A trust is a legal instrument used to control assets so as to control and protect accumulated wealth. Trusts can vary by type and each will have its own purpose. Generally trusts tend to be created by:
- a written deed of trust that is signed by the person granting the trust (known as a settlor) and the person who is going to manage the asset pursuant to the trust (known as a trustee);
- oral confirmation;
- in a testament or will; or
- by court order.
While trusts are often tax driven, they can also be very useful to:
- manage assets;
- create additional options for generational wealth distribution over time;
- protect assets from third parties such as family members or in blended families;
- conceal true asset ownership and allow for greater privacy, and
- reduce costs by avoiding probate process and claims under the Wills, Estate Succession Act.
In order for a trust to be considered a trust, judges have required three certainties before it may be said that a trust is formed. These are a clear intention to create the trust, clear identification of the subject matter of the trust, and clearly defined objects or beneficiaries of the trust.
There are numerous types of trusts used for estate planning purposes, including but not limited to:
- Testamentary trusts;
- Spousal Trusts;
- Alter Ego Trusts and Joint Partner Trusts; and
- Disabilities Trusts
Tax law is always changing and it is important to consult a qualified solicitor and/or a qualified accountant to understand the nuances of a given trust to ensure that it works for the intended purpose.
TESTAMENTARY TRUSTS
Testamentary trusts are those trusts that arise from a deceased person’s will. For example if a deceased had minor children, it is common it a will to include a clause to allow for minors to inherit when they reach the age of majority in BC but to allow a guardian or trustee to dip into some of the capital even while the minors are young to advance their interests in life, school, travel or to pay for health procedures if necessary.
SPOUSAL/COMMON-LAW PARTNER TRUSTS
Spousal trusts are formed for the express purpose of providing income to a spouse for their lifetime. There is a residency requirement for both the settlor and the trust. Spousal trusts can be a stand-alone instrument or else created within a will.
The major benefit of a spousal trust is that it permits capital gains to be deferred, allows capital losses to be claimed and even in some instances, provides for capital cost allowance until after the spouse has died.
ALTER EGO AND JOINT PARTNER TRUSTS
Alter ego trusts are for individuals who are at least 65 years of age. The purpose is similar to a spousal trust (to provide lifetime income to a spouse). A settlor can transfer his or her property to the trust on a tax deferred basis so there is no tax at the time of the transfer however tax would be payable on death. Joint partner trusts are used the same way as alter ego trusts but the relationship is generally married rather than common law. On the death of the last surviving spouse, the taxes are due.
Alter ego and joint partner trusts can serve as an alternate option instead of a will. These trusts avoid payment of probate fees on the assets in the trust, because the assets are not included in the estate of the deceased. Further, these trusts can potentially serve as substitutes for powers of attorney and as mechanisms for creditor protection.
MULTIPLE TESTAMENTARY TRUSTS
The use of multiple testamentary trusts is becoming increasing common in estate planning. There are reasons why a multiple will strategy should be used. For example, it should be used in some situations where assets are held in more than one jurisdiction and it will be more burdensome or complex to probate in one location and reseal the foreign probate in another. It may also be useful if one is planning to leave all their assets in one jurisdiction to one or more persons and the other assets in another jurisdiction to another. As well, there are times where probate can be minimized and it makes sense to use multiple wills. Private corporate shares as estate assets are often a frequently cited example used to show the savings achievable.
SPECIAL NEEDS TRUSTS
Persons with disabilities also frequently set up trusts to allow for government income to be received without penalty by the government when either an inheritance or gift is given to the disabled persons.
Currently, persons with disabilities can earn up to $12,000 per year and can have savings up to $100,000, all of which would be exempt, in addition to assets held in a discretionary trust. Persons with disabilities are also entitled to receive certain monies that are exempt, such as tax refunds or settlements from some lawsuits.
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