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Trusts and Estate Planning


You’ve worked hard and built assets over your lifetime. Now you are starting to think about your financial legacy. What is the best way to protect assets, provide support for family members, and ensure your wishes are followed?

People have a Will but often don’t consider trusts.

Many people hesitate when it comes to trusts, finding the concept and the various types of trusts confusing and overwhelming. Others think that trusts are only for the very wealthy.
The reality is that trusts can offer advantages for small and large estates alike and that the concept of trusts can be demystified with the right professional advice from legal counsel.

Understanding Trusts in Financial Affairs and Estate Planning

Understanding Trusts in Financial Affairs and Estate Planning

A properly structured trust may be just the thing to achieve your financial and estate planning goals.

What is a trust?

A trust is a legal relationship. The person who creates the trust is called the “settlor.” The settlor transfers ownership of assets/property to a “trustee” to control on behalf of one or more “beneficiaries.” The trustee holds legal title to the trust property and must manage it in accordance with both the terms of the trust agreement and the legal duties imposed on a trustee.

Who can be a trustee?

There can be more than one trustee and more than one beneficiary of a given trust. The trustee can be a layperson such as a friend or family member, a professional trustee (e.g., a lawyer), an institution such as a bank or a trust company.

For some type of trusts, the settlor can also be a trustee or co-trustee. For example, the settlor can be a trustee of a revocable trust (a revocable trust is one that can be altered, as opposed to an irrevocable trust that can only be altered if all beneficiaries agree or the court orders it to be altered).

When the settlor also acts as trustee, it allows the settlor to retain control over the trust property—but that arrangement can have tax implications and offers less protection from creditors.

When can a trust be set up?

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 you appoint a different person.

Benefits of Trusts

Benefits of Trusts

1. Bypass Probate

Trusts are very commonly used as a strategy to bypass probate. When you transfer assets into a trust during your lifetime, those assets are no longer owned by you directly, and thus are not estate assets. Such trust property is not subject to probate fees on your death. The property held in trust, such as real estate or a trust fund, are distributed in accordance with the terms of the trust document or trust arrangement that you create.

2. Tax Benefits

Trusts can have significant tax implications. A trust is not a separate legal entity but is treated as such by the Canada Revenue Agency for income tax purposes.

Certain types of trusts can be used to defer or minimize taxes, such as charitable trusts, spousal trusts, alter ego trusts, and joint partner trusts. There can also be opportunities for income splitting when there are multiple beneficiaries of a trust and the trust income is paid to the beneficiary in the lower tax bracket.

3. Privacy

Trusts can be used to maintain privacy for yourself and your family. Most Wills have to go through the probate process, which is public. You can use trusts to structure your affairs so that probate is not necessary for the assets in trust, only the remaining assets in your estate.

What types of trusts are there?

What types of trusts are there?

There are so many types of trusts available, each offering unique benefits depending on your goals and needs. In this section, we’ll have a look at some of the more commonly used types of trusts.

1. Trust for a Beneficiary who Lacks Financial Expertise

Inter vivos trusts or testamentary trusts can be used to benefit people who are not sophisticated in financial affairs, or adult beneficiaries who have shown themselves to be financially irresponsible in the past (sometimes referred to as “spendthrift trusts”).

The trustee manages the trust property in accordance with the trust deed, which explicitly sets out how trust income is to be distributed and when the beneficiary is permitted to access the trust property. Another benefit is that the beneficiary’s creditors can’t go after the property held in trust.

2. Testamentary Spousal Trust

A spousal trust can be used for several purposes. A spousal trust can be created to protect assets if your spouse lacks financial expertise to manage income/property on their own.

It can also be used to ensure that children from your previous marriage eventually inherit from your estate. Assets are held in trust and managed by the trustee for the benefit of your spouse during your spouse’s lifetime. After your spouse’s death, the trustee will transfer ownership and/or remaining money to your child(ren) in accordance with the instructions you left behind.

There are also tax reasons for using a testamentary spousal trust. For example, a trust can be used to defer income taxes that would otherwise be payable by your estate, relying on the “spousal rollover” provisions of the Income Tax Act. Capital gains that would otherwise be payable by your estate are deferred until your spouse dies or sells the property.

3. Testamentary Trust for the Benefit of Children

Testamentary Trust for the Benefit of Children

You can establish a trust in your Will for the benefit of a minor child, with the trust assets being held for the benefit of the child until they reach a specified age (e.g., the age of majority, age 25). You can provide explicit instructions about retaining income earned and what the trust assets and trust income can be used for (e.g., care needs and education expenses for minor beneficiaries).

4. Alter Ego Trust (also known as a “will substitute”)

These are special types of inter vivos trusts allowed under Canada’s Income Tax Act. You must be a Canadian resident who is 65 years or older to settle an alter ego trust. The distinctive feature of this type of trust is that you can be the settlor, trustee, and beneficiary of the trust during your lifetime.

When you transfer ownership of assets into the alter ego trust, the trust becomes the legal owner of those assets. You no longer own those assets personally, but you continue to maintain control over the assets in your capacity as trustee. The income and capital of the trust must only benefit you as the settlor during your lifetime.

In the trust document, you name the beneficiaries who are to benefit from the trust when you pass away, just as you would in a Will. When you die, the assets in the alter ego trust pass outside of your estate, thereby avoiding probate fees, legal costs, and the estate administration process.

5. Joint Partner Trusts

A joint partner trust is similar to an alter ego trust. Both are inter vivos trusts permitted by the Income Tax Act. Here is where they differ: with an alter ego trust, only one person (the settlor) is entitled to receive trust income and capital in their lifetime.

In the case of a joint partner trust, both the settlor and the spouse or common-law partner of the settlor can benefit from the income and capital of the trust during their respective lifetimes.

Your spouse can be named as the successor trustee to allow him or her to administer the trust after your death, or you can name a different replacement trustee. A joint partner trust continues after the death of the first spouse. The surviving spouse or common-law partner benefits from the income and capital of the trust while alive.

After the surviving spouse’s death, the trust assets go to the named beneficiary or beneficiaries pursuant to your instructions in the trust deed. Note that while you must be a Canadian resident who is 65 years or older to settle a joint spousal trust, your spouse does not need to be over 65.

6. Disability Trust

Disability Trust

A trust can be created to safeguard assets and provide income to a disabled person. A disability trust can be created during your lifetime, or in your Will (the latter are known as “Henson” trusts). When structured properly, these types of trusts can provide income and pay for care needs while not disrupting the disabled person’s eligibility for government disability benefits.

There can be significant tax implications of disability trusts. For example, all income retained within an inter vivos disability trust (i.e., not distributed to the beneficiary) will be taxed at the highest marginal tax rate. A testamentary disability trust, on the other hand, may benefit from favorable tax treatment in the form of taxation at marginal tax rates for the first 36 months if certain requirements are met.

In either case, tax advice should be received concerning how to minimize income taxes.

The trusts discussed above are just some of the options. Trusts can also be used to give money or property to charity, to hold insurance proceeds, to protect assets from creditors, and for myriad other purposes.

Have questions about trusts or your estate planning needs?

There are many important legal considerations and tax implications that necessitate professional advice when settling a trust. Our estate planning lawyers would be happy to review your circumstances to determine use of properly structured trusts would be advantageous for your estate plan.

Consult with our experienced team at (604) 330-9481.

We are proud to offer our legal services to the people of Vancouver, BurnabyNew WestminsterSurreyCoquitlam, Kelowna, and all other surrounding areas.

Have questions about a topic?

Onyx Law Group represents clients in family law, estate and trust litigation, estate planning and probate matters. Consult with our experienced team at 
(604) 900-2538

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