Special Report – Family financial success through real estate

Special Report – Family financial success through real estate

Discover three ways to use real estate as leverage for your children’s future

Acquiring real estate through a trust has many advantages and creates value 

Over the last few years, real estate trends have made acquiring property more difficult than ever for the younger generations. For this reason, many parents are looking to apply financial strategies that will give their children a solid financial springboard. Creating a trust to acquire real estate is a powerful tool at your disposal, with several tax, estate planning and asset protection advantages. Yet most people are not clear on exactly how they work, or think they are only for the very wealthy. That’s not true. Our experts, supported by a senior wealth advisor from one of Canada’s leading financial institutions, have looked at all the ins and outs. In this article, we demystify trusts.

What exactly is a trust and what is it used for?

To understand trusts and the role they can play in a real estate investment strategy, it’s important to know the basics: 

  • A trust is a mechanism put in place by an individual (called the settlor), to hold property or assets for the benefit of one or more beneficiaries, including third-party entities.
  • A trustee is appointed to manage the assets under the trust’s responsibility in accordance with the terms set out in the deed of trust. 
  • The beneficiary benefits from the assets placed in trust. Beneficiaries can be the settlor’s children, for example, or an entity like a foundation. 
  • For tax purposes, a trust is considered a private individual and can be taxed as such. 

The asset under trust no longer belongs to the settlor. This strategy can therefore have many financial advantages for families and individuals wanting to transfer assets to beneficiaries. However, it is important to understand the legal and tax ramifications of such a decision.

Two broad categories of trusts

There are two main types of trusts. 

  1.  Inter vivos (living) trusts, which are created while the settlor is still alive. They mainly make it possible to transfer assets to beneficiaries and to define the restrictions to apply to these assets. 
  2. Testamentary trusts, which are created after death and often result from testamentary dispositions made by the settlor. 

In both cases, the trustee administers the assets, such as real estate (land, principal and secondary residences, apartment buildings, commercial buildings) or other assets, such as stocks and bonds.

The 4 most common types of trusts used to buy real estate

There are several types of trusts through which one can acquire real estate assets and all have advantages and disadvantages. The preferred structure will therefore largely depend on the situation of the beneficiaries. Here’s an overview:

1- Family trust

This type of trust lets the members of a family create an estate separate from their personal estate to pave the way for future generations. The beneficiaries are generally family members—either immediate or distant—and sometimes the spouse. The deed of trust defines the rules to follow in managing and distributing the assets.

2- Real estate trust

Often used to manage real estate, such as residential or commercial buildings, this type of trust lets the trustee manage the property on the beneficiary’s behalf. It also offers some protection against creditors and legal proceedings.

3- Real-estate investment trust

The objective of this trust is to invest in real estate and generate rental income for the beneficiaries. Often publicly traded, real estate investment trusts allow investors to buy shares in a trust that holds real estate properties. 

4- Asset protection trust

This type of trust can be used to buy and manage real estate, as well as other types of assets, such as stocks and bonds. It protects certain assets from unfavourable legal or tax consequences.

Five advantages of buying real estate through a trust 

A trust is a vehicle that can provide several tax, estate planning and asset protection advantages. When involving real estate, most of these fall under one of the following categories:

1- Estate protection

In addition to protecting certain real estate assets from potential creditors, a trust allows the settlor to start giving to the next generation during his or her lifetime. As soon as the assets are placed in trust, they are no longer owned by the settlor, having become the property of the beneficiaries.

2- Control over how assets are transferred

Not only can the settlor decide how the assets and income will be distributed when they create the trust, they also retain the right to amend these terms at any point, according to the situation and realities. 

3- Simpler management

If the settlor’s children or grandchildren do not have the time, interest or ability to acquire, manage and sell real estate assets, a trustee can be appointed to perform this task. The benefits are twofold: it lightens the family members’ responsibilities while ensuring that the properties are managed by a competent resource, thus generating better returns and creating greater value.

4- Tax advantages

A trust, considered an individual for tax purposes, is taxed as a person would. It may therefore be beneficial to move assets to a trust to reduce a person’s tax burden. It should be noted, however, that the beneficiaries will be the ones taxed on these assets. In some cases, the trust makes it possible to multiply the capital gains deduction and split the income between family members. Also, in common-law provinces*, real estate assets that are transferred to a testamentary trust are not subject to probate fees upon the settlor’s death. 

5- Confidentiality

Unlike a will, which is generally public, a deed of trust is not subject to probate, which ensures the confidentiality of the transactions and your financial situation. By creating a trust, a settlor can dispose of property during their lifetime or after their death without any of the details being disclosed to anyone except the beneficiaries.

When you do business with a BARNES real estate broker, who are used to dealing with trusts, they can help you understand the subtleties of each of these advantages and how they can apply to your situation.

Two scenarios that could merit creating a trust 

The Tremblays own several homes, lots and industrial buildings. They have two children. One is a minor and the other, an avid traveller, has very little interest in business. The parents want to plan the transfer of their assets to their children but want a competent third party to manage these. By creating a trust, they will be able to appoint a trustee to take on this role and preserve the family assets.

The Dupas live in Paris and have three children. They have acquired significant wealth over the years. Their children are studying in Montréal and are looking to settle in Quebec once they get their permanent residency. Should they acquire real estate to help their children get set up in Quebec? Buying real estate through a trust ensures that the assets in the family portfolio will be managed by an expert in a way that is most advantageous, tax-wise.

Interested but not sure where to start?

While it’s s true that trusts are a financial vehicle mainly used by wealthy people with considerable assets, you don’t need to have a lot of money to create one and use it to your advantage. 

If you’re thinking of creating a trust, first determine what you are looking to achieve. Do you want to create an investment vehicle, set up a structure for future investments or protect existing assets? Will the assets be bequeathed during your lifetime or upon your death?

Often, it is your private wealth advisor or financial advisor who will suggest that you create a trust if they think it would benefit you. They will identify your goals and assess your financial, real estate and family situation. 

Once they have a clear picture of your situation, and depending on the level of complexity, professionals such as a notary, a lawyer, a tax professional and/or a real estate broker will be involved in creating and administering the trust. At BARNES, our real estate experts regularly deal with this type of project and have surrounded themselves with the most qualified professionals in the industry. 

By teaming up with an excellent network of professionals, we are able to answer the many questions people have on this subject and can support them throughout the process. We carefully assess how a real estate transaction will impact our clients’ overall financial situation and put in place the tools to make the best use of existing tax and legal provisions,” says Félix Giguère, partner and residential real estate broker at BARNES Québec.

Interested in learning more about creating a trust to acquire real estate? Contact us. We will enlighten you and put you in touch with top professionals.

*In Canada, all provinces except Quebec.

Dossier spécial – Prospérité financière familiale