Anthony Layton MBA, CIM

Chairman & CEO, Portfolio Manager

Peter Guay MBA, CFA

Portfolio Manager
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The pros and cons of family trusts

Almost everybody knows the hit TV series Downton Abbey.

Even if you weren’t a fan, you probably know it tells the story of a family of British aristocrats and their servants in the early part of the last century.

One of key plot point revolves around the fact that the patriarch, Lord Grantham, doesn’t actually own Downton Abbey. Instead, it’s held in a type of family trust.

Under the terms of the trust, the estate has to be kept together and passed on to the closest male heir. That stipulation causes all sorts of problems for Lord and Lady Grantham who are parents of three daughters.

Unfortunately, the trust didn’t also prevent Lord Grantham from almost bankrupting the family in a disastrous investment in a Canadian railway.

Used by many families

Now, family trusts aren’t fiction. And they’re not just for aristocrats. They’re used by many Canadian families as part of their estate planning. And, yes, they can be used to prevent younger generations from squandering the family wealth like Lord Grantham did. But they also have many other benefits.

The easiest way to understand a trust is by thinking about an example most of us are familiar with: a deceased person’s estate.

Your will expresses your wishes on how you want your estate to be divided up among your heirs, charities and other beneficiaries. The will’s executor is responsible for carrying out your wishes and typically does so in the months following your death.

Within your will, you can also set up a trust to administer some portion of your estate after your death. For example, imagine you have a disabled child who needs to be cared for. In your will, you could arrange for a trust to be created to provide for the care of that child until his or her death. This is known as a testamentary trust.

Established while you’re alive

There’s another kind of trust--one you establish while you’re alive. With this one, you also put assets into a trust for the benefit of your children, grandchildren or other beneficiaries. It’s called an inter vivos—or between living people—trust.

How does it work?

Let’s say you’ve looked at your financial situation carefully. You’ve got more money than you will need to live on or give away to your favourite charities.

You want to give the surplus to your kids or grandchildren. Now, you could simply give it to them as a gift. But then you wouldn’t have any control over how they use it. That’s okay for some people but not for others.

Say you have an incapacitated child or you’re worried one of your kids is going to blow the money in Vegas. Or maybe you just don’t trust your son-in-law and want money put aside and paid directly to your grandchildren when they reach a certain age.

Assets belong to the trust

To take care of these situations and many others, you could set up a trust and put your excess capital into it. Now the money belongs to the trust and is administered by one or more trustees in the interest of the beneficiaries.

You set out the terms of how the property will be administered in a formal trust agreement and you may decide to be one of the trustees. So, you are in control.

You could say, for example, your kids get just the income from the investments in the trust—the interest and dividends. Or you might decide they get a certain percentage of the capital each year. It’s up to you.

Apart from the Las Vegas gambler or the ne’er-do-well son-in-law, you might just want to avoid making your children too wealthy at too young an age—the proverbial trust-fund kids. You might decide they should have enough to meet their basic needs but still have to work for a living.

Or maybe some disaster occurs and all of a sudden you need the money yourself. While you no longer legally own the assets—the trust does--it’s still possible to pull back the money and use it yourself.

Can reap some tax benefits

And finally, there are tax planning benefits. You have to be careful here and make sure a tax expert advises you. But the main benefits involve paying income from the trust to beneficiaries who have lower marginal tax rates than you do. Also, investments can grow in the trust without creating capital gains in your hands.  

What are the pitfalls of using a trust?

They’re mainly the costs involved in setting up and maintaining one—and a family holding company, a structure that often goes along with a trust.

There are expenses to establish and register these structures and then annual administration fees. So you need to have a certain amount of money for it to make sense. How big an amount is a judgment call and should be discussed with your financial advisor.

In fact, trusts can be complicated so it’s important to discuss all your options with investment, legal and tax advisors who have lots of experience with them.


By: Anthony Layton | 2 comments

Should you pay your family from your company

Update:  On July 18 2017, Finance Minister Bill Morneau announced a plan to modify the taxation of private corporations. The proposed plan calls for 75 more days of consultation before legislation is to be introduced. I am keeping a close eye on this situation and will update this blog when more information becomes available.

Welcome back to “Do It Together” financial planning. We’re at part three of my business incorporation series. If you missed the first two videos on whether you should incorporate and whether you should pay yourself a salary or dividend, I recommend watching them as they lead up to this video: Paying your family from your company.

If you’re a legal or medical professional with an incorporated business, you have the opportunity to split your income among family members so you pay less tax.

However, you can’t just start paying your family, there are guidelines around how you split your income and to whom you can give that income. This video takes you through how income splitting works and the tax advantages.

Don’t forget to subscribe to my YouTube channel for more videos like these.

By: Peter Guay | 0 comments

What is a fiduciary standard?

What is a fiduciary standard? Putting your financial interests first

Do you know if your investments were recommended in your best interests in terms of risk and long-term sustainability?

It’s natural to assume your investment advisor is committed to act in your best interest. However, this isn’t the case in many advisor-client relationships – particularly when an advisor receives commissions or other sales-based compensation.

You may or may not have heard, but the Canadian investment industry is in the midst of a debate over the extent to which advisors should be legally required to act in their clients’ best interests.


Some players want to limit law

On one side, many major players in the industry appear to be attempting to limit the law’s reach and would prefer to continue operating under something called a “suitability standard.” Under a suitability standard, a firm must have a reasonable basis to believe that a recommended investment is suitable, given the client’s objectives. If this seems cryptic, well, that’s because it is.

On the other side of the debate is the push for what is called a fiduciary standard. Under a fiduciary standard, a firm must put their client’s interests above its own, regardless of its profit ambitions, and act strictly in the client’s best interest. This is a lot less cryptic and open to interpretation and requires a third party audit.

Only some advisors must meet fiduciary standard

At present, only certain types of advisors operate under a fiduciary standard in Canada, including portfolio managers, as designated by the Portfolio Management Association of Canada, and, in Quebec only, financial planners, accredited by the Institute québécois de planification financière.

In the absence of a fiduciary requirement for all types of investment advisors, responsibly minded firms, including PWL, are obtaining independent accreditation as fiduciaries.

CEFEX-accredited firms adhere to the Global Fiduciary Standard of Excellence, which means they must act in the best interest of investors. To obtain this accreditation, PWL was required to undergo an extensive “best interest” review – and to maintain this status we must be verified through annual audits by CEFEX.

How advisors meet the fiduciary standard

Dealing with an advisor who operates under a fiduciary duty means they:

  • have no conflicts of interest
  • will pursue an investment strategy using products that have only your best interests in mind
  • will place you only in investment products that are cost effective and, therefore maximizing the return on your actual investment

In order to maximize the return on your investment, you need an advisor who has a fiduciary duty, and whose firm makes the clients’ best interest the cornerstone of its philosophy and operations.

By: Anthony Layton | 0 comments

Salary or Dividend: How should you pay yourself from your Professional Corporation

Welcome back to “Do It Together” financial planning. My last video was the start of my new series on the whys and hows of incorporating your business and I talked about the advantages and disadvantages of incorporation. In this week’s video, I take you through a key question that comes up when you incorporate your business - should you pay yourself a salary or dividends?

There is a slight tax advantage of paying yourself a salary from your business but the decision isn’t that simple. I’ll take you through the reasons why to pay yourself by salary instead of dividends or to pay dividends instead of a salary. It comes down to where you are in life, and what you need to fund your lifestyle needs.


Check out today’s video and subscribe to my YouTube channel to learn more.

By: Peter Guay | 0 comments