What is a Family Trust?September 12, 2014
The concept of a family trust is often raised to founders of a startup as an alternative to holding their shares in their new company personally (see LW Academy tax planning measures video) , but what is a family trust?
A family trust is generally a legal relationship among three parties: the Settlor, the Trustees and the Beneficiaries. It is typically described in a document called a trust settlement. A trust can be used to separate legal and beneficial ownership of assets so that the person in control of the asset is not necessarily the person who benefits from the use of, or income from the asset. Still confused? Let’s break it down:
A trust is created by a person called a “Settlor” who creates the trust by providing property to the “Trustees” who become the legal owners of the property, which they manage on behalf of the Beneficiaries. The Settlor and the Trustees sign the trust settlement which outlines what the Trustees are permitted to do with the property held in trust. Once a Settlor provides the property to the Trustees and signs the trust settlement, the Settlor often has no further involvement with the trust.
The “Trustees” are the legal owners of the property settled on the trust by the Settlor, and they make all decisions with respect to the trust and the property held by the trust, within the parameters of the trust settlement. The Trustees must act in the best interests of the “Beneficiaries” at all times.
The “Beneficiaries” are those individuals and entities who will benefit from the property held by the trust. The trust settlement may provide that each Beneficiary gets a certain share of the trust property, or the trust settlement may provide the Trustees with broad discretion, such that the Trustees can distribute the trust property among the Beneficiaries as they see fit.
There are a number of special tax rules that apply or can apply to trusts, depending on what the trust is used for, that should be considered when the trust is put in place. As a result, it is important to consult your tax and legal advisors if you are considering using a trust.
Trusts can be used in many different contexts, but one popular use of trusts is to hold shares in a private corporation for tax and estate planning purposes. We’ll talk about the benefits of using a trust in this context in an upcoming blog post.