Trusts are a powerful tool used in tax and financial planning. Their main advantage is that they allow for the separation of control and management of assets. Trusts have many uses in both family and estate planning and as a tool to administer an estate on the death of an individual. However, over the past decade, the federal government has been actively updating filing requirements and tax obligations for trusts. These changes have led practitioners to debate whether trusts hold the same advantages as they used to.
It is true that from a tax perspective trusts are not as advantageous as they used to be. However, trusts can still be valuable when planning for unique family situations. In the broadest terms, trusts are used to pass money down through generations in a controlled manner. Many families utilize trusts to control how money is dispersed to certain family members and to ensure loved ones are taken care of.
What You Need to Know
There are two fundamental types of trusts:
- Testamentary
Testamentary trusts are often referred to as estate trusts as they are established on or as a result of an individual’s death. Testamentary trusts are stated in one’s will. Testamentary trusts are always irrevocable.
There are three parties involved in a testamentary trust. The person who orders the trust in their will is called the testator. The person responsible for distributing and managing the money is called the trustee. Finally, the person who is receiving the money is called the beneficiary.
- Inter Vivos
Inter Vivos means between living persons. Unlike testamentary trusts which are set up after death, inter vivos trusts are established while the testator is still living. Living trusts can either be revocable or irrevocable. A revocable trust would mean that the trustor could cancel or change the trust at any time.
Trusts have many uses. Below are some of the most common ways Canadians utilize trusts for estate planning purposes along with some issues trusts can address:
- Blended Families
Individuals who have remarried and have children from a previous relationship often use trusts to ensure that both their new spouse and their children are treated fairly in their will. Trusts can be used to ensure that a spouse is taken care of during their lifetime with the remaining assets being distributed to the children upon the spouse’s death.
- Gifts to a Minor
A trust can be used to give gifts to minors without allowing them access to a large sum of money all at once. The trust will distribute income to the minor until he/she reaches a specified age at which time he/she may be granted full access to the capital.
- Disabled Family Member
Trusts can be set up in a way that ensures that a disabled family member, whether that be a spouse or a child, receives an appropriate amount of care and income after the testator dies. This can bring great peace of mind to caregivers who worry about leaving behind a disabled dependent.
- Relative Lacking Money Management Skills
Relatives who lack money management skills, whether that be impulsive spending or simply lack of experience, can benefit from a trust being set up for them that distributes regular income. In this situation, a trustee can be charged with managing the money and a spend-thrift relative will not be able to use the capital too quickly.
- Bypassing Probate
Any assets that go through probate become public record. Trusts can offer privacy to an estate as they are not subject to probate.
The Bottom Line
Trusts are a great planning tool for many families. It is important to keep in mind that trust law is very complicated, and there is a number of tax and estate implications that need to be considered.