By Diane Peters
Tina Lee long worried about how her mother, who has little in the way of retirement savings, would stay healthy and comfortable in her senior years, and still enjoy being an involved grandmother to Ms. Lee’s two young children.
Ms. Lee, the founder and president of Leemore & Associates Real Estate Appraisers and Consultants Ltd. in Coquitlam, B.C., and her banker husband William Wong could well afford to financially help out her mother, June Wing, but needed a way to do it that made sense for her business and her family.
Ms. Lee found her solution: About five years ago, her accountant suggested setting up a trust to help her mother, now 62, who spent most of her life as a stay-at-home mom.
The accountant worked with a lawyer and an investment adviser to set up the trust. That allows Ms. Lee, 42, to move money from her business to her mother directly through the trust, instead of having it come out of her pocket. And that means the money is taxed in the hands of her mother at a lower tax rate than she’d pay.
Ms. Wing was apprehensive about the arrangement at first. “She’s very independent and didn’t want to be a burden on us,” Ms. Lee says.
But when she realized the tool also offered Ms. Lee a tax break, she agreed.
Trusts have long been seen as a way for parents to give money to their children. Now, a role reversal is increasingly taking place.
A growing number of baby boomers are heading into their retirement years, with many seniors realizing they haven’t socked away quite enough.
Meanwhile, their children, many of them small and medium-sized business owners, find themselves flush enough to help out. Their accountants and financial advisers are telling them that a trust offers the way: It’s easy to run, provides a tax shelter and, once set up, causes no risk to or burden on the business.
“We use trusts on a regular basis, and I’m seeing more in recent years being set up specifically to help parents,” says Phil Tippetts-Aylmer, a financial planner with Nicola Wealth Management in Vancouver.
Judy Moore, a tax partner with Collins Barrow Toronto LLP, is also seeing a spike. “Trust have become, in the past 15 years, very popular,” she says.
In fact, most of the partners in her firm have them. When one new partner wondered why he’d bother – he had no spouse or kids – Ms. Moore asked him: “What about your mother? You know you give her money from time to time; why don’t you create it for her?”
This is how it works: Your lawyer creates a trust as a financial entity that owns shares in your company. Once set up, you can flow as much money as you like from the company into the trust. The trust then gives the money out to beneficiaries, such as your parents.
The tax break comes by moving the money directly from the corporation into the trust, as opposed to taking it out of the giver’s pocket, where it would be taxed at a higher rate.
Tax rates vary across Canada, but hover around 21 per cent for people who make less than $38,000, plus seniors get a higher personal exemption, Ms. Moore says.
Older parents may also get more tax benefits if they have a lot of medical expenses but an income that was previously so low they didn’t get much of a deduction from these expenses.
By contrast, high-income earners fall in a tax bracket as high as 46 per cent.
Between a low-income senior and a high-income adult, there’s roughly a 25-per- cent tax difference, Ms. Moore says. So giving a parent $5,000 a year through the trust instead of out of pocket leads to $1,250 in tax savings, she says.
Sounds great. But there are some caveats.
“The use of trusts is not a one-size-fits-all solution,” Mr. Tippets-Aylmer warns.
For one, those savings have to offset the cost of setting up the trust. Mr. Tippetts-Aylmer estimates set-up fees, mostly legal, will run around $5,000.
As well, the business setting up the trust must be incorporated, so if you’re running a sole proprietorship, you’ll need to take that step, which will also add to the cost, he says.
If you mean to give your parents a very small amount of money irregularly, or just want to buy them, say, a car or a vacation, it may not be worth it, he says.
As well, before setting up a trust, have your parents’ finances scoured to make sure they really are in the right tax bracket. They may have income their kids simply don’t know about, Mr. Tippetts-Aylmer says.
Another issue: Seniors could have their guaranteed income supplement clawed back as their income increases and the supplement will be denied if they make more than $15,906 annually, according to the Canada Revenue Agency.
Your accountant needs to do a cost-benefit analysis to be sure the expenses and hassle are worth it, Mr. Tippetts-Aylmer says.
As well, trusts can be flexible; if you are setting up one for your parents, make sure to consider long-term circumstances and that it can be used in other ways down the road. “The thing about having a trust is you can set up an asset for the benefit of someone else, but you are in control. You can slow the income and have it taxed in whoever’s hands you want,” Ms. Moore says.
One additional bonus of creating the trust for Ms. Wing: It encouraged her to hand over what investments she had to the keener eyes of Ms. Lee’s financial advisers.
“They’re now looking at my entire portfolio and looking at how things will change when the kids get older,” says Ms. Lee, who now takes the trust and her mom’s finances into account when doing financial planning.
“We’re now looking at the bigger picture.”
Special to The Globe and Mail