Family trusts are utilized in many succession planning opportunities. They can be versatile and effective in reaching your goals of managing family wealth and minimizing taxes. But there are very special considerations that need attention if the family trust has been around for more than 20 years and it’s called the “21 Year Rule”.
Any family trust, whether it’s created during your lifetime or upon your death, has to treat itself as having disposed of all of its property every 21 years. This means that all assets of the trust must be sold or are deemed to be sold at Fair Market Value (“FMV”). If this results in a capital gain, the Trust would be subject to tax. Without this rule, a family trust could hold property for multiple generations without ever incurring tax on the death of a generation.
There are ways to avoid triggering the 21 Year Rule. A trust can generally transfer its assets to Canadian Resident beneficiaries on a tax-deferred basis prior to the 21 year anniversary. Some trust document/indentures actually specify that the assets be transferred before the 21 year anniversary. It is necessary to review original documentation to ensure you plan accordingly.
Some important factors to consider with family trusts:
- You can’t transfer trust’s assets to a non-Canadian Resident on a tax deferred basis without tax consequences on both sides of the border. Allow sufficient time to plan this transaction.
- If timed properly and with the right tax scenario, you can transfer the trust’s assets to grandchildren rather than your children and thus defer the taxes for another generation.
- In the case of a family trust owning a business that is transferring shares to children or grandchildren, it’s prudent to have a shareholders’ agreement in place before the children or grandchildren receive the shares.
- Even if your family trust is nowhere near 21 years old, having it reviewed carefully by an expert now can be a smart move.