Our next estate planning blog post in our series is dedicated solely to trusts. Last week we touched on trusts in our 3 more costly estate planning mistakes to avoid post. While trusts can keep your last wishes private and avoid hurt feelings among loved ones, as you’ll soon find out, they’re so much more. Not everyone needs a trust. It depends on the number and types of assets you have. Let’s take a closer look at trusts and help you decide whether it makes sense to set one up.


What is a Trust?

You’ve probably heard of trusts, but do you understand what they are and how they work? Trusts have been characterized in the media as a “tax-shelter for the rich.” Paris Hilton may be called a “trust-fund kid,” but that doesn’t mean trusts are just for the wealthy. Trusts can make sense for Canadians not part of the illustrious “one percent.”


There are three parties in a trust. Each party has a separate and distinct role. Before the trust can be created, there needs to be a settlor. The settlor is the individual who establishes the trust and contributes assets to be held in trust. The settlor spells out the rules on how the trust’s assets are to be used and managed (known as the trust agreement).


The responsibilities of the settler don’t end there. He or she also appoints the trustee. The trustee is the legal owner of the trust. (Sometimes the same individual can fill the role of settlor and trustee.) The trustee has the fiduciary duty to look after the trust’s assets for the benefit of the beneficiary. The trust agreement can specify the beneficiaries by name or by relationship (i.e. children, grandchildren, etc.).


Types of Trusts

There are two main types of trusts: testamentary trusts and living trusts. A testamentary trust is a trust created in your will that comes into effect upon your passing. Depending on how the trust is set up, the assets in the trust could bypass probate and not be counted as part of your estate (e.g. spousal trust). Otherwise the trust’s assets are considered part of the estate and are subject to estate fees and taxes since the trust is only established after death. Testamentary trusts are taxed at the same marginal tax rates as those of personal income. One main advantage of a testamentary trust is that it ensures your estate is preserved and distributed according to your wishes long after you’re gone.

The second type of trust is a living trust or inter vivos trust. As its name alludes, the transfer of assets don’t happen upon your passing but while alive– ownership of the trust immediately passes to the beneficiary once the trust is established, although the trustee still retains control of the trust. Furthermore, more assets can be added to the trust over time. Since the trust is set up while you’re still alive, unlike the testamentary trust, the living trust isn’t part of your estate and therefore not subject to probate fees. This is because the assets are deemed to have been disposed of at fair market value. There are however a few exceptions to this rule but that is beyond the scope of this article. A living trust pays a flat tax equal to the top marginal tax rate (federal and provincial combined).

This has been a brief overview of trusts. Hopefully you have a better understanding! There are many other advantages to the use of a trust. Next week we’ll take it a step further and look at some common uses for trust as a financial & estate planning tool.


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