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Estates & Wills & Trusts, Tax

Choice of trustee vital to trust's financial, relational goals

A trust can provide individuals with asset protection, tax advantages and confidentiality — but choosing the right trustee is essential to achieving these objectives, Calgary tax and fiduciary services lawyer Dennis Nerland tells

As Nerland, a founding partner of Shea Nerland Law and leader of the firm's tax and estate planning practice, explains, a trust is a legal arrangement whereby a trustee takes possession of, and holds title to, a property that is used for the benefit of other people, known as the “beneficiaries.” It is one of the most flexible mechanisms recognized by law, he adds.

“For the private client, the main advantages of using trusts are to protect assets against future unforeseen creditor attacks, failed marriages and irresponsible family members; to protect assets against income taxes, U.S. estate taxes and probate taxes; and to provide for the health, maintenance and education of minor and dependent children and spouses,” says Nerland.

These arrangements may also interest those who value their privacy, he adds.

“Even though a trust must file tax returns, the inner workings of the trust are shielded from public view. For example, assets held in a discretionary trust are strictly private unless a court orders disclosure,” says Nerland.

A lawyer’s advice on when to guide clients to such a structure will be principally driven by valuing its benefits versus its costs, he says.

“Only when there is a superior cost benefit result which is easily explainable should the trust structure be recommended." 

For example, says Nerland, an internal rate of return (IRR) should be measured against a minimum hurdle rate — typically the client’s weighted average cost of capital (WACC). 

“So, in simple terms, if a lawyer can advise a client that his trust IRR is 35 per cent versus a WACC of 20 per cent, the value proposition is clear, compelling and easily understood,” says Nerland.

Any disadvantages associated with using trusts usually revolve around the general lack of understanding of what they really are, he says.

“They are not a legal vehicle, but instead a fiduciary relationship. A collateral disadvantage is picking the wrong trustee, one who does not understand this. This can be overcome with some thoughtful and patient explanation and education.”

As such, he says, the most significant choice for clients is that of the trustee.

“Get the right one and there are significant benefits; choose the wrong one and the results can be really bad both financially and relationally. The right trustee understands that the proper focus is both on financial performance as well as the relational accretion that she is entrusted to steward.”

Nerland says a trustee’s powers begin when the ‘settlor’ transfers property to the trust, creating financial resources on the trust’s balance sheet, and remain in force until the trust is dissolved.

Although the ‘best person’ to administer a trust — whether an individual or corporate entity — is a personal decision, it is essential that they have integrity, a genuine understanding and concern for the welfare of the beneficiaries, and an absolute willingness to serve, he says.

“Such an office requires its servant to have a broad life and business experience, as well as being untarnished by possible questions concerning past neglect of duties or incompetence,” Nerland adds.

To Read More Dennis L. Nerland Posts Click Here
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