For many high-income earners, trust funds can provide long-term financial flexibility that creates many options for sharing and preserving wealth and optimizing tax savings.
As a dentist, it’s common for your needs to change as your income increases, your practice matures, and your family grows. Starting a trust fund early can give you a more effective way to provide for your family and future generations.
Trust Fund Basics
Trust funds are simply a structure that can hold assets on behalf of a person or group of people. The major advantage of creating one is that you get to decide how and when assets go into, and come out of, the trust and who receives them. You benefit from:
- The potential for lower taxes when you distribute your wealth
- Greater control over when and how your money is taxed
- Maximum flexibility to distribute your wealth over time
“Trusts have always been a good way for owners of Canadian Controlled Private Corporations (CCPC) to control how assets and income get shared while you’re alive and after your death,” says Nicholas Talarico, a chartered professional accountant and Edmonton-based partner with the tax services team of MNP, an accounting firm with offices across Canada. “Changes to the tax act in 2017 helped to shine a new light on trusts as owners paused to re-evaluate their plans for preserving wealth and ensuring their legacies.”
Your Options
As a dentist, and the owner of a CCPC you may be wondering whether trust funds will allow even more financial flexibility. Although the Canada Revenue Agency recognizes almost three dozen types of trusts, they all fall into two main categories to choose from. Each one puts you in control of how your assets are shared and who will receive income.
Inter-vivos
While you’re alive, you can create and oversee an inter-vivos trust. This allows you to put assets into a trust and redirect it to beneficiaries in a tax-friendly way.
An advisor can help you determine the best way to achieve your goals and assist with navigating the rules around hiring family members to help run the business.
Testamentary
A testamentary trust is created on and as a result of the death of a person and the terms are generally established by the will of the deceased individual.
Your will provides direction on how assets get distributed and how the trust will be managed. As your circumstances change throughout your life, you can make adjustments to your will, such as adding new beneficiaries or charities.
The Gift You Share
Once you decide that trust funds are right for you, your family, and your practice, put time on your side. Starting a trust fund early in your career is a gift to everyone who stands to gain from your planning, including you, because it creates additional flexibility.
Let’s take a look at how setting up a trust might work for a dentist in the prime of life:
A short tale
David, a practice owner, and his spouse decide to buy a cottage in their early 40s. They have two children, neither of them married. It's virtually impossible to foresee all the financial complications that could arise when their children get married and start their own families. For example, who inherits the cottage?
Owning the cottage within a family trust is one way to manage inheritance. This gives the owners a wide range of options when it comes to controlling who inherits it and how it should be valued at that time. In addition, the trust can also be adjusted from time to time, if, for example:
- The children get married
- The parents want to provide for their grandkids
- Adjustments need to be made because of divorce
The bottom line is that trusts give you and your loved ones the maximum amount of flexibility. By laying the groundwork in advance, you can head off tax complications and financial disputes.
Additional Benefits of Trust Funds
As a dental professional, and the owner of a successful practice, you have many practical and compassionate reasons for considering the use of trusts to insulate your assets from certain kinds of taxes and spare your family a host of difficult choices.
Avoid probate
Probate is the legal process by which the value of your estate is added up and the amount of tax due is calculated. The process is fair and proven but it takes time, especially when your wealth is related to assets you might share with partners. When assets are held in trust, your beneficiaries can receive them faster.
Prevent family feuds
Trust funds are respected documents in a court of law. So long as you’ve made your wishes clear, there should be little room for misinterpretation when it comes to how you want assets distributed.
Reduce legal challenges
A well-documented inter-vivos or testamentary trust leaves little room for dispute. It’s less likely that third-parties intent on making financial claims will have success contesting your intentions.
Ensure your legacy
If there are charities, faith groups, or educational organizations that you want to assist, a trust can ensure that they receive your gift in the most tax-effective way. An advisor can help you incorporate charitable giving into your overall financial plan to maximize the tax efficiency of your gifts.
Is Setting Up a Trust Fund Right for you?
Trust funds are one of many tools available to dentists and other high-income earners to increase and preserve wealth.
The experts at CDSPI can work with you and your trust advisors, such as lawyers, accountants and tax planners, to personalize a trust solution that’s right for you. We’re also here to help you monitor progress and make adjustments as needed. “Always be planning,” says Talarico. “Financial success is an ongoing process and you should always be looking for new ideas.”
To learn more about whether a trust fund is right for you, your family, and your practice, contact an Advisor at CDSPI Advisory Services Inc. about your insurance needs or investment plan, please book a meeting or contact us at 1.800.561.9401 or cdspi@cdspi.com. We’ll explain your options and guide you through the process to give you the maximum flexibility you need.