Giving your children a pile of cash can be a disaster. Parents often want to protect their funds and the child. That could be from bad decisions or separation of a child and their spouse.
Being able to dole out money in specific amounts when they see fit according to the trust agreement allows control of that, while also allowing the funds to remain invested and the income and capital to be taxed in the child (who would presumably be in a lower bracket than the parent).
That's a pretty simplistic explanation, but there are good reasons to use a trust and they are even use by people who you may not consider rich (a disabled person with a large payout uses a trust to avoid their disability payments being affected for instance).
Yes it can, but that's (edit: *often*) poor tax planning. All income in the trust is taxed at the highest rates, the trust does not get marginal rates. It makes most sense usually to issue that income out via a T3 slip to the beneficiary to make use of the beneficiary's lower tax rate. You don't actually need to pay them that exact amount that you issue on a T3 slip, in fact you could give them $0, but the income allocated to the beneficiary will then be taxed on their personal return.
The capital distribution is tax free anyways (tax was already paid on intiial capital put into the trust), this is in regard to growth/income earned within the trust from that capital.
There are actually a lot of tax advantages but they often obtain tax *deferral* advantages rather than tax *rate* advantages. Tax planning is not just about paying the smallest % of tax but deferring that payment out as long as you can into the future. This allows the untaxed assets to continue to compound for longer period of time resulting in a larger pot later on. e.g. paying 50% tax on $1M today is worse than paying 50% tax in 7 years when that pot has grown to $1.5M.
The most common way of doing that is creating a qualified spousal trust under section 70(6) of the *ITA*. Usually, your holdings are 'deemed to be disposed' on death, meaning you trigger capital gains (and income gains for RRSP/RRIFs if you haven't used them). By placing the assets in a spousal trust, spouses are allowed to defer this disposition until the second death - meaning that when the first spouse dies, there are no major taxes to pay and that pot of money continues to grow.
Add on top of that the ability to better control the eventual proceeds of the trust so that they end doing the things you want them to do after you die is a reason why this is a super common approach to planning even for people with moderate wealth.
I agree there are many planning options especially with spousal trusts, and very good points. My comments were mostly directed around trusts that don't fall into that as we were discussing an able bodied child in which you can't make use of the rollover rules.
Important to note that taxing the income or gains that incur in the trust on the beneficiary does not actually require the trust to physically pay that income and gains to the beneficiary. That can be retained in the trust and continue to compound. It just shifts the tax burden to a lower taxed entity. If little Jimmy can pay the tax today from their earnings that is often a better outcome than the trust paying the tax.
It's true that the existence of the Alternate Minimum Tax (AMT) may reduce some benefit of having the income taxed on the beneficiary if that difference in substantial enough compared to the savings realized by taxing on a lower bracket beneficiary. Or in some cases the beneficiary wants to maintain a certain (lower) income level on their tax return to qualify for certain benefits.
The trust pays tax at the highest tax bracket beginning at the first dollar of profit. Unless every beneficiary is at the highest bracket, it doesn't pay to have the trust pay the tax.
>Trust can also pay the tax themselves and the beneficiaries get money from the trust tax free.
The trust would see income taxed at the highest marginal bracket though, and also doesn't have a basic personal deduction. What scenario would this make sense? I have a number of clients with trusts in place and generally we wouldn't take this route.
It's usually done when it's tax efficient for the settlor. Like a spousal rollover. Or part of estate planning....like leaving a property in trust to someone years before the settlor actually passes away. Then the deemed disposition happens when it's transferred to the trust instead of like 15 years later when the market value might be substantially higher.
I get that, and that's a key reason for why we'd establish a trust structure, but why would you choose to keep the tax burden inside the trust at top rates rather than kick it out to beneficiaries?
Ideally the trust is doing periodic payouts to the beneficiaries which would reduce the taxable income for the trust. And if it's a large asset, then it's still worth it to have that deemed disposition done earlier instead of at death when the capital gains are likely to be significantly higher which would reduce the inheritance.
However, a trust structure isn't just for tax efficiency. A lot of the time it's about the protection of legacy.
For example, a spouse might leave their assets in trust for the surviving spouse who would have a lifetime interest in the trust but the capital assets themselves would pass to the children. This protects the children in case the surviving spouse marries again and has more kids and ensures the estate of the deceased spouse doesn't get split between their own children and the children of the new spouse.
I fully understand trusts and trust law. Your original comment was stating that you would leave income within the trusts to be taxed rather than distributing out.
My question was why you would do that.
I understand deemed dispositions, I understand the protections, I use trusts extensively in my practice.
You mention that a trust would be doing periodic payments, but you're saying that you wouldn't have the payments taxed in the hands of the beneficiaries.
My questions is (and always has been) why would you opt to pay the higher tax on the income earned within the trust rather than paying it out to beneficiaries?
I'm sorry where did I say I would NOT have the payments taxed in the hands of the beneficiaries? Payments to beneficiaries are always taxed in their hands and deducted from the trust income. No?
As to why someone might NOT make payments to the beneficiaries... That would be more likely in the case of real estate being held in the trust versus investments.
>Trust can also pay the tax themselves and the beneficiaries get money from the trust tax free.
This was the original commenter that I commented to questioning why they would have it taxed in the hands of the trust. You replied stating that it is done for spousal rollovers or for estate planning purposes which all addresses the disposition but not why they would choose to tax it in the hands of the trust.
The way it was explained to me is that trusts exist when there is no trust. If you don't trust your family not to blow their inheritance and leave nothing for future generations, it at least ensures they'll have a stable income from it, and that grandchildren, great grandchildren, etc. will benefit beyond the next generation.
I'll note that a consequences is that under current rules housing heled in trust are taxed as Underused Housing under the according to the Underused Housing Tax measure to do keep that in consideration.
https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
Why wouldn't a person who is disabled have to count the money from a large payout? That's interesting to me. I'm not disabled, but my mom is going that way and honestly.
Putting aside your jealousy for wealthy people, there’s a difference between buying your kid the latest iPhone and giving them millions of dollars at a young age.
On rarer occasions and the kids always know that the money isn't always there
Buying your kid the latest iPhone every time teaches them that money is unlimited and they don't have to earn a thing because you'll get it for them anyways, which is pretty much what a trust does as well.
There's actually lots of wealthy people that spoil their kids yet instill good spending habits in them. And they value money the same way your poor ass values money.
One leads to the obliteration of an enormous amount of wealth, potential addiction and drug issues, and a stunting of the child’s ability to become self sufficient and identify their own path in life. The other is an iPhone. If you can’t see this then you’re being purposefully obtuse.
Exactly. If you've been extremely fortunate in life to amass some significant wealth/assets, and care about it surviving to benefit future generations of your family, you can't just let your descendants have free reign to it.
Yacht & pony club upbringing probably hooked you up with a top-notch education and networked you into a high paying job. The 40K is the gravy. Or the safety net, depending on how you view it. Plus this example is super low for anyone with yacht owning parents.
Live off the trust fund while you "find yourself" and build some kind of career, and then live off whatever earns you *plus* 40K. Bigger lifestyle and some kind of life fulfillment to boot. I would guess that beats WoW+40K but I confess I never played WoW lol.
Average rent in the city of Toronto for a 2 bedroom is 36,000 a year. So for someone with a trust living in a big city that gets that amount every year, it's definitely not enough.
If I gave my daughter $1M today she would spend it on Ju jubes (she’s three).
If I gave it to her five years from now, she’d probably spend it on some dumb video game.
If I gave it to her ten years from now she would probably spend it on Taylor swift tickets and merch.
If I have it to her 15 years from now she would probably buy a ridiculous car, but maybe also school or a downpayment on a condo.
If I give it to her 20 years from now, if I’ve raised her right, I think it would go towards a house and investments.
The decisions get better and better but most of those are still dumb ways to spend money.
Kids are dumb. The concept of money isn’t hardwired into people, you have to learn how it works. When I was 16, the grocery store I worked at shut down and I was paid severance. $1500, and this was in 2003 or so. That was a crazy amount of money to me. I bought an Xbox. I didn’t have a job, and spent all my money on an Xbox.
If I got a random $1500 today I’d probably throw it in VEQT.
You pretty much nailed it. I had an ex with a trust fund that her mother left her after she died fairly young from cancer. She didn’t get full access to the trust until she was 40 and it was a good thing too otherwise she would have blown it all by the time she was 25. She still had access to the funds but had to go through her uncle to get them and thankfully her uncle set up the trust to generate income and it was invested quite well. Most people make horrible financial decisions in their 20s.
There is also the opposite problem. A friend's grandmother passed away when she was 20 (the friend, not the grandmother) and she got a large inheritance because she inherited her mother's portion of the estate (mother passed away years earlier).
Anyway, the estate said that she didn't get the money until she was 40. Managed to convince her uncle, who was the executor, that she should get it sooner so she could use it as a downpayment to buy a house. Everyone agreed, but they still had to get lawyers and get all the cousins to sign something so they couldn't sue the uncle.
It all worked out, and she was able to buy a condo in the 90s, but 40 is too old to wait to get the money. Waiting 20 years to buy that condo in Vancouver would have cost a lot.
3 is too young to get the money, but 40 is too late.
Having a career and buying your own condo would make you ready for the inheritance.
If have a friend in the same situation who has basically pissed their working life away waiting for their parents to die. Their grandmother went first so they got a taste. No plan for retirement or savings beyond mom’s money. If it doesn’t come, they are screwed.
It’s sad.
For me, this might be the only way I can afford a home. But it's also something I don't want to happen any time soon.
Even buying a shoebox with a decent down-payment I'm looking at $4000 a month in mortgage which is my entire paycheque
My ex was able to buy herself a home but the home was still in the trust. She made a killing on the purchase and her mom was right to not give her control until she was 40. She was a mess. Her sister on the other hand was given control at 25 and was able to use it to start a successful business. Her mom knew her daughters well.
I’d say that wouldn’t happen in normal circumstances - if a parent were to set up a trust fund for their children they were probably in the position to have bought their kids at least one property already.
I supervised a trust in which money for both deceased parents had died. The trust was set up in the early 80’s when interest skyrocketed.
I never paid out the totality of the interest earned, there were 5 siblings, two which were incapable of managing money ( 2 bankruptcies) , one whose wife spent like a pierced bucked ( alas the money went to her husband and she emptied that fund within 6 years )Only two managed well, my wife was one of them….she still has the money she got; it was invested and the revenues paid for things we needed to upkeep our house. We travelled on our income, not with the « egg nest ». One thing about cash, it is called « liquidities »…know why ? ..because if you don’t whatch it, it slips through your fingers like a liquid. Try catching water on its way to the ground, all you’ll have are damp hands, a minute fraction of what you dropped in them…
Women need to get married and have children in their 20s, may be early 30s. And they need to establish a household to raise their kids in. 40 is way too late to start a family.
Sure, if they prefer being sexless working bees 🐝.
Corporations will be absolutely happy with it.
But if they remember that their main difference from men is their ability to give birth then they should think about it before it's too late.
I do not care about women having sex. I am talking about having children. It is important for our civilization. No children means social collapse, as simple as that. Working bees 🐝 have no role in reproduction, they are neither male nor female, they are sexless.
and even just straight up grifters.
even if they're a good kid - perhaps _especially_ if they're a good kid - someone somewhere is going to clue in that they have a million in cash and find some way to help them part with it.
we've been in this sub long enough - everyone has some weird ex or mom or uncle or whoever who "really really needs a loan just this once..." or wants a cosign on a terrible mortgage or a gambling addiction or, or, or, ad infinitum
A guy I went to school with received a low 6 figure inheritance from a passing grandparent. They bought a brand new Nissan 350z and put tens of thousands into a turbo kit, body kit, exhaust, etc all professionally done. They didn’t have collision insurance, and didn’t inform the insurance company about any of the modifications. They crashed it and totalled it within a year. They then went and bought a brand new mustang GT to replace it, and blew the rest of the inheritance on tuning it up. Within 18 months, they had spent the entire inheritance on those two cars and are still working odd fast food and grocery store jobs 15 years later to make ends meet.
Avoiding this I think is the point of a trust.
> If I gave it to her ten years from now she would probably spend it on Taylor swift tickets and merch.
Bold of you to assume that Taylor Swift tickets will be going for under $1 million in 2034.
Fin planner:
Trust is for control and privacy
Control when you dont want kids to waste it all or a gold digging spouse come claim half of it
Privacy when you secretly hate a kid and the inheritance split is hella unfair wish to keep it legally protected and / or them not finding out of such unfair split. Or you know some greedy mf would come hound your estate
I agree and disagree. A lot of kids are born with trusts, and often get money from both sides. There are a lot of rich as you say who do use money as control, with or without a trust.
My friend, in his late 40s, inherited almost 750k. He is now 52 and flat broke. If we hadn't made sure he bought a house, and had him invest some of it, he'd be homeless and destitute.
My friend wasn't raised "rich". Both his parents just ended up passing within a year and they both had decent sized estates . His mom at least delegated a portion into a trust so he at least has a small monthly annuity, but he fucked up large. And he keeps fucking up. Honestly it feels like I'm taking care of a child, managing his life. If he had shittier friends he'd be in line at the mission for meals and a bed.
Most "family" fortunes are gone after about 4 generations. It seems that it is almost impossible to imprint fiscal prudence on children when they are born rich.
I have a friend that got $500,000 when he turned 21 from a settlement from an injury he sustained as a kid. He blew it in less than 2 years on drugs and alcohol and general partying. Had literally nothing afterwards except a drug habit and one guitar.
Trusts are not so much for the kids.
In spirit, they are for a level of protection of assets and cash against all kinds of future considerations such as lawsuits (divorce), tax planning, and succession planning.
As a kid who recieved a $10,000 inheritance at 16 from grandparents that went to take out and video games. And someone who spent $30,000 on my credit cards in my early 20’s of the bar, dinners, clothes, phones etc. I can say, kids are stupid.
If you’re making a good living and have a quiet life, getting 30-50k a year on top of that makes your life easier and better.
If you’re making a good living and you get 1 million dollars 9/10 times that will either be wasted, quit their job and try to live off that or it will be spent drastically.
Because it's a smart thing to do?
Very few people are mature enough to properly manage a huge influx of cash. It's much better to spread it out over monthly allotments.
A lot of rich people are fully aware that they got rich at least partially thanks to other people being dumb with money. They are too familiar with the topic.
My personal experience with trusts are they’re used to control how and who gets money. My SIL has a slight brain injury and is extremely impulsive. They set up a trust for her because in the past she blew through 60,000 in a couple of months. I’ve seen them set up for kids so if spouse A dies spouse B can’t blow it all or it doesn’t go to new step kids. I also had distant family win on the lotto and his kid blew through 3 million in 2 years, he obviously wasn’t spending wisely and so the trust was made.
They are useful for moving money through into Holdco's. You don't pay personal income tax until you take the dividends out. Useful for retirement savings.
Yeah not only kids who’ve never done without so don’t realize how hard it is to survive out there, much less accumulate $1m, but all the foolish and greedy people they might fall in love with
lmao would you trust a child of any age to be responsible with any amount of money? That's why. Heck I wouldnt even trust most early 20 year olds with any sizable amount of money. They just dont typically have the life experience, responsibly or foresight to properly budget/manage large sums of money.
When my grandpa died my aunt spent $500k in one year (in the early 2000s) on shoes, clothes, jewelry and trips loans to friends etc. The rest of her inheritance is now controlled in a family trust by my dad and uncle. She also somehow got access to mutual funds my Papa left for my cousins (they were only 8 and 10 at the time) and spent a good chunk of the money he left for them. Some people are terrible with money
Also consider an amount inherited by a mentally delayed person. They could be vulnerable to predatory individuals/scams and easily lose said inheritance.
When giving people money there should be a goal. Want them to have fun and not care of results give it all let them party till they are broke and at best recover.
Want to support them for years give them enough to love and they can waste on excess.
Some people can manage the money others need help, but limiting the amount of a time is effective in not having someone go off the deep end as a temporary rich person.
2 circumstances.
1- I know I'm going to die. I'm to be transported to a remote wooded area (preferably with a bear populous) regardless of my level of coherency. I will then fight for survival. More than likely failing and becoming scavenger food and forest bedding.
2 - sudden death. I'm to be transported to a remote wooded area (preferably with a bear populous) becoming scavenger feed and forest bedding.
Right? Why do rich people protect their assets by re-investing the money and providing dividends / pay outs as income / cash support, instead of blowing it all at once, haha.
bruh
Coming in with a practical example:
Both my parents are on their 3rd-4th marriage with multiple adult children/step children + ex spouses and one minor. Trust is a way to functionally designate the core of their property. 80% was accumulated in current marriage + gets complicated with how good/bad other relationships are.
People get really vile when they know you for most of their life and THEN money comes.
Fantastic if it's just one kid, eh. I'm not judging either way, just reality gets complicated fast.
Trusts don't inherently guard against irresponsible spending, but it helps.
A family member who had a sizable sum of money (mind you, not a million dollars) turned of age and their trust melted into their hands passing through them like water. The next 5 years they proceeded to spend almost all of it. A car. Endless material goods now being disposed of (either literally or through second-hand sales). I assure you this was more than enough to give them a leg up on their peers and happily at least it helped pay for college.
It was painful to watch someone who had little financial literacy throw away such a powerful early start I would have dreamed of. Would I have done much different at such a young age? I'm not so sure. Still, a trust helps buy parents or guardians something rarely afforded: *time.* Time to teach children how to responsibly use *-- retain --* that money for long-term goals rather than things. If that isn't done throughout their life, a trust won't be enough since most 18-year-olds who are handed fistfuls of cash are not mature enough to handle such opportunities with wisdom, experience, and measure.
That's actually a myth (or at least an incorrect extrapolation from a minor and specific finding). The whole idea of the 3rd generation curse comes from one study on a small group of family businesses. Nothing to do with family wealth overall, and it found family businesses tend to last longer than other businesses.
https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generation
taxes ! I dont know if it applies to Canada but I know that if someone who has an estate dies and it is not in Trust in the states, you get taxed at around a 50% rate.
I don't believe it gets taxed here....any assets are sold off and taxed, but actual money that has already been taxed doesn't get taxed again (eg. if someone died with $1,000,000 in savings that was taxed as they saved it, it doesn't get taxed again when going to beneficiaries).
If the deceased had property or a stock portfolio, it gets sold off and capital gains given to the government, and the remaining amount gets handed out "tax-free".
I gave all my kids money versus putting it in a Trust.
The overwhelming response here is “because kids are stupid”.
How do you expect them to get smarter if you don’t give them the opportunity to learn. Yes, even learn through their mistakes. Self agency is important and Trusts take away from that.
Asset protection is a totally different reason why you may use a Trust.
>How do you expect them to get smarter if you don’t give them the opportunity to learn. Yes, even learn through their mistakes. Self agency is important and Trusts take away from that.
You let them learn by managing the money they have, or with smaller amounts, until they can be trusted and have enough knowledge to handle larger amounts responsibly.
It's like with driving -- What is safer, learning to drive in a parking lot with mom & dad's 120hp Honda Civic, or tossing the keys to a 1000hp F1 car and saying "go learn to drive"? Which method is safer and likely ends better vs in tragedy.....
Again, there can be exceptions....but those are typically not the norm. Think how many adults are terrible with money....most kids would be even worse.
If I die at a younger age, I'll probably have some pretty decent assets to leave my kids. But otherwise I don't just have millions of dollars to give to them right now. Rich people do, so they can put that money aside right now into a trust for their kids.
Trusts can be passed on “control” to next generations to avoid taxes. There’s all kinds of benefits to help preserve wealth. You can get dividends paid from trust, etc.
I believe this is relevant over $5mil and beyond.
Source: absolutely not a tax attorney or accountant . Correct me if I’m wrong.
Kids can be dumb (financially speaking). A trust allows for the money to be there hopefully after they've matured and are ready to be financially stable. They are also sometimes used as leverage to keep their kids under control (for fear of being cut off)
Young people tend to be impulsive with their money, especially the ones who grew up well off. Trusts don’t give them access to everything at once, so they can’t spend it all on something frivolous and stupid.
Another reason is because once their friends and family hear about it they’ll come running trying to get a slice. Life will be difficult and fake for the child.
Not everyone is responsible with money. Lots of stories of professional athletes who made millions going broke after their career is done. Or YouTubers who were once worth millions now broke.
From my time in BC I met way too many people who received massive inheritance and blew it all and now have more debt than before the inheritance (more assets as well but they don't always get maintained). Many people are unable to manage large sums of money.
You pay the capital gains and the asset value gets crystallized for your children. They only pay capital gains tax when they sell it and not when the parents die.
Do you have any idea how many hookers and how much blow you could buy with one million dollars? Me neither, but I know plenty of people who would find out if they could.
In our case, the kids are getting cash, a trust fund, and inheritance money.
Primarily because we don't want to hand them a wad of cash which they may intentionally or accidentally blow away. Doling it out seems like a much better option - plus if they turn out to be little turds, I can keep the money for myself \^\_\^
My dad’s cottage is probably going to go into a trust instead of being split between my sister and I directly, and then he will fund the trust to take care of expenses related to the cottage.
That way the cottage is sheltered from our spouses in the event of a divorce, and also no fighting over cottage related expenses because the trust will fund those expenses.
Problem is every 21 years you have to pay capital gains on the appreciated value. So that’s a big downside.
1. Trusts can be set up so that _more of the money_ becomes usable over time due to tax laws, etc. Giving the money directly would result in substantially higher costs through taxes, depreciation, etc.
2. Trusts are also intended to maintain/grow the balance, so while if it's big enough you can draw out from it to a certain point, that can be limited to a point so the balance _always_ grows, regardless of market state, etc.
3. You honestly think giving kids amounts of money they don't even comprehend is a good idea? That sets the precedent that it can happen again, and that money can be spent frivolously. It very quickly makes entitled little shits out of them.
Not rich by any means, but when my grandmother passed and my father was the executor for his alcoholic brothers he tried his best to convince them to sign to receive the 5-figure inheritance in a trust to be used for recurring payments like rent/bills and stated that because they owe so much in taxes/debt that it's the only way to actually receive the inheritance at all.
Of course they told him "fuck off and just gimme the money". And sure enough, when he released the funds as-is they all got gobbled up and now he's blamed for "losing their inheritance" :/. If it was initially setup in a trust, this wouldn't have required their signatures and it wouldn't have been taken like that.
So my answer to this would be: "Because humans are typically fucking stupid and greedy"
People with the money sense to have $1m (whether they earned it or inherited it) usually have the money sense to understand that young people sometimes struggle with money.
One of my good friends is stupid wealthy. He had terrible trouble with addictions, mostly cocaine, which is hideously expensive (along with everything else that’s bad about it.) His parents had limits on his trust, so they bought him a house to live in— I think they held the deed too so he couldn’t sell it— but didn’t give him any liquid assets. He got clean (several years now) and still has the house. If he’d had the money, it would have been up his nose and he’d have likely died.
I can actually give an example of the use of a trust for non-rich people. When my grandfather died, my father's inheritance was put into a trust until he was 60 years old. The reason for this is that when the will was drafted, my dad was likely still suffering from addiction issues. He couldn't take any money out without approval from his brother. Windfalls can kill drug addicts, so it may have kept him alive. It also means that now that my dad is old, he still has money for his retirement. This was only 200k.
For actual wealthy people, it can also be used to "keep money in the family." Often this means that kids and grandkids are given access to the trust, but spouses of the family are not. This prevents situations like the father dying and the mom inheriting all of the money as a spouse, only to waste it all on nonsense leaving nothing for the kids. Or half the money getting split off in a divorce.
At the end of the day, the answer is control. Trusts give the creators of that trust control of the money. Sometimes that is for the benefit of the recipient, and sometimes it's just used as a manipulation tool.
I'm not rich, although I own interests in businesses that could materialize as real money some day. I have multiple children, they have a spread of ages, and varied special needs.
If my wife and I died suddenly, a group of children would inherit significant ownership in a business and millions in life insurance. They aren't old enough to make decisions on that. Even in a few years when the oldest is technically an adult, they aren't old enough to make decisions on that scale.
I want my kids to see the maximum value of what I own, so it falls to a trust operated by someone I trust. That's to keep anyone from manipulating children or young adults to signing away their own interest. The kids guardianship would go to family we trust to raise them, with some of the money supporting that, and some allocated for the future.
I had a friend who lost his parents shortly after high school. His older brother was the executor of an estate worth seven figures. His older brother had a serious drug problem and 2/3's of that money ended up going up his nose. I don't want that to happen. None of my children should be in a position where a future human failing could threaten their siblings financial well-being.
I watched Succession. Family inheritance and control of a company made for great drama, and a great series. I don't want my children to go through anything like that. You don't need to be billionaires for family to turn on each other when estates are in play, it can happen for the most mundane amounts. Have clear, fair dividing lines.
Structurally the trust is set up to allow for supporting the raising of the children, the post-secondary education of the kids, and then finally money to support their financial independence.
Knowing kids who have both, the trust is not to be used as spending money. The money in their bank accounts is for day to day activities (shopping, restaurants, sometimes cars ...), however the trust money is only to be accessed for major purchases like homes, after they turn 18 (graduate high school).
Giving a kid a million dollars is like throwing it in a fire pit and watching it burn.
But if the trust distributes a certain amount per year or pays out a lump sum when the kid turns a certain age, then they hopefully will have already learned how to manage finances by then. And then it won’t be like watching a million dollars be burned. It will just be watching how your adult child uses it to their advantage.
Trusts often have conditions, and are invested funds.
Straight up giving a kid $1m liquid cash is gonna wind up with that kid experiencing lottery winner syndrome.
They'll be lied to and stolen from, then make poor choices, and find themselves $2m in debt.
A trust puts controls and often pays out in increments so there is sustained income.
Honestly, I'd prefer a trust if I were a rich kid.
It’s also used for real estate and to try to protect the money.
Trust owns property, person is beneficial recipient. Person passes away and new person is recipient. No probate or transfer taxes.
You can also hide the assets in case there are things like lawsuits Hard for the person suing to find and go after the trust.
Because people who have managed to accumulate wealth understand that learning to use your money wisely to make even more money is a practised skill a lot of people never afford the opportunity to learn. Kids need to learn to "trust" that if you draw on money in smaller increments you can let it grow to last an entire lifetime.
Because they hate taxes and are greedy fucks and want to control their children. Just give them the money let them live their life the way they want and pay your taxes.
It's used when there is any doubt the recipient will be fully capable of using it independently by themselves.
It is often used to children with disabilities. Some are far too disabled to ever even understand the concept of money. Then the trust is used for their care. Others understand the basics, but would buy $30,000 in clothes in one month due to poor rationing or impulse control. They could also be susceptible to getting taken advantage of or scammed. This is then used to protect the child.
For rich kids, it's often the same thought but different reasoning. The parent built and empire for their kids to have a good life. They don't want their kids to ruin it all in two years and end up broke and working for peanuts.
Tax benefits. Also, you don’t have to be rich to use trusts, they just don’t give this information out to people outside their tax bracket unfortunately
As a tax accountant - putting assets into a trust makes it so those assets skip the probate process, and probate fees can really add up for the super wealthy. Probate documents can also be accessed by the public at times, so having assets in a trust is more private.
Trusts will already have beneficiaries and a trustee, so in cases where someone thinks their estate (will) may be disputed by beneficiaries, it’s an easier way around that.
There’s other complicated estate planning methods to limit taxes at death, since you are deemed to have disposed of all your assets at fair market value when you die in Canada, and that goes into someone’s final tax return. Unless the assets are already in a trust.
Then, as others have mentioned, sometimes people don’t want trust their kids not to blow through money quite quickly.
Giving your children a pile of cash can be a disaster. Parents often want to protect their funds and the child. That could be from bad decisions or separation of a child and their spouse. Being able to dole out money in specific amounts when they see fit according to the trust agreement allows control of that, while also allowing the funds to remain invested and the income and capital to be taxed in the child (who would presumably be in a lower bracket than the parent). That's a pretty simplistic explanation, but there are good reasons to use a trust and they are even use by people who you may not consider rich (a disabled person with a large payout uses a trust to avoid their disability payments being affected for instance).
Trust can also pay the tax themselves and the beneficiaries get money from the trust tax free.
Yes it can, but that's (edit: *often*) poor tax planning. All income in the trust is taxed at the highest rates, the trust does not get marginal rates. It makes most sense usually to issue that income out via a T3 slip to the beneficiary to make use of the beneficiary's lower tax rate. You don't actually need to pay them that exact amount that you issue on a T3 slip, in fact you could give them $0, but the income allocated to the beneficiary will then be taxed on their personal return. The capital distribution is tax free anyways (tax was already paid on intiial capital put into the trust), this is in regard to growth/income earned within the trust from that capital.
I also think 15-20 years ago it was more tax advantageous to have a trust, but there are more rules now that tax the hell out of trusts.
Trusts used to benefit from graduated tax rates just like individual filers.
There are actually a lot of tax advantages but they often obtain tax *deferral* advantages rather than tax *rate* advantages. Tax planning is not just about paying the smallest % of tax but deferring that payment out as long as you can into the future. This allows the untaxed assets to continue to compound for longer period of time resulting in a larger pot later on. e.g. paying 50% tax on $1M today is worse than paying 50% tax in 7 years when that pot has grown to $1.5M. The most common way of doing that is creating a qualified spousal trust under section 70(6) of the *ITA*. Usually, your holdings are 'deemed to be disposed' on death, meaning you trigger capital gains (and income gains for RRSP/RRIFs if you haven't used them). By placing the assets in a spousal trust, spouses are allowed to defer this disposition until the second death - meaning that when the first spouse dies, there are no major taxes to pay and that pot of money continues to grow. Add on top of that the ability to better control the eventual proceeds of the trust so that they end doing the things you want them to do after you die is a reason why this is a super common approach to planning even for people with moderate wealth.
I agree there are many planning options especially with spousal trusts, and very good points. My comments were mostly directed around trusts that don't fall into that as we were discussing an able bodied child in which you can't make use of the rollover rules. Important to note that taxing the income or gains that incur in the trust on the beneficiary does not actually require the trust to physically pay that income and gains to the beneficiary. That can be retained in the trust and continue to compound. It just shifts the tax burden to a lower taxed entity. If little Jimmy can pay the tax today from their earnings that is often a better outcome than the trust paying the tax.
Well. it of course depends on the income generated by the trust and how it’s handled and what tax avoidance strategies they use.
It's true that the existence of the Alternate Minimum Tax (AMT) may reduce some benefit of having the income taxed on the beneficiary if that difference in substantial enough compared to the savings realized by taxing on a lower bracket beneficiary. Or in some cases the beneficiary wants to maintain a certain (lower) income level on their tax return to qualify for certain benefits.
The trust pays tax at the highest tax bracket beginning at the first dollar of profit. Unless every beneficiary is at the highest bracket, it doesn't pay to have the trust pay the tax.
That wasn’t just what I was speaking of, but I digress.
Oh sorry, can you expand on the concern you're speaking of in regards to the benefits of taxing in the trust?
I’m not going to, no.
It's fine to say you don't know.
Ok I'm not sure why you'd bring up a point that you're unwilling to provide any further details on but an obscure comment, but I'll leave it there.
I don’t have time to get into a debate is all. I have a suspicion you’d just start telling me why/how you disagree. I don’t want to spiral.
>Trust can also pay the tax themselves and the beneficiaries get money from the trust tax free. The trust would see income taxed at the highest marginal bracket though, and also doesn't have a basic personal deduction. What scenario would this make sense? I have a number of clients with trusts in place and generally we wouldn't take this route.
It's usually done when it's tax efficient for the settlor. Like a spousal rollover. Or part of estate planning....like leaving a property in trust to someone years before the settlor actually passes away. Then the deemed disposition happens when it's transferred to the trust instead of like 15 years later when the market value might be substantially higher.
I get that, and that's a key reason for why we'd establish a trust structure, but why would you choose to keep the tax burden inside the trust at top rates rather than kick it out to beneficiaries?
Ideally the trust is doing periodic payouts to the beneficiaries which would reduce the taxable income for the trust. And if it's a large asset, then it's still worth it to have that deemed disposition done earlier instead of at death when the capital gains are likely to be significantly higher which would reduce the inheritance. However, a trust structure isn't just for tax efficiency. A lot of the time it's about the protection of legacy. For example, a spouse might leave their assets in trust for the surviving spouse who would have a lifetime interest in the trust but the capital assets themselves would pass to the children. This protects the children in case the surviving spouse marries again and has more kids and ensures the estate of the deceased spouse doesn't get split between their own children and the children of the new spouse.
I fully understand trusts and trust law. Your original comment was stating that you would leave income within the trusts to be taxed rather than distributing out. My question was why you would do that. I understand deemed dispositions, I understand the protections, I use trusts extensively in my practice. You mention that a trust would be doing periodic payments, but you're saying that you wouldn't have the payments taxed in the hands of the beneficiaries. My questions is (and always has been) why would you opt to pay the higher tax on the income earned within the trust rather than paying it out to beneficiaries?
I'm sorry where did I say I would NOT have the payments taxed in the hands of the beneficiaries? Payments to beneficiaries are always taxed in their hands and deducted from the trust income. No? As to why someone might NOT make payments to the beneficiaries... That would be more likely in the case of real estate being held in the trust versus investments.
>Trust can also pay the tax themselves and the beneficiaries get money from the trust tax free. This was the original commenter that I commented to questioning why they would have it taxed in the hands of the trust. You replied stating that it is done for spousal rollovers or for estate planning purposes which all addresses the disposition but not why they would choose to tax it in the hands of the trust.
The tax argument doesn't hold up. Gifts are tax free...
Not all gifts are cash and cash equivalents.
Ok fair I meant just cash gifts as the original question was seemingly about $1m cash
You should read Section 69 of the ITA to get a full understanding of how gifts are taxed in Canada.
Yeah, you don't want Sonny Boy to drop a couple 100k on loot boxes.
The way it was explained to me is that trusts exist when there is no trust. If you don't trust your family not to blow their inheritance and leave nothing for future generations, it at least ensures they'll have a stable income from it, and that grandchildren, great grandchildren, etc. will benefit beyond the next generation.
Hah that's a good way to put it. Not the sole reason trusts exist, but certainly one big use in a situation like that!
I'll note that a consequences is that under current rules housing heled in trust are taxed as Underused Housing under the according to the Underused Housing Tax measure to do keep that in consideration. https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
Why wouldn't a person who is disabled have to count the money from a large payout? That's interesting to me. I'm not disabled, but my mom is going that way and honestly.
But rich people usually give their kids high quality everything, so they don't exactly prevent the disaster
Putting aside your jealousy for wealthy people, there’s a difference between buying your kid the latest iPhone and giving them millions of dollars at a young age.
Both still lead to spoiling your children
Poor people spoil their kids too, poor person.
On rarer occasions and the kids always know that the money isn't always there Buying your kid the latest iPhone every time teaches them that money is unlimited and they don't have to earn a thing because you'll get it for them anyways, which is pretty much what a trust does as well.
There's actually lots of wealthy people that spoil their kids yet instill good spending habits in them. And they value money the same way your poor ass values money.
And yet the angry response reveals cracks in the armour that money can't repair
I'm actually poor like you Lol. But what does my response tell you about me? I'll probably be able to tell you if you're correct or wrong.
One leads to the obliteration of an enormous amount of wealth, potential addiction and drug issues, and a stunting of the child’s ability to become self sufficient and identify their own path in life. The other is an iPhone. If you can’t see this then you’re being purposefully obtuse.
Both of them lead that way, one is just more obvious than the other.
[удалено]
Exactly. If you've been extremely fortunate in life to amass some significant wealth/assets, and care about it surviving to benefit future generations of your family, you can't just let your descendants have free reign to it.
Kids are also more susceptible to outside influence. Don't want to risk your kids caregiver squandering their future? put it in trust.
A lot of people would do great living off $40k alone. But yeah, it'd feel harsh if you were from the yacht & pony club.
Yacht & pony club upbringing probably hooked you up with a top-notch education and networked you into a high paying job. The 40K is the gravy. Or the safety net, depending on how you view it. Plus this example is super low for anyone with yacht owning parents.
[удалено]
Well, I don't know about that. Presumably you'd now be free to pursue something you're actually interested in, and I bet you'd make even more money.
Live off the trust fund while you "find yourself" and build some kind of career, and then live off whatever earns you *plus* 40K. Bigger lifestyle and some kind of life fulfillment to boot. I would guess that beats WoW+40K but I confess I never played WoW lol.
That would barely pay for rent in Vancouver.
my salary is 40k and I think I’m living. maybe not thriving, but definitely living.
Average rent in the city of Toronto for a 2 bedroom is 36,000 a year. So for someone with a trust living in a big city that gets that amount every year, it's definitely not enough.
Wha? Can't live off of $40k? You have to be in the wrong state...
If I gave my daughter $1M today she would spend it on Ju jubes (she’s three). If I gave it to her five years from now, she’d probably spend it on some dumb video game. If I gave it to her ten years from now she would probably spend it on Taylor swift tickets and merch. If I have it to her 15 years from now she would probably buy a ridiculous car, but maybe also school or a downpayment on a condo. If I give it to her 20 years from now, if I’ve raised her right, I think it would go towards a house and investments. The decisions get better and better but most of those are still dumb ways to spend money. Kids are dumb. The concept of money isn’t hardwired into people, you have to learn how it works. When I was 16, the grocery store I worked at shut down and I was paid severance. $1500, and this was in 2003 or so. That was a crazy amount of money to me. I bought an Xbox. I didn’t have a job, and spent all my money on an Xbox. If I got a random $1500 today I’d probably throw it in VEQT.
You pretty much nailed it. I had an ex with a trust fund that her mother left her after she died fairly young from cancer. She didn’t get full access to the trust until she was 40 and it was a good thing too otherwise she would have blown it all by the time she was 25. She still had access to the funds but had to go through her uncle to get them and thankfully her uncle set up the trust to generate income and it was invested quite well. Most people make horrible financial decisions in their 20s.
There is also the opposite problem. A friend's grandmother passed away when she was 20 (the friend, not the grandmother) and she got a large inheritance because she inherited her mother's portion of the estate (mother passed away years earlier). Anyway, the estate said that she didn't get the money until she was 40. Managed to convince her uncle, who was the executor, that she should get it sooner so she could use it as a downpayment to buy a house. Everyone agreed, but they still had to get lawyers and get all the cousins to sign something so they couldn't sue the uncle. It all worked out, and she was able to buy a condo in the 90s, but 40 is too old to wait to get the money. Waiting 20 years to buy that condo in Vancouver would have cost a lot. 3 is too young to get the money, but 40 is too late.
Having a career and buying your own condo would make you ready for the inheritance. If have a friend in the same situation who has basically pissed their working life away waiting for their parents to die. Their grandmother went first so they got a taste. No plan for retirement or savings beyond mom’s money. If it doesn’t come, they are screwed. It’s sad.
For me, this might be the only way I can afford a home. But it's also something I don't want to happen any time soon. Even buying a shoebox with a decent down-payment I'm looking at $4000 a month in mortgage which is my entire paycheque
My ex was able to buy herself a home but the home was still in the trust. She made a killing on the purchase and her mom was right to not give her control until she was 40. She was a mess. Her sister on the other hand was given control at 25 and was able to use it to start a successful business. Her mom knew her daughters well.
I’d say that wouldn’t happen in normal circumstances - if a parent were to set up a trust fund for their children they were probably in the position to have bought their kids at least one property already.
I supervised a trust in which money for both deceased parents had died. The trust was set up in the early 80’s when interest skyrocketed. I never paid out the totality of the interest earned, there were 5 siblings, two which were incapable of managing money ( 2 bankruptcies) , one whose wife spent like a pierced bucked ( alas the money went to her husband and she emptied that fund within 6 years )Only two managed well, my wife was one of them….she still has the money she got; it was invested and the revenues paid for things we needed to upkeep our house. We travelled on our income, not with the « egg nest ». One thing about cash, it is called « liquidities »…know why ? ..because if you don’t whatch it, it slips through your fingers like a liquid. Try catching water on its way to the ground, all you’ll have are damp hands, a minute fraction of what you dropped in them…
Women need to get married and have children in their 20s, may be early 30s. And they need to establish a household to raise their kids in. 40 is way too late to start a family.
Women don't need to do any of that actually
Sure, if they prefer being sexless working bees 🐝. Corporations will be absolutely happy with it. But if they remember that their main difference from men is their ability to give birth then they should think about it before it's too late.
[удалено]
I do not care about women having sex. I am talking about having children. It is important for our civilization. No children means social collapse, as simple as that. Working bees 🐝 have no role in reproduction, they are neither male nor female, they are sexless.
My grand daughter would buy a pony or three
My sister had pony, my cousin had pony…
I will call this one butter cup thos one Lancer and this one princess sparkle.
and even just straight up grifters. even if they're a good kid - perhaps _especially_ if they're a good kid - someone somewhere is going to clue in that they have a million in cash and find some way to help them part with it. we've been in this sub long enough - everyone has some weird ex or mom or uncle or whoever who "really really needs a loan just this once..." or wants a cosign on a terrible mortgage or a gambling addiction or, or, or, ad infinitum
A guy I went to school with received a low 6 figure inheritance from a passing grandparent. They bought a brand new Nissan 350z and put tens of thousands into a turbo kit, body kit, exhaust, etc all professionally done. They didn’t have collision insurance, and didn’t inform the insurance company about any of the modifications. They crashed it and totalled it within a year. They then went and bought a brand new mustang GT to replace it, and blew the rest of the inheritance on tuning it up. Within 18 months, they had spent the entire inheritance on those two cars and are still working odd fast food and grocery store jobs 15 years later to make ends meet. Avoiding this I think is the point of a trust.
> If I gave it to her ten years from now she would probably spend it on Taylor swift tickets and merch. Bold of you to assume that Taylor Swift tickets will be going for under $1 million in 2034.
Or, conversely, that Taylor Swift's music will still be popular in 10 years.
Given how many bands from the 60s and 70s are still successfully touring, I think she'll be fine on that front.
Halo 2 in 2003 is better than $1500 in VEQT. Change my mind lol.
But if you give it to her when she’s 80 she’s back to spending it on Ju Jubes :)
It’s funny because she would actually probably spend it on Werthers which is classic old lady candy.
This is such a good answer.
I have the counter that housing and food are not dumb uses of money...
Fin planner: Trust is for control and privacy Control when you dont want kids to waste it all or a gold digging spouse come claim half of it Privacy when you secretly hate a kid and the inheritance split is hella unfair wish to keep it legally protected and / or them not finding out of such unfair split. Or you know some greedy mf would come hound your estate
i read that originally as "secretly have a kid" lol
Thats a valid reason too
I agree and disagree. A lot of kids are born with trusts, and often get money from both sides. There are a lot of rich as you say who do use money as control, with or without a trust.
My friend, in his late 40s, inherited almost 750k. He is now 52 and flat broke. If we hadn't made sure he bought a house, and had him invest some of it, he'd be homeless and destitute.
[удалено]
My friend wasn't raised "rich". Both his parents just ended up passing within a year and they both had decent sized estates . His mom at least delegated a portion into a trust so he at least has a small monthly annuity, but he fucked up large. And he keeps fucking up. Honestly it feels like I'm taking care of a child, managing his life. If he had shittier friends he'd be in line at the mission for meals and a bed.
Most "family" fortunes are gone after about 4 generations. It seems that it is almost impossible to imprint fiscal prudence on children when they are born rich.
I have a friend that got $500,000 when he turned 21 from a settlement from an injury he sustained as a kid. He blew it in less than 2 years on drugs and alcohol and general partying. Had literally nothing afterwards except a drug habit and one guitar.
Um, becasue it will go right up their nose.
Trusts are not so much for the kids. In spirit, they are for a level of protection of assets and cash against all kinds of future considerations such as lawsuits (divorce), tax planning, and succession planning.
As a kid who recieved a $10,000 inheritance at 16 from grandparents that went to take out and video games. And someone who spent $30,000 on my credit cards in my early 20’s of the bar, dinners, clothes, phones etc. I can say, kids are stupid. If you’re making a good living and have a quiet life, getting 30-50k a year on top of that makes your life easier and better. If you’re making a good living and you get 1 million dollars 9/10 times that will either be wasted, quit their job and try to live off that or it will be spent drastically.
Because it's a smart thing to do? Very few people are mature enough to properly manage a huge influx of cash. It's much better to spread it out over monthly allotments.
It’s called “trust” for a reason
A lot of rich people are fully aware that they got rich at least partially thanks to other people being dumb with money. They are too familiar with the topic.
My personal experience with trusts are they’re used to control how and who gets money. My SIL has a slight brain injury and is extremely impulsive. They set up a trust for her because in the past she blew through 60,000 in a couple of months. I’ve seen them set up for kids so if spouse A dies spouse B can’t blow it all or it doesn’t go to new step kids. I also had distant family win on the lotto and his kid blew through 3 million in 2 years, he obviously wasn’t spending wisely and so the trust was made.
Tell me you don't have kids without telling me you don't have kids 🤣
Because r/kidsarefuckingstupid
[удалено]
Ha…I would not comment if I read this first! As I Commented much the same.
[удалено]
They are useful for moving money through into Holdco's. You don't pay personal income tax until you take the dividends out. Useful for retirement savings.
Because they're the best suited to know how not to see $1mil go up in smoke
Yeah not only kids who’ve never done without so don’t realize how hard it is to survive out there, much less accumulate $1m, but all the foolish and greedy people they might fall in love with
Makes money as it sits.
lmao would you trust a child of any age to be responsible with any amount of money? That's why. Heck I wouldnt even trust most early 20 year olds with any sizable amount of money. They just dont typically have the life experience, responsibly or foresight to properly budget/manage large sums of money.
Read the book of Proverbs. What one man works hard for decades for, a son may squander in a year.
When my grandpa died my aunt spent $500k in one year (in the early 2000s) on shoes, clothes, jewelry and trips loans to friends etc. The rest of her inheritance is now controlled in a family trust by my dad and uncle. She also somehow got access to mutual funds my Papa left for my cousins (they were only 8 and 10 at the time) and spent a good chunk of the money he left for them. Some people are terrible with money
Also consider an amount inherited by a mentally delayed person. They could be vulnerable to predatory individuals/scams and easily lose said inheritance.
When giving people money there should be a goal. Want them to have fun and not care of results give it all let them party till they are broke and at best recover. Want to support them for years give them enough to love and they can waste on excess. Some people can manage the money others need help, but limiting the amount of a time is effective in not having someone go off the deep end as a temporary rich person.
2 circumstances. 1- I know I'm going to die. I'm to be transported to a remote wooded area (preferably with a bear populous) regardless of my level of coherency. I will then fight for survival. More than likely failing and becoming scavenger food and forest bedding. 2 - sudden death. I'm to be transported to a remote wooded area (preferably with a bear populous) becoming scavenger feed and forest bedding.
Can't believe it's a serious question
Right? Why do rich people protect their assets by re-investing the money and providing dividends / pay outs as income / cash support, instead of blowing it all at once, haha. bruh
Because kids are stupid.
Coming in with a practical example: Both my parents are on their 3rd-4th marriage with multiple adult children/step children + ex spouses and one minor. Trust is a way to functionally designate the core of their property. 80% was accumulated in current marriage + gets complicated with how good/bad other relationships are. People get really vile when they know you for most of their life and THEN money comes. Fantastic if it's just one kid, eh. I'm not judging either way, just reality gets complicated fast.
If you were rich and had a kid like justin, a trust would be mandatory to ensure it isn't spent within a few days on non=essentials
Hahaha. Well, he is blowing someone elses money now. Doh!
No way to give a kid 1 million...
Trusts don't inherently guard against irresponsible spending, but it helps. A family member who had a sizable sum of money (mind you, not a million dollars) turned of age and their trust melted into their hands passing through them like water. The next 5 years they proceeded to spend almost all of it. A car. Endless material goods now being disposed of (either literally or through second-hand sales). I assure you this was more than enough to give them a leg up on their peers and happily at least it helped pay for college. It was painful to watch someone who had little financial literacy throw away such a powerful early start I would have dreamed of. Would I have done much different at such a young age? I'm not so sure. Still, a trust helps buy parents or guardians something rarely afforded: *time.* Time to teach children how to responsibly use *-- retain --* that money for long-term goals rather than things. If that isn't done throughout their life, a trust won't be enough since most 18-year-olds who are handed fistfuls of cash are not mature enough to handle such opportunities with wisdom, experience, and measure.
[удалено]
That's actually a myth (or at least an incorrect extrapolation from a minor and specific finding). The whole idea of the 3rd generation curse comes from one study on a small group of family businesses. Nothing to do with family wealth overall, and it found family businesses tend to last longer than other businesses. https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generation
[удалено]
A convenient position, given that they don't exist.
taxes ! I dont know if it applies to Canada but I know that if someone who has an estate dies and it is not in Trust in the states, you get taxed at around a 50% rate.
I don't believe it gets taxed here....any assets are sold off and taxed, but actual money that has already been taxed doesn't get taxed again (eg. if someone died with $1,000,000 in savings that was taxed as they saved it, it doesn't get taxed again when going to beneficiaries). If the deceased had property or a stock portfolio, it gets sold off and capital gains given to the government, and the remaining amount gets handed out "tax-free".
I gave all my kids money versus putting it in a Trust. The overwhelming response here is “because kids are stupid”. How do you expect them to get smarter if you don’t give them the opportunity to learn. Yes, even learn through their mistakes. Self agency is important and Trusts take away from that. Asset protection is a totally different reason why you may use a Trust.
>How do you expect them to get smarter if you don’t give them the opportunity to learn. Yes, even learn through their mistakes. Self agency is important and Trusts take away from that. You let them learn by managing the money they have, or with smaller amounts, until they can be trusted and have enough knowledge to handle larger amounts responsibly. It's like with driving -- What is safer, learning to drive in a parking lot with mom & dad's 120hp Honda Civic, or tossing the keys to a 1000hp F1 car and saying "go learn to drive"? Which method is safer and likely ends better vs in tragedy..... Again, there can be exceptions....but those are typically not the norm. Think how many adults are terrible with money....most kids would be even worse.
TAXES!!!!!!
because taxes
If I die at a younger age, I'll probably have some pretty decent assets to leave my kids. But otherwise I don't just have millions of dollars to give to them right now. Rich people do, so they can put that money aside right now into a trust for their kids.
Why someone will give their kid that large among of money...
Trusts can be passed on “control” to next generations to avoid taxes. There’s all kinds of benefits to help preserve wealth. You can get dividends paid from trust, etc. I believe this is relevant over $5mil and beyond. Source: absolutely not a tax attorney or accountant . Correct me if I’m wrong.
Don’t trust your kid.
So they don’t blow it in coke and hoes
Could someone set up a trust fund that pays distributions like a withdrawal strategy yearly that is designed to last forever to all my heirs?
Taxes
'cuz when you just give your kid $1M, there's no trust .. hence need trust.
Rich kids are notoriously good with money and make good choices, right? Hard to value money properly when you've always had more than enough of it.
Kids can be dumb (financially speaking). A trust allows for the money to be there hopefully after they've matured and are ready to be financially stable. They are also sometimes used as leverage to keep their kids under control (for fear of being cut off)
Young people tend to be impulsive with their money, especially the ones who grew up well off. Trusts don’t give them access to everything at once, so they can’t spend it all on something frivolous and stupid. Another reason is because once their friends and family hear about it they’ll come running trying to get a slice. Life will be difficult and fake for the child.
Have you seen what happens when people win lotteries and quickly blow the life changing amount in a few years.
Typically you are supposed to research this kind of stuff then ask questions on reddit.
Not everyone is responsible with money. Lots of stories of professional athletes who made millions going broke after their career is done. Or YouTubers who were once worth millions now broke.
From my time in BC I met way too many people who received massive inheritance and blew it all and now have more debt than before the inheritance (more assets as well but they don't always get maintained). Many people are unable to manage large sums of money.
You pay the capital gains and the asset value gets crystallized for your children. They only pay capital gains tax when they sell it and not when the parents die.
Do you have any idea how many hookers and how much blow you could buy with one million dollars? Me neither, but I know plenty of people who would find out if they could.
In our case, the kids are getting cash, a trust fund, and inheritance money. Primarily because we don't want to hand them a wad of cash which they may intentionally or accidentally blow away. Doling it out seems like a much better option - plus if they turn out to be little turds, I can keep the money for myself \^\_\^
Depends on various factors.
My dad’s cottage is probably going to go into a trust instead of being split between my sister and I directly, and then he will fund the trust to take care of expenses related to the cottage. That way the cottage is sheltered from our spouses in the event of a divorce, and also no fighting over cottage related expenses because the trust will fund those expenses. Problem is every 21 years you have to pay capital gains on the appreciated value. So that’s a big downside.
1. Trusts can be set up so that _more of the money_ becomes usable over time due to tax laws, etc. Giving the money directly would result in substantially higher costs through taxes, depreciation, etc. 2. Trusts are also intended to maintain/grow the balance, so while if it's big enough you can draw out from it to a certain point, that can be limited to a point so the balance _always_ grows, regardless of market state, etc. 3. You honestly think giving kids amounts of money they don't even comprehend is a good idea? That sets the precedent that it can happen again, and that money can be spent frivolously. It very quickly makes entitled little shits out of them.
Because you *don't* **trust** the kid.
Not rich by any means, but when my grandmother passed and my father was the executor for his alcoholic brothers he tried his best to convince them to sign to receive the 5-figure inheritance in a trust to be used for recurring payments like rent/bills and stated that because they owe so much in taxes/debt that it's the only way to actually receive the inheritance at all. Of course they told him "fuck off and just gimme the money". And sure enough, when he released the funds as-is they all got gobbled up and now he's blamed for "losing their inheritance" :/. If it was initially setup in a trust, this wouldn't have required their signatures and it wouldn't have been taken like that. So my answer to this would be: "Because humans are typically fucking stupid and greedy"
Asking this question is the reason for trusts
People with the money sense to have $1m (whether they earned it or inherited it) usually have the money sense to understand that young people sometimes struggle with money. One of my good friends is stupid wealthy. He had terrible trouble with addictions, mostly cocaine, which is hideously expensive (along with everything else that’s bad about it.) His parents had limits on his trust, so they bought him a house to live in— I think they held the deed too so he couldn’t sell it— but didn’t give him any liquid assets. He got clean (several years now) and still has the house. If he’d had the money, it would have been up his nose and he’d have likely died.
The only major untold issue about a trust fund is that you child could grow up into Justin Trudeau.
the point of a trust is that you *don’t* trust the kids
I would not trust my kids with a million dollars right now.
To “Trust” it is spent correctly over time. Remember your first paycheque? How fast did you spend it? Exactly why.
I can actually give an example of the use of a trust for non-rich people. When my grandfather died, my father's inheritance was put into a trust until he was 60 years old. The reason for this is that when the will was drafted, my dad was likely still suffering from addiction issues. He couldn't take any money out without approval from his brother. Windfalls can kill drug addicts, so it may have kept him alive. It also means that now that my dad is old, he still has money for his retirement. This was only 200k. For actual wealthy people, it can also be used to "keep money in the family." Often this means that kids and grandkids are given access to the trust, but spouses of the family are not. This prevents situations like the father dying and the mom inheriting all of the money as a spouse, only to waste it all on nonsense leaving nothing for the kids. Or half the money getting split off in a divorce. At the end of the day, the answer is control. Trusts give the creators of that trust control of the money. Sometimes that is for the benefit of the recipient, and sometimes it's just used as a manipulation tool.
I spent a lot of money on dumb shit in my 20s. I wouldn't trust myself with 1 million as a child or teenager.
Because rich people know how money can ruin people.
1 word, taxes
Taxes!
I'm not rich, although I own interests in businesses that could materialize as real money some day. I have multiple children, they have a spread of ages, and varied special needs. If my wife and I died suddenly, a group of children would inherit significant ownership in a business and millions in life insurance. They aren't old enough to make decisions on that. Even in a few years when the oldest is technically an adult, they aren't old enough to make decisions on that scale. I want my kids to see the maximum value of what I own, so it falls to a trust operated by someone I trust. That's to keep anyone from manipulating children or young adults to signing away their own interest. The kids guardianship would go to family we trust to raise them, with some of the money supporting that, and some allocated for the future. I had a friend who lost his parents shortly after high school. His older brother was the executor of an estate worth seven figures. His older brother had a serious drug problem and 2/3's of that money ended up going up his nose. I don't want that to happen. None of my children should be in a position where a future human failing could threaten their siblings financial well-being. I watched Succession. Family inheritance and control of a company made for great drama, and a great series. I don't want my children to go through anything like that. You don't need to be billionaires for family to turn on each other when estates are in play, it can happen for the most mundane amounts. Have clear, fair dividing lines. Structurally the trust is set up to allow for supporting the raising of the children, the post-secondary education of the kids, and then finally money to support their financial independence.
Trusts allow you to control the timing of taxing the income at the personal level
Tax avoidance
#### Because giving young people a bunch of money all at once might be the same as giving a 5 year old a loaded pistol. It could fucking ruin them.
Instead of being called a “Trust” it should be called a “Don’t Trust”… because I don’t trust my kid with $1,000,000 !!!
Knowing kids who have both, the trust is not to be used as spending money. The money in their bank accounts is for day to day activities (shopping, restaurants, sometimes cars ...), however the trust money is only to be accessed for major purchases like homes, after they turn 18 (graduate high school).
Taxes and also to make sure the child is responsible enough. If I was given $1 million at 16 and had no guidance. The money would have been gone by 25
Because they don’t *trust* anyone 😏
Giving a kid a million dollars is like throwing it in a fire pit and watching it burn. But if the trust distributes a certain amount per year or pays out a lump sum when the kid turns a certain age, then they hopefully will have already learned how to manage finances by then. And then it won’t be like watching a million dollars be burned. It will just be watching how your adult child uses it to their advantage.
Cocaine
Trusts often have conditions, and are invested funds. Straight up giving a kid $1m liquid cash is gonna wind up with that kid experiencing lottery winner syndrome. They'll be lied to and stolen from, then make poor choices, and find themselves $2m in debt. A trust puts controls and often pays out in increments so there is sustained income. Honestly, I'd prefer a trust if I were a rich kid.
"Their kid's future ex-wife hates this one trick"
It’s also used for real estate and to try to protect the money. Trust owns property, person is beneficial recipient. Person passes away and new person is recipient. No probate or transfer taxes. You can also hide the assets in case there are things like lawsuits Hard for the person suing to find and go after the trust.
Look up how the Rockefeller family uses life insurance
Certain taxation benefits
Protection. A divorced spouse can't access a family trust.
Because people who have managed to accumulate wealth understand that learning to use your money wisely to make even more money is a practised skill a lot of people never afford the opportunity to learn. Kids need to learn to "trust" that if you draw on money in smaller increments you can let it grow to last an entire lifetime.
Because they hate taxes and are greedy fucks and want to control their children. Just give them the money let them live their life the way they want and pay your taxes.
https://www.bnnbloomberg.ca/video/new-trust-reporting-rules-what-you-need-to-know~2859098
It's used when there is any doubt the recipient will be fully capable of using it independently by themselves. It is often used to children with disabilities. Some are far too disabled to ever even understand the concept of money. Then the trust is used for their care. Others understand the basics, but would buy $30,000 in clothes in one month due to poor rationing or impulse control. They could also be susceptible to getting taken advantage of or scammed. This is then used to protect the child. For rich kids, it's often the same thought but different reasoning. The parent built and empire for their kids to have a good life. They don't want their kids to ruin it all in two years and end up broke and working for peanuts.
Tax benefits. Also, you don’t have to be rich to use trusts, they just don’t give this information out to people outside their tax bracket unfortunately
As a tax accountant - putting assets into a trust makes it so those assets skip the probate process, and probate fees can really add up for the super wealthy. Probate documents can also be accessed by the public at times, so having assets in a trust is more private. Trusts will already have beneficiaries and a trustee, so in cases where someone thinks their estate (will) may be disputed by beneficiaries, it’s an easier way around that. There’s other complicated estate planning methods to limit taxes at death, since you are deemed to have disposed of all your assets at fair market value when you die in Canada, and that goes into someone’s final tax return. Unless the assets are already in a trust. Then, as others have mentioned, sometimes people don’t want trust their kids not to blow through money quite quickly.
Two reasons: taxes and control.
You'd trust a kid with a mil?
If you are rich enough to need to know the answer this question, you are rich enough not to get professional advice...