June 8, 2016 Business Law
A trust is an independent patrimony created by a settlor and managed by one or several trustees for the benefit of the beneficiaries. The beneficiaries have no right of ownership over the property held in trust, which is instead within the trust’s separate patrimony. There are several types of trusts, but this article will focus on the discretionary family trust.
A family trust is of interest to the businessperson who:
Essentially, when a family trust is created, the businessperson will freeze the value of his business accumulated in his common shares. He then exchanges these shares with his business’ preferred shares, redeemable for a value equal to that of the business’ value. The business’ value is therefore isolated (i.e. frozen) in these preferred shared, hence the term “freeze.”
The operating company will then issue participating shares to the trust and the businessperson will usually retain control over his business through control shares.
The company’s dividends may thereafter be paid to the trust (now a shareholder of the company), which then proceeds, at the trustees’ discretion, to the distribution of dividends to one or several trustees, such as the businessperson, his holding company, his spouse or children of full age, hence the term “discretionary family trust.” Additionally, the business’ future value increases normally in the new shares held by the trust.
The family trust provides significant benefits, notably:
While a very interesting tool for tax savings, the trust is not suitable for all situations. Its rules of operation and taxation are numerous and complex. To learn more about trusts, contact one of our lawyers.
This bulletin provides general comments on recent developments in the law. It does not constitute and should not viewed as legal advice. No legal action should be taken on the basis of the information contained herein.Back to the list of publications - Business Law