Tax avoidance, unlike tax evasion, is completely legal. It involves the use of legal means to minimize the payment of taxes. Taxes are monies due the government assessed against the value of either of assets or income (the latter, income tax).

In describing the citizen's legal rights to avoid taxes, one American judge once said:

"Any one may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one’s taxes."1

As the cost and expectations of government increases, the pressure on their tax departments to find sources of tax dollars is a never-ending process. Much of that is because the creativity of wealthy tax-payers to avoid taxes locks step. This creates a fascinating if not extremely complex cat and mouse game between the tax department and well-advised wealthy citizens.

Trust law is one of those battlefields, and a very, very busy battlefield it is. Throw in the ability to (i) loan a trust money or to borrow from it, (ii) create companies, both offshore and otherwise, and the ability to merge those companies and move money between them, and you have an impressive array of tax avoidance tools.

From the days of Roman law (i.e. cestui que use) and even, though much later, the English common law (the ancient word for it was a use), the concept of a trust has existed. It is similar to a company in that it is a separate creature in law established apart from its creators (called a settlor in trust law), but not like a company in that the purpose of a trust need not be the mindless pursuit of profit but a benevolent cause such as the care of specified children.

trust law and taxesA trust is a separate entity from the person who creates the trust. This latter person, the settlor makes the initial transfer of assets, often just a single or regular deposit of money, and once transferred, those assets no longer belong to the settlor but belong to the trust. Often, these payments and even the creation of a trust is provided for in a will; the trust is created at the death of the contributor.

This, lawyers call a testamentary trust. Once funds are transferred into a trust, either during the lifetime of the settlor (the app for that is called an inter vivos trust - see The Living Trust, Inter Vivos Trust: Trust Information You Can Use) or after his/her death, money, assets and income are distributed in accordance with the constitution of the trust, the written document which created the trust.

When money goes directly from an estate to a beneficiary, the government tax collector is usually omnipresent, hat in hand, be it in the demand for estate taxes or probate taxes. If money has gone directly from the decedent's hands to a trust, there is less money for the estate to show the tax collector and thus, avoidance of tax while at the same time distributing wealth to heirs.

The Rockefeller family are well-known users of trusts, helping establish the popularity of trusts for family members: parking money in a safe place where the beneficiaries could only access it on a needs basis or at the discretion of some trusted third-party called a trustee. That type of trust still flourishes today and is called a family trust.

To be fair to the legacy of the Rockefellers and the Carnegies and other similar wealthy American families who used the legal tool of a trusts, much of their money also went to permanent benevolent trusts available to benefit the citizenry at-large, often called foundations, as in the Rockefeller Foundation and the Carnegie Foundation. Both have amazing track records consistent with the Rockefeller Foundation's stated purpose being to:

"... promote the well-being of humanity throughout the world".2

That of the Carnegie Foundation (

"We are engaged in a deep and long-term exploration of the application of the tenets, tools, and methods of improvement research to develop a science of performance improvement in education."


Here is the magic of lawyers in that they can draft clever constitutions which give a settlor almost Godlike powers over the trust but still maximize the tax opportunities that might be available to the trust and allow the settlor to avoid taxes but still keep all of her/his money "in the family", and not have to cut off a large chunk to remit to a tax agency.Rare is the tax authority that does not give a trust a beneficial tax rate compared to the rates imposed on wealthy settlors, for example. Plus, if a settlor can control the flow of assets to the trust, his or her balance sheet can be tweaked to give the settlor the lowest tax rates even as they move money to the benefit of a foundation or family members.

A trust is taxed like a person, on income earned every year. A tax return has to be filed annually for each trust and money remitted to pay any taxes owing.

Trusts often sit on assets which earn money such as a rental property or investments. That income, while deposited to the trust, has to be reported and declared in the annual tax return of the trust, with payment of income taxes in accordance with the applicable tax rate, payable by the trust.

trust and tax wallTrust agencies, the Canadian Revenue Agency (CRA) or the Internal Revenue Agency of the USA (IRS) are wise to trusts and they tend to tax trusts at a higher rate than the individual:

"In 2014, trusts pay the maximum rate on any earnings above $12,150, while individuals can make as much as $406,750 before the top rate kicks in."3

The Game

A cash-rich trust would usually disgorges itself with payments to lower-earning beneficiaries. In fact, in many family trusts, the beneficiary is a handicapped person unable to fully participate in the workforce and may be living on a combination of trust income and a form of government social assistance. When a trust transfers income to a beneficiary, that reduces the trust's taxable income. The beneficiary has more than enough room in his or her tax bracket to absorb the payment without bumping up to the high bracket covering the trust.

Thus, tax savings, aka tax avoidance.

The game for trustees is to be alive to the tax situation, including prospectively, and that means reliance on a good accountant.

It also means keeping an eye on the pool of beneficiaries so that if money needs to be transferred, it goes to those most likely to be able to absorb it without tax consequences. This is where the excellence of the initial drafting lawyer in crafting the trust in the first place can pay off.

This, though, has to be balanced with the legal obligations set up in the trust such as a balanced-hand between beneficiaries, but also in regards to future beneficiaries and the overall purpose of the trust.

Always, the trustee of a family trust will need the wisdom of Solomon, a good lawyer and an even better accountant.