Should You Set Up a Family Trust for Your Adult Children in Ontario?

Should I Set Up a Family Trust for My Adult Kids in Ontario?

A family trust sounds like something reserved for the ultra-wealthy — and for a long time, that was mostly true. But the question comes up regularly with parents who have adult children, meaningful savings, or a small business they plan to pass on. The honest answer is: it depends heavily on what you are trying to accomplish. For some Ontario families, a trust is a powerful and legitimate planning tool. For others, the cost and complexity far outweigh the benefit.

What Is a Family Trust — and How Does It Actually Work?

A family trust is a legal arrangement where you transfer assets to a trustee — often yourself or a trusted family member — who holds those assets on behalf of named beneficiaries such as your adult children or grandchildren. The trustee has discretion over how income and capital are distributed each year, which is why these are often called discretionary trusts.

In Canada, family trusts are governed by the federal Income Tax Act, and in Ontario they also fall under the provincial Trustee Act. Setting one up requires a legal trust deed drafted by a lawyer, and the trust must file its own annual T3 tax return because it is treated as a separate legal entity for tax purposes. That separation is both the source of its planning power and the root of its complexity.

The Real Reasons Ontario Families Still Use Family Trusts

The reasons families use trusts have shifted considerably over the past decade. Here are the situations where a family trust still genuinely adds value.

Estate planning and probate reduction. Assets held in a trust do not form part of your estate when you die, so they are not subject to Ontario's Estate Administration Tax. On a $1 million portfolio, that is up to $15,000 in fees your family does not have to pay — and the transfer to your beneficiaries happens without going through the courts.

Protecting an inheritance from your kids' creditors or a future divorce. If you leave assets directly to an adult child and they later go through a separation or bankruptcy, those assets may be at risk. Because trust assets are technically owned by the trustee rather than your child, they are harder to reach in a legal dispute — though this protection is not absolute and depends on how the trust was structured from the start.

Multiplying the Lifetime Capital Gains Exemption on a business sale. If you own shares in a qualifying small business corporation, a family trust can allow multiple family members to each use their own Lifetime Capital Gains Exemption — currently $1,250,000. On a business sale, this can reduce your family's total tax bill by tens of thousands of dollars.

What a Family Trust Won't Do Anymore

Income splitting was once the main reason families set up discretionary trusts. The strategy was straightforward: distribute investment income from a high-income parent to lower-income adult children, who would pay tax at a lower rate.

The 2018 Tax on Split Income (TOSI) rules largely ended this for most families. Under TOSI, split income paid to adult family members is now taxed at the top marginal rate unless specific exceptions apply — the most common being that the recipient is actively involved in the family business. For a typical Ontario family with an investment portfolio and adult children who are not working in the business, the old income-splitting benefit through a trust is essentially gone.

This does not mean trusts have no value. It means the rationale has narrowed, and the benefits that remain need to clearly outweigh the costs.

The Costs and Complications to Weigh Before Deciding

Setting up a family trust in Ontario is neither cheap nor simple:

• Legal fees to draft a trust deed typically run $3,000 to $8,000 or more.
• Annual accounting costs for a T3 trust return add $500 to $2,000+ per year — indefinitely.
• The 21-year deemed disposition rule means every 21 years, the trust is treated as if it sold all its assets at fair market value, triggering capital gains even if nothing actually changed hands. Planning around this date needs to start well in advance.
• Reduced flexibility — once assets are in a trust, the rules governing them are more rigid. You cannot simply treat those assets as your own any longer.

For families with substantial wealth, a business, or layered estate planning goals, these costs are often worthwhile. For most others, simpler structures will accomplish the same thing with far less overhead.

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Whether a family trust makes sense for your situation depends on your estate size, your family's tax picture, whether you own a business, and what you actually want to happen to your assets. Marc Pineault, a financial planner in London, Ontario, works with families across Southwestern Ontario who are asking exactly these questions. If you want a clear-eyed look at whether a trust belongs in your plan, the best place to start is a conversation. Visit calmmoney.ca to book a consultation.

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This article is for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial planner before making any financial decisions.