Dynasty trust makes family secure, keeps vision alive

Dave Johnson built up a substantial fortune. He did it the old-fashioned way - from scratch. By the time he was 40, he had made his first million. By the time he was 50, he had 20 million. By the time he was sixty, he had 50 million.

It takes a special person to build a large fortune. It is not taught in school. It also takes a measure of luck.

Knowing something of history, and something of the world, he knew what the future would bring. The vast majority of family fortunes last for two or three generations before they disappear without a trace, like sandcastles on the beach. Well-meaning heirs are rarely able to keep things going. There is a natural tendency to spend money, or use it in ways that put it at risk. Luck changes.

It does not have to happen that way. Some families carve a portion of the wealth off and put it into a dynasty trust. These are also called "perpetual trusts," or sometimes "legacy trusts."

Johnson decides to divide his wealth into two parts. The larger part will amount to 60 per cent. It will be given directly to his children. That will be their working capital, to do with it as they will. They can leave it to whoever they want when they eventually die.

The other 40 per cent will not be given directly to the children. It will be carved off and held in a dynasty trust. The trust will be based in Canada. That is where his family is. Offshore trusts are not as attractive to the wealthy as they once were.

Manitoba and Saskatchewan have laws that allow a trust to stay in operation forever. He will have to pick one of those two provinces to legally host the trust. Other provinces and territories in Canada place maximum time limits on the duration of a trust, forcing it to be collapsed during the lifetimes of the second generation of beneficiaries. That will not fit the plan.

How does the trust work?

A trust company that administers trusts in Saskatchewan or in Manitoba is generally appointed to look after the money. That is what a trust company does. A special deal is cut on fees.

A council is then set up consisting of adult family members. It meets annually with the trustee. The family council has the power to fire one trust company and replace it with another. If the trust company charges too much, or treats the family poorly, it is gone.

How is the money in the trust used?

The trust document tells the trustee how to administer the money.

If Johnson is worried about the social safety net, he can direct that the money be focused on the future security of his descendants. None of them will ever be on the soup-line.

If he believes in education, he can direct that that money be used first and foremost for education. His heirs will consistently have the benefit of the best schools. None will ever know a limited horizon for lack of education.

If he is entrepreneurial, the trust can be established to fund business starts by lineal descendants. Perhaps one of the great-grandchildren will inherit his Midas touch.

He can combine some or all of those elements together, mixing and matching as he pleases. Johnson gets to decide what is important when the trust document is being drafted. His vision governs.

The most common objective for a dynasty trust is to make the family secure. It is rarely about providing guaranteed income. No one wants to create "trust babies" reliant on handouts from the trustees.

This is not about saving taxes. If Johnson lives in Alberta, a dynasty trust in Manitoba or Saskatchewan will actually increase his taxes, not decrease them.

Wealth creates a variety of opportunities. Many families set up a charitable foundation, leaving a measure of their wealth for the long-term benefit of the larger community around them. Some families, fewer in number, set up a dynasty trust to do the same thing for their descendants.

Dave Johnson is not real. The story is based on a variety of clients in various provinces who have built similar structures.

John E. S. Poyser is a lawyer with the Wealth and Estate Law Group at the Winnipeg firm Inkster, Christie, Hughes LLP. Contact him at (204) 947-6801 or jpoyser@inksterchristie.ca .

Republished from the Winnipeg Free Press print edition December 15, 2010 B6