For many Alberta families, wealth is more than a bank balance. It’s a home, a family business, a farm, an investment portfolio, or a cottage in the mountains. Protecting those assets, and passing them on the way you intend, takes planning.

We regularly sit down with Calgary-area families who want exactly that, and a family trust is often one of the most flexible tools we discuss.

What is a family trust?

A family trust is a legal arrangement in which one person (the settlor) transfers property to trustees, who hold and manage it for the benefit of family members (the beneficiaries) under the terms of a written trust deed. Trustees can be family members, professionals, or both. The trust is governed by Alberta’s trust law, including the Trustee Act, and the trust deed that sets out who benefits, how, and when.

Most family trusts are discretionary, meaning the trustees decide when and how much each beneficiary receives. That discretion is the source of many of the trust’s advantages.

1. Protection from creditors

When you personally own assets, a creditor with a judgment against you may be able to reach them. Assets held in a properly structured trust are legally owned by the trust and managed by the trustees, not by you or the beneficiaries. In a discretionary trust, a beneficiary typically has no fixed entitlement to trust property, only a hope that trustees will exercise their discretion in their favour. This is what creates the difficulty for a creditor to seize those assets.

This can matter for:

• Business owners and professionals exposed to lawsuits or business debts
• Beneficiaries who may face financial trouble, such as a child starting a business or one prone to overspending
• Beneficiaries who may face marital or relationship issues, the discretionary aspect can shield your children from the reaches of ex partners and their lawyers
• Family wealth intended to stay in the family line rather than be swept up in a beneficiary’s insolvency

Protection is not automatic however:

• Transfers made when you are already insolvent, or to defeat a known creditor, can be reversed
• If you remain in control of the trust and treat its assets as your own, a court may see through the arrangement
• Timing is everything – in a perfect world a trust should be set up well before any trouble appears, not after.

2. Protection in a family law dispute

Alberta’s Family Property Act generally calls for an equal division of property acquired during a relationship, but certain property is treated differently. Assets a spouse receives by gift or inheritance from a third party are typically exempt from division, though any increase in value during the relationship may still be shared or if those assets are co-mingled and shared. But, that protection is subject to court discretion and the inadvertent co-mingling of that inheritance with other assets.

A family trust can strengthen a family’s position in several ways:

• Parents and grandparents can leave or gift assets to a child through a trust instead of outright, so the assets stay separate from the child’s marriage or relationship
• A discretionary interest is generally harder for a court to value and divide than property owned outright
• Business ownership can be structured so that family shares remain in the trust across generations

Again, this is not a guarantee. Courts look at the substance of the arrangement so structuring it right from the start and setting up the management of the trust properly from the start is vital. Courts may also consider a spouse’s expectation of future benefits from a trust when dividing property or assessing support. The key is to layer defences of the trust with a proper and enforceable prenuptial or cohabitation agreement.

3. Control that outlasts you

Unlike a simple gift or a will that hands assets over outright, a trust lets you set the terms:

• Delay distributions until a beneficiary reaches a certain age
• Support education, a first home, or a business start-up
• Protect a beneficiary with a disability, or one who isn’t ready to manage money
• Keep family property, such as a farm or business, from being split up or sold

4. Income splitting and tax planning

In certain circumstances, trusts may allow income to be allocated among family members, potentially at lower tax rates. Since the introduction of the federal “tax on split income” (TOSI) rules, this is much more restricted, but trusts can still play a role in tax planning, including multiplying the lifetime capital gains exemption on qualifying small business shares or farm property. The rules are technical and change over time so careful tax planning and advice from professionals is needed.

Keep two other tax risks and concerns in mind:

• Most trusts face a 21-year rule: every 21 years, the trust is deemed to have sold its assets at fair market value, which can trigger tax unless planned for.
• Transferring assets into a trust can itself be a taxable event, and attribution rules may tax income back to the person who contributed the assets.

5. Privacy and estate planning

Assets held in a trust generally pass outside your estate, so they don’t go through probate. A will becomes a public court record once probated, whereas a trust’s terms remain private. In Alberta, probate fees are capped at a modest amount, so the savings are smaller than in some provinces, but privacy and continuity of management are still real benefits. A trust also allows for a smooth transition if you become incapacitated, since the trustees can keep managing the assets without court involvement.

What to consider before you set one up

• Cost and complexity. Trusts need a properly drafted deed, ongoing record-keeping, and annual trust tax returns (T3). Recent rules also require additional beneficial-ownership reporting for many trusts.
• Loss of direct control. Once assets are transferred, they belong to the trust. You can’t simply take them back.
• Choosing trustees. Trustees owe fiduciary duties. Choose people who are responsible and impartial, and consider a professional co-trustee.
• Getting the timing and structure right. A trust set up while you’re solvent and stable is far more defensible than one established in a crisis.

This article is general information only and is not legal, tax, or financial advice. Laws change and every situation is different. Reading it does not create a lawyer-client relationship.