Family trusts are a preferred alternative for people seeking flexibility, asset protection, and control in their family business, even though they are more complex than other business forms. We will go through the advantages and disadvantages of discretionary trusts and steps about family trust creation in this post to help you understand why they are so popular among family businesses.
Advantages of a Family Trust
1. Avoid Probate
The process of formally establishing the validity of a Will before a judicial body is known as probate. A trust’s assets are allocated under the trust’s terms.
If your family owns property in other jurisdictions, you may be subject to several Probates, each governed by the laws of that state. These expenses can vary significantly and you have to spend hundreds of dollars as a fee. Probate is generally considerably more expensive than performing some basic Estate Planning ahead of time. Having family trust, you can avoid probate.
2. Distribution of income and capital
When a distribution is made from a family trust, the trustee decides how much income or capital to pass on to each beneficiary. This could lead to tax planning opportunities, such as distributing more money to the beneficiary with the lowest marginal tax rate.
3. Discount on capital gains
When selling trust assets that have been held for more than a year, a family trust may qualify for a capital gains deduction.
4. Asset security
Beneficiary creditors are unable to pursue business assets since they are owned by the trustee rather than the beneficiaries. Asset protection can also be enhanced by having a firm function as a trustee.
Disadvantages of a Family Trust
1. Income must be shared out
Profits must be dispersed every financial year, and any funds not distributed are subject to taxation at the highest marginal rate. Retaining profits for working capital is wasteful from a tax standpoint because of this constraint.
2. Personal responsibility
When an individual trustee is chosen instead of a corporation, the trustee may be held personally accountable for some trust debts.
3. Extra Documentation
The increased paperwork is one of the drawbacks of a Trust. To make a Living Trust work, you must ensure that all of the Trust’s assets are lawfully transferred to you as the Trustee. If an asset has a title (real estate, stocks, mutual funds), the title must be changed to reflect the Trust’s ownership of the item. Assume you wish to place your home in the Trust. To do so, you’ll need to draught and execute a new deed transferring ownership to you as the Trustee.
The cost of establishing and maintaining trust is higher. When distributing profits to verify compliance with the trust deed, or if you want to change the trust deed’s conditions, you’ll almost certainly need accounting help. Borrowing money for a trust can be challenging due to its complexity.