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What is a trust? Family vs Personal: which one to choose

What is a trust

What is a trust? By setting up a trust, the settlor transfers part of his estate for the benefit of other people, the beneficiaries. The third important actor in the trust is the trustee, who must manage and administer the trust property as directed by the settlor.

What is a trust? Family vs Personal: which is the right one?

1) Family trust

Did you know that the family trust is the entrepreneur’s vehicle par excellence? It is the keystone giving access to a host of tax strategies designed to reduce your tax burden while protecting your assets from creditors. Indispensable for the entrepreneur! Unlike the personal trust which serves to receive and protect values already accumulated in the past, the family trust serves to accumulate values to be realized from its creation.

The trust is a legal entity like a company, but with its own characteristics. In particular, it has its own assets and can thus own property, invest as well as contract with third parties. The trustees manage the trust like the directors of a company, and the beneficiaries of the trust can receive income and capital like the shareholders of a company. You will be the trustee of your trust, as well as the beneficiary along with your family members.

Protect your assets with the family trust

Because the trust can hold its own property, a creditor who obtains a judgment against you will not be able to enforce it against the trust property. This will allow you to sleep soundly, even when the wind picks up around you.

The taxation of it

The trust is a taxpayer like you and must therefore file an income tax return annually. However, the income earned by the trust can be returned to the beneficiaries and it is then the beneficiaries who will have to tax the amount received rather than the trust. This characteristic is the basis of several tax strategies, including income splitting with members of your family. For example, if your company’s shares are held by a family trust rather than you, a dividend received by the trust may be taxed in the hands of a family member with a lower tax rate than yours in the extent to which that person is the beneficiary of the trust.

Tax strategies to know

Setting up a family trust opens the door to a multitude of tax strategies, including: reducing your personal taxes; reducing your tax on death; the possibility of taking advantage of tax exemptions for members of your family, including the capital gains exemption of $ 800,000 (annual indexation) when your business is sold; the ability to pass your business to the next generation while minimizing taxes.

2) Personal trust

Did you know that your personal trust could save you from ruin by standing up to your creditors? Can you really do without it? Unlike the family trust which serves to accumulate values to be realized from its creation, the personal trust serves to receive and protect values already accumulated in the past.

The trust is a legal entity like a company, but with its own characteristics. In particular, it has its own assets and can thus own property, invest as well as contract with third parties. The trustees manage the trust like the directors of a company, and the beneficiary of the trust can receive the income and capital like the shareholders of a company. You will be the trustee, as well as the sole beneficiary of your personal trust.

Protect your assets

The primary purpose of a personal trust is to protect your valuable assets that you acquired in the past. These assets, you could not transfer them to a family trust. However, it is possible to transfer them to a personal trust without tax consequences. Because the trust can hold its own property, a creditor who obtains a judgment against you will not be able to enforce it against the trust property. This will allow you to sleep soundly, even when the wind picks up around you. It is a formidably effective bulwark between you and your creditors.

The taxation of it

A personal trust unlike the family trust has no tax utility per se. You must report the income from property that you transfer to a personal trust, on your income tax return and so, for tax purposes, the trust does not exist.

3) Verdict: Family or personal?

Why a family trust rather than a personal trust or vice versa? Since you cannot transfer property to a family trust without contaminating it, making it useless for tax purposes, the family trust will have to accumulate property on its own. In general, the family trust will accumulate value by subscribing to shares of your company following a freeze transaction.

While the family trust is useful for asset protection purposes, many use it primarily to take advantage of a multitude of tax strategies. Unlike the family trust, you can transfer property directly into the personal trust. Thus, the primary objective of a personal trust is to protect your creditors from assets in your patrimony that already have value.

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