While family trusts are great tools for flexibility in income
splitting and succession planning, a day will come where the
trustees must make the decisions about what to do with the trust
From an income tax point of view, a trust is deemed to dispose
of trust property at the 21st anniversary of settlement of the
trust, and every 21 years thereafter. This policy is meant to force
a distribution of trust property to the beneficiaries or have taxes
Below are some key planning considerations when approaching the
21st anniversary of a family trust.
Keeping Property in the Trust: As the trust
reaches its 21st anniversary, under the 'do nothing'
approach, the trust will retain the property but will be deemed to
dispose of it at fair market value (FMV) and reacquire it at that
same FMV, essentially triggering the taxes and having a new cost on
the property. The trustees should determine the consequences of
triggering the gain on the 21st anniversary. Depending on the cost
base of the assets and the FMV, the capital gain may not result in
a significant tax and there will be another 21 years to make a
decision about the ultimate distribution of trust property.
Sell Property: If the trust is going to trigger
capital gains on the trust property, the trustees may decide to
sell the property and distribute the net assets to the
Watch Timing of Acquisitions / Dispositions:
Consideration may be placed on what properties the trust should
own. It may make sense to delay purchasing an asset until after the
21st anniversary or alternatively, sell certain assets in advance
of the date. If a property is to be sold shortly after the deemed
disposition at the 21st anniversary, the deemed disposition may not
have a significant cost as the new adjusted cost base will be equal
to the FMV at the 21st anniversary.
Rollout of Trust Property: Generally, a trust
can transfer the trust property to the capital beneficiaries on a
rollout basis, which means the trust disposes of the assets at its
adjusted cost base (ACB) while the beneficiaries receive the assets
at that same amount. The properties with latent gains will be held
by the beneficiaries directly. Often the trustees will want to
transfer properties to the beneficiaries directly, effectively
winding up the trust. This rollout can be denied if the trust is
considered a reversionary trust.
Reorganization Planning: There are times the
trustees may wish to implement a reorganization. The trustees may
allocate certain properties with accrued gains to the beneficiaries
so they are not disposed at FMV, but retain other assets that do
not have accrued gains and trigger the capital gains on these at
the 21st anniversary. If you are using a family trust, it is
critical to consider the various options and scenarios to ensure
the trust continues to meet the family's goals as it approaches
the 21st anniversary.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
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