Protection from creditors
Simply put, it is similar in many ways to an incorporated business and allows you to protect your personal assets from creditors.
Let’s take the example of a general contractor who takes out a loan from a financial institution in order to undertake a real estate development project. The bank could require that he personally guarantee the transaction to protect against its potential failure. In order to reduce his risks, the entrepreneur might have placed his property in a personal trust ahead of time to keep it safe from any legal action by the lender, as the trust is its own legal entity.
An ounce of prevention is worth a pound of cure
In this particular case, it’s important to stress that the property’s transfer into a personal trust was done ahead of time. You cannot wait until things start heading south to begin the proceedings, as it will be too late by then.
Although properties are the most commonly used example in these cases, know that it can apply to any important asset you wish to protect.
Are there any tax implications?
It is not, however, a tax reduction strategy, as is the case with a family trust. That type of trust usually allows you to pay less taxes on capital gains by taking advantage of the lower tax rates of other major recipients.
In a personal trust, any income generated will be added to your personal income.
However, “you can transfer assets accumulated before its creation into a personal trust with no tax implications, which you cannot do with a family trust”, according to Yvon Gélinas, CPA, CA senior partner at Boily Handfield CPA Inc.
Surround yourself with qualified professionals
Given the many rules and complexities that come into play when setting up such a legal entity, it is important you surround yourself with competent legal and taxation experts. A personal trust is not for everyone, and only a professional analysis of your particular situation can determine if it’s the best solution for you.
The rules for getting a loan for a trust differ from those for an individual.
Key takeaways
- A personal trust is similar in many ways to an incorporated business and allows you to protect your assets from creditors.
- It is not a tax reduction strategy, as is the case with a family trust.
- You can transfer assets accumulated before its creation into a personal trust with no tax implications.