If you’ve been named as a beneficiary of a trust, but you’re unsure of how trust assets are to be distributed to beneficiaries, you want to make certain that you understand your legal rights and that you’re treated fairly. It is recommended to work with an experienced lawyer to help you navigate this legal landscape.
At Onyx Law Group, we regularly advise beneficiaries of their rights and assist trustees to ensure smooth distribution of trust assets. We also help prepare estate plans, including trusts, for our clients. If you want to know more about estate planning or wish to discuss your unique circumstances, we welcome you to reach out to our British Columbia estate and trust lawyers to arrange a consultation.
In today’s article, we’ll provide an overview of trustee duties and the process for the distribution of trust assets to beneficiaries.
What Is a Trust?
A trust is not a separate legal entity. Instead, it is a legal relationship between the trustee and the beneficiaries of the trust. The legal relationship is set out in a written trust agreement known as a trust deed. The person who creates the trust is called the “settlor.” The settlor transfers ownership of assets/property to one or more “trustees” to manage on behalf of one or more “beneficiaries.”
When Is a Trust Created?
A trust can be set up during the settlor’s lifetime (called an “inter vivos trust” or “living trust”), or in a person’s Last Will and Testament to take effect when the will-maker dies (called a “testamentary trust”). When a trust is established in a will, the executor named in the will is the trustee unless the will-maker appoints a different person.
An inter vivos trust can be revocable or irrevocable. An irrevocable trust can’t be revoked during the lifetime of the person who created the trust, except in very specific situations. Family trusts that benefit family members, for example, are always irrevocable.
What Is a Trust Used for?
Trusts can be used for many purposes. A trust in a will can be used to control how and when a child receives their inheritance. The will-maker can specify in their will that their child’s share of the estate is not to be paid to the child until they reach a certain age. If it’s a discretionary trust, the trustee can make distributions from the trust before the child reaches the specified age (e.g., for post-secondary education).
Other purposes of trusts include asset protection, gifting property while maintaining some control over the property, incapacity planning (an alter ego trust or joint partner trust structured to benefit the settlor and/or their spouse), tax savings, pooling investments or investing for someone else’s benefit, and avoiding probate fees. Trusts can also be used to benefit charitable organizations, or to provide property or assets to a disabled person while protecting their eligibility to receive disability benefits.
Legal Framework for Distribution of Trust Assets to Beneficiaries Canada
A trustee holds legal title to the trust property, but the trust property does not belong to the trustee. The trustee must manage trust property and make distributions of trust income and capital assets to trust’s beneficiaries in accordance with the terms of the trust deed and applicable laws including the Trustee Act and the Income Tax Act.
Trustee’s Responsibilities During Distribution
Being a trustee is a serious role with many responsibilities and powers. Trustee duties include administering the trust in accordance with the law and the terms of the trust, acting honestly, managing trust assets in good faith, distributing trust income and capital assets when required, communicating with beneficiaries, and accounting to beneficiaries.
The role of a trustee is fiduciary in nature. They must act in the best interests of the trust’s beneficiaries. A trustee is not allowed to personally profit from their dealings with the trust assets and is not permitted to exercise their powers if their own interests conflict with their duties to the trust’s beneficiaries. For example, a trustee must not borrow from the trust, loan trust assets to themselves, or commingle trust monies in the trustee’s own bank accounts.
A trustee is also bound by the duty to maintain an “even hand” which means they can’t favour one beneficiary over another (unless the trust deed specifically permits unequal treatment).
Exercising Trustee Powers
A trustee must act personally and can’t delegate their responsibilities to other people. For example, if the trustee is managing a discretionary family trust, the trustee must personally make decisions about how to manage the trust and how to exercise their discretionary powers.
However, a trustee is allowed to hire professionals such as a tax lawyer, financial advisor, or accountant to assist/advise them in the decision-making process. Many trustees also choose to hire an estate and trust lawyer in BC to help them navigate the laws and regulations and ensure that all legal obligations are met.
Is It a Non-Discretionary Trust or a Discretionary Trust?
The written trust agreement may create a discretionary trust. The deed will specify that the trustee has discretion to decide how and when trust income is to be distributed to beneficiaries (“income” is made up of revenue earned from the use or investment of trust property and can include interest, rent, stock dividends, etc.). Or, the trust deed may specify the types of discretionary requests that may be allowed, such as distributions from a testamentary trust to pay a child’s education expenses, care costs, medical expenses, etc.
Alternatively, the written trust agreement may specify that the trustee does not have discretionary powers with respect to trust income and/or capital assets. That is called a non-discretionary trust. For instance, a non-discretionary distribution may be stipulated to guarantee fixed payments; the beneficiary receives funds on a schedule set out in the trust, and the trustee has no discretion to change when or in what amount.
Key Steps in Distributing Trust Assets to Beneficiaries in Canada
Below is a general overview of the steps involved in distributing trust assets.
Review the Trust Document
The first and most important step is to carefully review the terms of the trust deed. The written trust agreement should clearly outline details including the property or assets held in trust, the identity of the beneficiaries, the entitlement(s) of each beneficiary, and who should receive the remaining balance of the trust if a beneficiary dies before the trust ends (or when the trust comes to an end).
The trustee and the trust’s beneficiaries should be familiar with all the terms and conditions of the trust so they know their rights and can act in accordance with the settlor’s intent.
Calculate Trust Assets
A trustee is responsible for management of trust assets. They must gather and inventory all trust property, maintain records, properly invest trust property, and ensure proper valuation of assets (e.g. appraisal to determine fair market value). Certain types of trust property can be more difficult to manage and distribute, such as a family business or intellectual property. The trustee may need to liquidate or transfer property to carry out their duties.
The trustee will also need to pay any debts or liabilities owed by the trust prior to distribution. For example, if the trust is to be comprised of the residue of a deceased person’s estate, the trustee must pay the estate’s debts, funeral expenses, probate fees, and the deceased’s income tax bill. Whatever is left is the “residue” and is held in trust for the beneficiary or beneficiaries on the terms specified in the will.
Determine Tax Liabilities
A trust is considered a separate taxpayer, so the trustee has a duty to complete a tax return for the trust for each year of its existence. A trust in Canada is required to report its annual income and expenses on a T3 return. The trust must pay income tax on the trust’s taxable income. Canadian tax law requires trusts to pay tax at the highest marginal tax rate on all taxable income, with no right to claim personal tax credits.
If a trust distributes the income it earned in the year to the trust’s beneficiaries, the trust can deduct the amount of income distributed for income tax purposes. The trustee must file the T3 return to report the distributions, and the beneficiary must claim the income received on the beneficiary’s tax return.
Develop a Distribution Plan
If the trust deed specifies a distribution plan, the trustee must follow it. If, however, the trust deed gives the trustee discretion, the trustee must exercise that discretion in a manner that is reasonable and in good faith.
Should the distribution be a lump sum, or staggered distributions? How might a distribution of trust assets impact another beneficiary? Remember, trustees have a duty to maintain an even hand and treat all beneficiaries equally, which can be extremely challenging in practice (e.g., where one beneficiary has a life interest in a specific asset, and then a second beneficiary will receive what is left of that asset when the beneficiary with the life interest dies).
The trustee should gather information and get professional advice as needed to formulate a distribution plan. For example, if the trustee has discretion to make payments for the support of a beneficiary, the trustee may request an annual budget from the beneficiary, so they understand the beneficiary’s needs and can plan accordingly. A trustee may wish to hire an accountant, tax lawyer, investment advisor, and/or trust and estate planning lawyer in British Columbia to advise them about a particular investment, potential tax consequence, or distribution plan.
Communicate with Beneficiaries
A trustee is required to communicate with beneficiaries regarding major decisions and the activities of the trust. Clear, regular communication between beneficiaries and trustees is vital to the process. It ensures transparency, manages expectations, and can prevent conflicts. Beneficiaries who are not kept reasonably up to date are more likely to be upset about delays and may begin to suspect the trust is being mishandled.
Execute the Distribution
The last step is executing the distribution of trust income or capital assets, as the case may be. The trustee may need to engage the services of a lawyer to prepare legal documents to transfer trust property such as real estate.
Throughout the life of the trust, the trustee must keep detailed records of investments, income earned by the trust, and expenses incurred. The record-keeping obligation applies to all transfers or sales of trust property and all payments out of the trust to beneficiaries, etc. Records must be maintained for a period of time, even after all trust assets have been distributed, in case a dispute arises or a beneficiary alleges trustee misconduct.
Tax Implications for Beneficiaries
The general tax rule is that the trust pays tax on any income that stays in the trust. A trust beneficiary pays tax on income and/or capital that is paid from a trust to him or her. There are other situations where the settlor foots the tax bill due to attribution rules.
Trusts are often used to reduce taxes payable by transferring wealth to future generations on a tax deferred basis. It’s possible to defer capital gains until the capital property is sold or distributed to beneficiaries (subject to deemed disposition imposed by the 21-year rule). A trust beneficiary will bear the tax burden of a capital gain when a taxable capital gain is paid or payable to them.
The bottom line is that Canadian tax law is highly complex, and beneficiaries should seek advice on tax consequences from a qualified professional.
How Long Does a Trustee Have to Distribute Assets?
The timeframe will depend on the type of trust and the distribution plan specified in the trust agreement (e.g., a one-time distribution upon the happening of a certain event vs. a trust created to benefit a particular person for the duration of their lifetime). If a beneficiary is concerned that the process is taking too long, they should reach out to a trust lawyer for advice. Trustees can be removed or found personally liable for loss caused by inaction or unreasonable delay.
Need an Estate Planning Lawyer to Ensure a Smooth Distribution?
We are here to help with whatever issues you are facing. We provide advice to beneficiaries, ensuring efficient and fair distribution of the trust’s assets and intervening when actions taken by a trustee violate his or her duties. We can also advise trustees, executors, and administrators on their responsibilities every step of the way.
At Onyx Law Group, we believe it’s important to know your legal rights and obligations before making decisions. You don’t have to navigate the process alone. We offer consultations to give you the opportunity to discuss your matter with a passionate and knowledgeable lawyer who can advise you on the best steps forward. We welcome you to contact our trust and estate planning lawyers in BC today!