to be met throughout his or her lifetime. However, optional trusts that allow people to control how their wealth is shared are just now becoming more popular, according to Elaine Blades, director for estate and trust products and services at Scotia Private Client Group.
"We're starting to see more of it," she says, as the population ages and wealth accumulates. "Some clients don't feel it's wise to simply pass a cheque along. They want their children to get money in stages and learn how to best deal with the money. There can be tax advantages to doing it and matrimonial protection."
The clients that Ms. Blades caters to in the Scotia Private Client Group are high net worth and have at least $500,000 in investable assets. However, a family trust does not need to be six or seven figures. "You can have smaller trusts and we see it primarily in wills," says Ms. Blades. Often, grandparents set aside several thousand dollars for each of their grandchildren and set some conditions around how and when the money can be used.
The perception of family trusts as vehicles for only the extremely wealthy is one of the misperceptions about trusts that Ms. Blades wants to put to rest. Here are her top five myths and realities about the structure.
Myth #1: They are inflexible.
Reality: Trusts can be quite versatile and are often the best option to provide for disabled beneficiaries or for children of blended marriages. The terms of the trust can vary. There can be a fixed-interest trust, where an amount is invested and the beneficiary gets the money. Or a trustee can be appointed to pay it out. You can also stagger the payments so that funds are paid out when the beneficiary reaches certain age milestones.
Myth #2: They are mainly used to avoid estate taxes and probate costs.
Reality: Trusts can offer significant tax benefits and avoid probate costs, but they also have other benefits like asset protection, investment management, and protection for disabled family members or the client if they become incapacitated.
"It's always a cost benefit analysis with a trust," says Ms. Blades. "You would never just look at the financial benefits such as how much tax is saved; you would also look at the beneficiary benefits. You need to do the analysis to see when and where it is worthwhile."
Myth #3: They are only for the very wealthy.
Reality: Trusts can be set up for anyone with specific needs and are useful vehicles for passing funds to children or grandchildren. There are multimillion-dollar trusts and there are much smaller trusts.
Myth #4: You lose control.
Reality: Trusts are customized vehicles designed in line with your wishes and ensure that cash is ultimately transferred to beneficiaries as desired. While you no longer own the money, you can say when and how you want it used. Your control comes in under the terms and conditions you're drafting.
Myth #5: Trusts are complicated and onerous to manage.
Reality: The provisions of a trust can be as simple or as complex as you want or need. To set up a trust, you would first need to meet with a will and estate planner or a lawyer to draft the agreement. It is also important to get separate tax advice from an accountant to ensure the trust is a worthwhile vehicle for you. If you make the trust a part of a will - this type of trust is called a testamentary trust - the cost will be built into the cost of the will. If you create a trust that takes effect while you are alive - known as a living trust or inter vivos trust - it will cost at least $1,000 to set up and establish. For a large trust, you will need to appoint a trustee to oversee it and manage investments held within the trust. This comes with a typical annual fee of 1 per cent.