What is a trust, and when is it useful?
The ABC’s of Trusts
Put very simply, a trust is an interest in property. More particularly, a trust is an equitable or beneficial right or title to property, real or personal, held for the beneficiary (equitable owner) by another person (legal owner).
In this article, we will demystify the world of trusts and provide a high-level overview of how a trust operates, as well as provide some examples of how trusts may help you in your estate plan.
A trust is formed when a person with property (a “Settlor”) wants to give property to another person (the “Beneficiary”) and have that gifted property managed and controlled by a third person (the “Trustee”). In order to create a valid trust, there must be clear certainty of intention, certainty of subject matter and certainty of object. This means that the Settlor must have the intention to create the trust, it must be clear what property is held in trust and it must be clear who will benefit from the trust.
Unlike an individual or a corporation, a trust is not a legal person that can enter into contracts or incur liability; however, a trust is a method for disposing of property and therefore must file tax returns and pay income taxes where applicable. Accordingly, if you are preparing to settle a trust, be prepared to incur legal and accounting fees for the duration of the trust.
A trust may take one of two forms – a testamentary trust or an inter vivos trust.
A testamentary trust is a trust that is created in a will. A will does not take effect until the will-maker dies and therefore the trust created in the will does not come into effect until the will-maker dies. The will itself establishes who the Trustee(s) and Beneficiaries of the trust will be and identifies the property which will form the subject of the trust.
An inter vivos trust is a trust that is created during the Settlor’s lifetime and transfers or gifts the property to the trust while the Settlor is alive.
Why set up a trust? A trust may be used in a variety of fields, from estate planning to tax planning, for a variety of reasons, from preservation of family wealth to charitable giving.
Some examples of testamentary trusts include the following:
- Brian and Amy have children who are minors (under the age of 19). They establish a trust in their Will whereby the executor, acting as Trustee, holds any gift to their children in trust until the children reach the age of 19 or older. Brian and Amy decide that the age of majority is not the age of maturity and design the trust to pay their children 50% of the trust proceeds at age 22 and 50% at the age of 25.
- Sandy has two adult children, one of whom is disabled and receives funding from the provincial government as a Person with a Disability (PWD). Sandy wants to provide equally for her two children upon her death, but an outright gift may result in the child losing his PWD funding, which is subject to a means test by the provincial government. Sandy creates a fully discretionary trust, also called a Henson Trust, for her disabled child in her Will which will allow her disabled child to access his share of the estate without exceeding his asset limit allowed by the government.
Some examples of inter vivos trusts include the following:
- George and Ruth want to ensure that the family cottage may be enjoyed for years to come by their children, grandchildren and great grandchildren. They establish a trust and appoint their children as the Trustees of the trust. The cottage becomes the property of the trust. This allows many generations of family to enjoy the property and may help minimize probate fees upon the death of George and Ruth.
- Norm is 66 years old and has two adult children, Josh and Christina. Norm has lost touch with Josh and hasn’t spoken to him in many years. Norm wants to leave most of his estate to Christina and her five children. Norm is concerned that Josh may make an application to contest or vary his Will if he does not divide his estate equally between Josh and Christina. Norm creates an alter-ego trust, appointing himself as the Trustee of the trust and the sole Beneficiary of the trust for so long as he is alive. Upon Norm’s death, Christina is appointed as the Trustee and Christina and her children are appointed the Beneficiaries of the trust. An inter vivos trust is private and not subject to the Wills, Estate and Succession Act, and therefore cannot be contested.
Trusts are subject to different tax rules than individuals and therefore it is prudent to receive proper advice from an accountant prior to making any major changes to your estate plan or to ownership of property.
Whether you want a trust to manage the family cottage, a trust for a disabled beneficiary, or a trust to protect assets from wills challenges, our estate planning lawyers at Linley Welwood would be happy to discuss your objectives and how a trust may assist you in meeting those objectives. Now that you have a firm grounding in the law of trusts, watch for a more in-depth explanation of Alter Ego and Joint Partner Trusts in our next blog post, and learn how these estate planning tools may help you achieve your goals.
© Linley Welwood LLP. The contents of this article do not constitute legal advice. Readers should seek legal advice in relation to their own specific circumstances.