By: Jayson Schwarz LLM and Allan Church
As you look at the family running over the property, you sit back and think hmmm all of these kids and I’m getting older, what to do? One of the options is to create a trust.
WHAT IS A TRUST
A trust is a relationship among several parties. The key players are:
- the settlor or the person who sets up the trust;
- the trustees or the person(s) who manage the trust and the property it owns, and
- the beneficiaries or the persons who are entitled to benefit from the property owned by the trust.
The settlor sets up the trust by transferring something to the trustees. The settlor establishes the rules around how that property and any other property acquired by the trust is to be managed and used. The rules can be very detailed or very broad. In the latter case the trustees would be allowed a lot of discretion in how they manage the trust’s assets.
USING A TRUST TO OWN THE FAMILY COTTAGE
A trust can be an ideal vehicle to own a family cottage. It is less regulated than other methods of ownership and doesn’t have to file an income tax return unless it has taxable income to report. A trust can also provide a high degree of flexibility in terms of the provisions that can be included in the rules mentioned above.
There are challenges to using a family trust to own your cottage and your legal or accounting professional can explain them to you.
Notwithstanding these limitations, a trust can be useful in the following situations:
As Part of a Testamentary Plan
The family cottage could be left to a trust created under a person’s will. When a parent dies, they could leave the family cottage to a trust for the benefit of their children and grandchildren. The trust could contain rules as to how the cottage is to be shared and who will ultimately get the use of it. The increase in the value of the cottage will be taxable in the year the parent dies, so this strategy will not avoid current taxes. The trustees will have to consider what is to be done with the family cottage 21 years after the death of the last beneficiary alive at the time the trust was created (the “Period”). At that time the trustees would consult with their legal or accounting professional to find out the best route to take.
Acquisition of a Cottage
A family trust should be considered where a person is purchasing a cottage later in life. The trust could buy the property and Mom, Dad, the kids and grandchildren could use the property. At the end of the Period, the cottage could be transferred to the kids or the grandchildren. Tax on the increase in the value of the cottage up to Mom and Dad’s death would be deferred until the cottage is sold by whomsoever received the cottage from the trust.
A family trust can provide significant flexibility and planning opportunities in the right situation. However consideration has to be given to a wide range of tax and family issues before deciding whether a trust is right for you. Make sure to contact a lawyer or accountant who is familiar with how to use a family trust to get more information.
Many thanks to Allan Church who is a Toronto/Mississauga tax accountant and partner in the accounting firm MNP LLP for assistance in writing this Article.