# Family Trust and Holding Company...worth it?



## plaza (Sep 16, 2010)

I recently sold my business and have a lump sum of cash in it. I was advised by two planners to do a freeze and setup a family trust with my company under it which will be used as a Holding company for future investments. This would allow me to pay out a dividend to my wife and kids once they become 18. It would also keep the government from liquidating my assets in the event I passed away.

I hold a few income properties in my personal name in addition to my personal residence. My initial idea was to transfer the income properties into the business and then only taking the minimum salary required in order to live and pay least amount on income tax. I was advised against this for now since I am not back to work and plan to take a year or two off. Since the income generated on the properties is under 40k net, then I would be ahead in my personal name rather than being taxed at the higher rate in the company and then issuing a dividend to reduce it. 

Does this make sense? If I am not going to carry the properties in my holding company, does the family trust still make any sense?

What are your thoughts/experience on this?


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## WiseOwl (Jan 1, 2015)

Setting up a family trust can be an extremely useful vehicle for estate planning purposes. Your family would indirectly benefit from the trust (as beneficiaries), but would not directly own shares in your corporation. 

Because the trust directly owns the shares of your corporation and your family does not, risk associated with future marital breakdown or disputes with your children is minimized. For example, with respect to children, sometimes you may have one child that is less responsible with money, they may not want to run the business, or maybe they do not have a strong marriage. You may not want to give up a portion of your company to this child or risk having your business enter into their own marital dispute (remember they own part of your business with shares!), but still want them to benefit from the family business. Trusts allow you to do this effectively and efficiently.

The way that this would work (at a high level) is that your corporation would pay a dividend to the family trust and then the income would be distributed from the trust to the individual beneficiaries. If set up as a discretionary trust, you can allocate the dividend income from the trust however you want (i.e., income splitting). This will help your family to minimize overall taxes or to meet other goals you or your family may have.

You do still however have to be cognizant of "kiddie tax" rules. You won't be able to allocate the income from the family trust to a child under the age of 18 without triggering the kiddie tax rules. It no longer matters what type of income you are allocating (prior to 2014, you could hold a rental unit inside a trust, earn the rental income from a third party, and then allocate the net income to your minor children without triggering the kiddie tax rules. This is no longer possible. Thought I would add this caveat in since you mentioned you personally own a few properties and the changes to this legislation is very recent).

At a high level, the above rules basically result in your child paying tax at the highest rate in effect (currently 29% federally) regardless of their actual marginal rate. At this point, for you, the trust would still be beneficial from a spousal income splitting perspective.

A freeze is essentially the ideal way for you to introduce a trust into an existing corporate structure. If you don't need to withdraw the cash you received from the sale of the business and plan to continue investing it to earn future income, then this setup will work well for you. Keep in mind though that family trusts are subject to the "21 year rule" in that every 21 years, there is a deemed disposition of all trust property. Your advisor will be able to help you plan for this down the road (generally speaking the most effective way of dealing with this rule is to do another freeze immediately before the deemed disposition is set to occur and then distribute the frozen preferred shares to the beneficiaries of the trust). 

Overall the trust does add some additional administrative responsibilities (annual T3 return, T3 distribution slips to beneficiaries, 21 year rule, etc.) but the flexibility they provide from an estate planning perspective is really well worth it IMO.

Cheers,
WiseOwl


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## WiseOwl (Jan 1, 2015)

I should add that my above reply assumes you have significant cash in the corporation from the sale of the business that will earn significant income in the future. I assumed that was the case since I wouldn't see an advisor recommending such a structure if it was a small amount of cash that could otherwise be paid out as a one-time dividend as part of winding down the corporation.


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## plaza (Sep 16, 2010)

WiseOwl said:


> I should add that my above reply assumes you have significant cash in the corporation from the sale of the business that will earn significant income in the future. I assumed that was the case since I wouldn't see an advisor recommending such a structure if it was a small amount of cash that could otherwise be paid out as a one-time dividend as part of winding down the corporation.


Thank you for the info wiseowl. I'lol have to ask the lawyer setting it up if it will be discretionary or not.
When you say significant cash amp, how much are we looking at as a minimum?

I don't need the cash now and plan to invest it in real estate, stock market or other in order for it to hopefully grow.

At what point would it be worth to will over my three properties I own now personally?

On a side note, I noticed you just commented on a another post about a nanny. We were looking to hire one but were shut down because we were not eligible to deduct her. My wife makes a salary but I only make rental income and rental income does not qualify for child deductions. Through the trust or holding company would there be any way of doing it for someone that is investing in real estate or the market?


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