By Monica Gutschi of DOW JONES NEWSWIRES
A young dentist needed Phil Tippetts-Aylmer’s help to purchase an established practice. But after he delved a little deeper, he discovered there were a whole host of other issues she needed resolved.
And there was one solution for all: a family trust.
“Trusts essentially are very flexible financial tools for small business owners,” says Tippetts-Aylmer, a financial planner with Nicola Wealth Management of Vancouver.
Indeed, family trusts have become an extremely popular structure for small-business owners to efficiently distribute income and ensure business assets are passed on to another generation. In most cases, the income is shared with adult children and the assets are passed on to the younger generation.
But in this case, the family trust was used for the benefit of an older generation: The dentist was able to help out both her parents and her husband’s parents.
“The discussion started when we looked at a way to make her income more tax efficient,” Tippetts-Aylmer said. When he suggested she could split the income from her dental practice with lower-income members of her family, he discovered she had both the need and the desire to help her parents financially.
At that point, Tippetts-Aylmer turned to the dentist’s accountant and lawyer.
His partner at Nicola Wealth Management, Paul Gleeson, suggests financial planners who are setting up family trusts work closely and cooperatively with the other professionals who also advise their client as there are so many interlocking issues that one might miss but another won’t.
“It is critical that the discussion include all relevant advisers,”Tippetts-Aylmer says. “You can’t make sweeping assumptions.”
A client in a similar situation to the dentist set up a family trust to flow income to his parents as a means to lower histaxable income. But when an accountant looked closely at the numbers, he discovered that when the parents turned 65, the tax benefit for the client would be offset by the clawing back of their government benefits.
“The benefits (for the client) that we were looking at did not outweigh the costs (to the parents),” Tippetts-Aylmer says.
For the dentist, however, the accountant’sanalysis of the tax returns of all family members involved, resulted in a equitable solution. The dentist would be able to provide her parents and one of her husband’s parents with C$50,000 in dividends annually from the trust without tax implications, as well as draw down dividend income for herself and her husband.
Consultation with her lawyer determined that a family trust had already been established when the dentist had incorporated, and it was flexible enough to allow the addition of new beneficiaries.
“We got two for one in terms of benefits,” Tippetts-Aylmer says.
Loris Macor, a tax partner at PwC, notes afamily trust is one of the most flexible planning tools available for affluent Canadians who may wish to help their parents but can’t access government subsidies and tax credits because of their limited availability. In these cases, the trust can be set up for the benefit of a number of family members so that if one passes away, there is no impact on the income of the other beneficiaries.