Is a Family Trust a Good Idea?

Is a family trust a good idea? Picture this: a maze of family trusts, promising shelter for assets and strategic tax benefits, yet concealing hidden complexities that could trip up even the most seasoned investors. While family trusts offer a shield against creditors and a cloak of privacy, are they truly the holy grail for wealth management? This post describes a different approach—one that champions transparency and accountability. And ultimately, greater financial peace of mind.

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What is a Family Trust?

In Canada, a family trust is a legal arrangement where assets are held and managed by trustees for the benefit of family members or beneficiaries specified in a trust deed.

A family trust in Canada is established with the primary purpose of managing and distributing assets for the benefit of family members. The trust is created by a settlor (the person establishing the trust) who transfers assets into the trust, which are then managed by trustees appointed in accordance with the trust’s terms. The beneficiaries, who can include family members such as children, spouses, or other relatives, receive the benefits from the trust as specified in the trust deed.

Is It a Good Idea to Use a Family Trust?

As a wealthy investor, let’s consider the benefits to using family trusts: creditor protection, privacy, tax management, control.

Do wealthy investors need creditor protection? No.

Is privacy a main concern? Yes, but there are better ways to be discreet about wealth. Including living a modest lifestyle.

Are managing taxes a concern? Certainly, but trusts offer limited benefits for tax management while introducing significant drawbacks for long-term investors including the 21-year rule. Income splitting using trusts has limited benefits for wealthy investors who are always in the top tax bracket. Once again, if tax savings are the goal, there are better ways to achieve this without using trusts.

How to Use Family Trusts for Control and Legacy Planning

When wealthy investors want to “rule from the grave”, trusts can be a valuable tool. But frankly, our family office avoids these types of investors. Instead, we counsel our clients to include multiple generations into wealth management discussions during their own lifetimes.

Too often, entrepreneurs and wealthy investors hide their wealth from family and use it as a tool to maintain power over them. Strategically doling out information and benefits. Oftentimes, clients who don’t include their heirs in their wealth management process during their lifetime will leave their heirs with a mess (including emotional damage promoting guilt, fear, anger, etc).

Instead of using a family trust, its better to include heirs in your wealth management process during your lifetime. Here are some examples:

• Include your adult children in review meetings with your accountants and investment advisors. Maybe as an observer at first. Over time, allow them to provide more input. Eventually, have them make decisions with your guidance.
• Include your adult children in your philanthropy. Create a donor advised fund account where your family can make granting and investment decisions together. Create a process for this and make it fun.

If you are in need of some personalized wealth guidance, contact us or fill out our free assessment questionnaire to determine if our family office services can help you efficiently manage your wealth!

When are Family Trusts Appropriate?

Let’s say you’re an entrepreneur with young children. You’ve diligently used life insurance to protect them in the case you die before they’re adults. A trust might make sense so that your spouse, friend, and trust company can make their financial decisions until they reach a stage of life when they can take responsibility for themselves.

Sometimes, investors create family trusts to hold specific assets such as cottages. This is often done so that the trust deed can contain specific terms that allow beneficiaries to manage the asset with a path to eventually dissolve the trust and re-arrange ownership. Trusts allow lots of flexibility in this regard.

There are tax benefits to using trusts in some situations. But, there are better, less complicated ways to achieve the same (or better) tax benefits.

So, Is a Family Trust a Good Idea?

Rather than make your financial life more complicated using structures like family trusts, investors should be looking for ways to simplify their financial life.

The worst investors we’ve seen are those who are creating complexity. Since, complexity adds costs and provides benefits to cunning advisors instead of promoting financial peace of mind. Smart investors are consistently looking for ways to gain clarity and transparency.

There is no tax planning tool that will enable your family to maintain their wealth through generations. What matters most are the capability of the people who have the responsibility.

So, instead of looking for legal structures to maintain your wealth. Take a different approach by creating more transparency and accountability. Because, to successfully transition wealth through generations, you’ll need to share and transition responsibility to the next generation during your own lifetime.

This approach to wealth management succession involves building trust and allowing the next generation to gain their own experience. They must be allowed to make mistakes because it will help them gain the strength of experience to pass down their wisdom to their own children one day too.

Contact Us

Our family office works with wealthy investors who care about making a positive impact with their wealth and passing on their wisdom through generations. Contact us, to learn more about our approach to generational wealth management.

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