Why Family Trusts Still Matter: Legacy, Tax Efficiency & Asset Control

Why Family Trusts Still Matter: Legacy, Tax Efficiency & Asset Control

In the world of Canadian tax and estate planning, few tools are as misunderstood—or as underestimated—as the family trust. Since the introduction of the Tax on Split Income (TOSI) rules in 2018, a growing myth has emerged: that trusts no longer provide meaningful tax advantages and are largely irrelevant.

That couldn’t be further from the truth.

At ModernAxis, we continue to build and manage trust structures for business owners, professionals, and families who understand that wealth planning is about more than tax—it’s about control, flexibility, and protection. In this article, we’ll show why family trusts are still critical, even in today’s regulatory environment.

Let’s begin with the core benefits most relevant to Canadian entrepreneurs and families.

What Is a Family Trust?

A family trust is a legal relationship where a trustee manages assets on behalf of beneficiaries. The trust itself is governed by a formal trust deed, and it must follow detailed tax and legal requirements. Though commonly set up for tax planning, family trusts also help with estate planning, wealth protection, and business succession.

Trusts in Canada can be inter vivos (established during your lifetime) or testamentary (created through your will). In this article, we’re focusing on inter vivos family trusts used in personal and corporate structures.

1. Multiplying the Lifetime Capital Gains Exemption (LCGE)

One of the most powerful benefits of a family trust is the ability to multiply the Lifetime Capital Gains Exemption, or LCGE.

What is LCGE?

In 2025, each Canadian individual can claim up to $1,250,000 in tax-free capital gains when selling Qualified Small Business Corporation (QSBC) shares. This exemption is indexed annually and provides substantial tax savings when exiting a business.

Why Use a Trust?

If your company’s shares are held directly by you, only your LCGE is available. But if those shares are held through a family trust, the gain on sale can be split among multiple beneficiaries—each of whom may claim their own LCGE.

This results in:

  • Reduced total tax on sale

  • More control over the distribution of sale proceeds

  • A tax-efficient exit strategy for family-owned businesses

Real-Life Example

Let’s say Julie owns a successful construction firm. Ten years ago, her accountant advised her to issue the company’s common shares to a family trust with Julie, her spouse Mark, and their three children as beneficiaries.

In 2025, Julie receives a $6 million offer for the business. The shares qualify as QSBC shares, and the family decides to proceed with a share sale.

Instead of just claiming her personal LCGE, Julie—through the trust—allocates portions of the gain to each beneficiary:

  • Julie: $1.25M exemption

  • Mark: $1.25M exemption

  • Two adult children: $1.25M each

  • Youngest child (17): No allocation due to TOSI

Result? $5 million of the capital gain escapes taxation. Without the trust, the tax bill would have been significantly higher.

Important Note: For minors, TOSI typically applies, so allocating gains to children under 18 may not be tax-effective. Planning should begin early to time gains with a child’s age and situation.

2. Keeping Assets Out of Your Estate

A common mistake in estate planning is to assume your will is enough. In reality, probate fees, public disclosure, and delays can reduce the efficiency of your estate plan.

Family trusts help by keeping select assets outside of your estate.

Probate Fee Savings

In British Columbia, probate fees are calculated at 1.4% of the estate value above $50,000. For an estate worth $3 million, that’s over $41,000 in probate fees alone.

Assets inside a trust are not subject to probate, meaning they pass to beneficiaries without court approval or public filing.

Privacy and Confidentiality

Probate is a public court process. If privacy is important to your family, or you have complex estate wishes, trusts provide a higher level of discretion. Beneficiaries can receive distributions quietly and efficiently.

Speed of Distribution

Because trust assets avoid probate, they can be distributed immediately after death, assuming the trust deed allows it. In contrast, estates may take months—or even years—to settle.

3. Building Flexible Estate Freezes

An estate freeze is a common strategy used by Canadian business owners to cap the value of their ownership interest, allowing future growth to accrue to family members or successors.

How It Works

Let’s say your company is worth $2 million. You’re nearing retirement and want to start planning for succession. In an estate freeze, you:

  1. Exchange your common shares for preferred shares with a fixed value ($2M)

  2. Issue new common shares to a family trust

  3. The trust holds those new shares for your spouse, children, or even a future Holdco

Over time, any increase in value beyond $2M belongs to the trust’s beneficiaries—not you. This limits the taxable portion of your estate and passes growth to the next generation.

Why Not Just Issue Shares Directly?

Because you may not yet know which child wants to take over the business—or if they’re ready. A trust allows you to delay decisions while still freezing your estate.

Tip: Estate freezes should be reviewed every few years. If your situation changes or beneficiaries are added, adjustments may be needed.

4. Corporate Tax Deferral and Dividend Flexibility

Even after TOSI, trusts still play a role in deferring corporate tax when paired with a holding company.

Common Scenario

You have an active business (Opco) paying dividends to a family trust. The trust then designates a holding company (Holdco) as a beneficiary. The dividend flows through the trust and into the Holdco, preserving tax deferral.

This setup:

  • Consolidates wealth inside the Holdco

  • Delays personal tax until funds are withdrawn

  • Enables future estate freezes or reinvestment from the Holdco

Note: Passive income inside Holdco still affects the small business deduction (SBD) limit. Monitoring investment income across the corporate group is essential.

5. Asset Protection in High-Risk Situations

A well-structured family trust can offer a level of asset protection that direct ownership often can’t—especially in high-risk professions or complex family dynamics.

Creditor Protection

If set up properly and not in anticipation of litigation or insolvency, trusts can help shield assets from creditors, lawsuits, and professional liability. This is particularly valuable for doctors, contractors, lawyers, and entrepreneurs exposed to legal risk.

⚠️ Caution: Transferring assets into a trust after liabilities arise may be considered a fraudulent conveyance and challenged in court. Timing and intent are critical.

Matrimonial Protection

While more controversial, some families use trusts to shield inherited assets from division in a divorce. The effectiveness of this strategy varies:

  • Some provinces, like Ontario and British Columbia, may treat trust-held inheritances as excluded property if not commingled

  • Others may consider beneficial ownership or the nature of distributions over time

  • Courts have become more willing to “pierce the trust” if it’s clearly used to control assets in a way that disadvantages spouses

Always consult both a family law lawyer and a trust and estates advisor if matrimonial protection is a planning objective.

6. Supporting Vulnerable Beneficiaries

One of the most human-centered reasons for using a trust is to protect and provide for family members who may not be in a position to manage large sums of money responsibly.

Minor Children

A trust can stagger distributions by age or tie them to key milestones like:

  • High school or post-secondary graduation

  • Reaching age 25, 30, or beyond

  • Buying a first home or starting a business

This allows parents to ensure their children are financially prepared before receiving substantial wealth.

Dependants with Special Needs

Trusts can be set up to preserve a beneficiary’s eligibility for provincial disability benefits (e.g., Ontario Disability Support Program, BC Persons with Disabilities benefit) while still offering supplemental financial support.

This is often done using a Henson trust, which provides absolute discretion to the trustee—ensuring the assets are not considered “available” to the beneficiary.

Mental Health, Addiction, or Financial Instability

Trusts are frequently used to protect vulnerable individuals from themselves. Whether a beneficiary struggles with substance abuse, mental illness, or simply poor money management, the trust can restrict access and require third-party approval or trustee discretion.

7. Family Governance and Legacy Planning

In many families, financial success can bring complexity, especially across generations. Trusts help to create a framework for governance and continuity.

Multi-Generational Planning

Family trusts help build a bridge between generations by:

  • Centralizing control of family assets

  • Creating shared values around stewardship and philanthropy

  • Helping younger family members learn from professional trustees and advisors

For example, some clients use their trust as a way to involve children gradually in family wealth, allowing them to serve as co-trustees or participate in investment decisions as they mature.

Encouraging Stewardship

Rather than simply handing over wealth, a trust can instill responsibility. Distributions can be conditional on:

  • Financial literacy training

  • Drug and alcohol testing

  • Career milestones or education completion

In this way, trusts aren’t just vehicles for tax planning—they’re tools for family leadership development.

8. Philanthropic Giving Through Trusts

Some Canadian families establish charitable trusts or private foundations to leave a lasting legacy.

Options Include:

  • Testamentary charitable trusts, funded through the will

  • Inter vivos charitable trusts, created during your lifetime

  • Donor-advised funds, which can be held by a trust and directed annually

This approach helps create structure and continuity around charitable goals, particularly when involving younger family members in annual giving.

While charitable bequests can also be made in a will, a trust allows for more ongoing engagement and control.

9. Key Limitations and Pitfalls to Watch

While powerful, family trusts are not without costs, complexity, and compliance risks. Here are the most important limitations to consider.

A. Compliance Costs and Admin Burden

  • Annual T3 trust return required

  • Trustee must maintain records of distributions, beneficiary entitlements, and investments

  • Legal and accounting fees for setup, ongoing reviews, and possible restructuring

B. New Trust Reporting Rules (Schedule 15)

Since 2023, nearly all express trusts must now disclose:

  • Identity of trustees, settlors, and beneficiaries

  • Legal and tax-residency details

  • Relationship to other parties

This has significantly reduced the privacy once associated with trusts. Even inactive trusts may have to file.

C. The 21-Year Deemed Disposition Rule

Perhaps the most misunderstood pitfall: every 21 years, most Canadian trusts are deemed to dispose of their capital property at fair market value—potentially triggering a major capital gains tax.

Solution:

  • Roll out assets to beneficiaries before the 21st anniversary (if permitted by the trust deed)

  • Freeze and reissue trust interests to reset the clock

  • Plan early—don’t leave this until the last minute

D. Attribution Rules

Be cautious of attribution rules if the trust is funded with loans from a parent or distributions are made to minor children. TOSI rules may also apply unless the gain qualifies for the LCGE.

Final Thoughts: Why Family Trusts Still Matter in a Modern Tax World

Despite changing tax rules and rising compliance requirements, family trusts remain one of the most versatile and effective planning tools for Canadian families and business owners. While the Tax on Split Income (TOSI) rules have limited some traditional income-splitting strategies, the broader value of trusts has not disappeared—it has simply evolved.

Today, family trusts are used to:

  • Multiply the Lifetime Capital Gains Exemption (LCGE) during a business sale

  • Avoid probate and preserve privacy in estate planning

  • Implement flexible estate freezes for business succession

  • Defer tax using holding companies as corporate beneficiaries

  • Protect assets from creditors, lawsuits, or family law claims

  • Support vulnerable beneficiaries, including children with special needs or those facing personal challenges

  • Encourage long-term family governance and financial stewardship

  • Facilitate structured charitable giving that aligns with your values

However, trusts are not simple, and they’re not a one-size-fits-all solution. They come with legal and tax complexity, ongoing compliance (including T3 filings and new trust reporting rules), and a need for regular review—especially before the 21-year deemed disposition date.

That said, for those willing to plan intentionally, the benefits of a family trust can far outweigh the administrative effort. When integrated into a thoughtful wealth and business strategy, trusts offer protection, flexibility, and control that no other structure can match.

At ModernAxis, we specialize in helping clients build and maintain tax-efficient structures that support their business goals and family values. Whether you’re planning an exit, preserving wealth, or preparing for future generations, we’re here to help you make smart, strategic decisions.

Thinking about whether a family trust fits into your plan?

Let’s talk. We at ModernAxis can help you design a structure that protects your wealth, reduces your tax burden, and supports your legacy.