How to Use Trusts in Estate Planning

Trusts can be used for estate planning to pass assets to beneficiaries while keeping them out of probate and further from contestation.

Continue reading to learn the basics of trusts, including the different types, and how they are used for estate planning.

 

Trust Basics

A trust is a method of estate transfer during which another party is granted the authority to handle assets for the benefit of a third party. This fiduciary relationship can be created in a variety of ways to meet many needs, and there are several types out there to fit specific situations.

A trust is active from the moment that it is created, and you can use it to distribute different assets to your beneficiaries. They are used most commonly to keep these assets out of the probate process and provide beneficiaries with immediate access.

 

Trusts and Taxation

Depending on where your trust is situated, it may be subject to different taxes. Trusts are often used to alleviate tax pressure on certain individuals, but recent changes in Canadian tax laws make this more difficult.

A common way that trusts are used without incurring any tax is by distributing dividends. Due to the Dividend Tax Credit and personal tax credits, an individual without any other income can receive dividends with value in the tens of thousands without needing to pay taxes on them.

The taxes placed on a trust vary depending on the amount, the type of trust, and the tax bracket of the beneficiary.

 

Types of Trusts

While there are several types of trusts in existence, they fall into two categories: living trusts and testamentary trusts. Both of these types can be used to distribute, and they bring their own benefits to the table when looking at estate planning tools.

 

Living Trust

A living trust, also known as an inter vivos trust is common for estate planning because it can effectively transfer property after death to beneficiaries. The Canadian Revenue Agency notes that there are at least 30 types of living trusts that you can create, and each has its own rules.

Some common types of living trusts include:

  • Alter ego trusts that allow settlors over 65 to be the only ones to receive the income or capital of the trust during the remainder of their lifetime.
  • Employee benefit plans in which an employer contributes to a custodian for the benefit of employees, former employees, or their families.
  • Joint spousal or common-law partner trusts where the settlor, age 65 or older, and their spouse or common-law partner receive all income from the trust.
  • Master trusts that are exempt from Part I tax, but only if they meet all of the criteria.
  • Real estate investment trusts (REIT), which must have REIT properties as at least 90 percent of its assets, and at least 90 percent of its income sourced from rent.

Regardless of specifics, a living trust is revocable, and it may be referred to as a revocable trust. This means that it can be changed during the life of the trustor, and the trustor maintains the ownership held by the trust until their death.

At the point of death, a living trust is used to transfer property outside of probate court, escaping additional fees and processing time.

 

Testamentary Trust

Testamentary trusts are the ones created when an individual dies. Conditions and terms are explained in the will or by a court order that is related to the estate.

Types of testamentary trusts include:

  • Graduated rate estate (GRE)
  • Lifetime benefit trusts
  • Qualified disability trusts (QDT)
  • Spousal or common-law partner trusts

To be valid, the trust must identify the trustor, the trustee, a successor trustee, and beneficiaries of the trust. This type of trust is used most often when an individual wants to leave assets to an individual who has yet to hit a certain milestone (such as turn 18 or graduate), and it terminates when the beneficiary receives the assets.

Because a testamentary trust is associated within a will, the will must be authenticated in probate before the testamentary trust is created. It does go through the probate process, and if the beneficiary is not to receive the funds until a later date, then the trustee must go to probate court each year to verify the handling of the trust.

 

Using a Trust for Estate Planning

When you use a trust for estate planning you need to decide a few things, including the property you intend to transfer and who will be the trustee and beneficiaries.

 

Choosing Property to Transfer

The property that you can transfer in a trust is usually what you want to be settled, but most advise against settling property that provides income or capital to beneficiaries.

Examples of what you can include in a trust include:

  • Real estate
  • Financial accounts
  • Retirement accounts
  • Life insurance

When setting up a trust you need to look at any tax implications of including certain assets; working with a financial advisor is essential at this time.

 

Choosing a Trustee and a Beneficiary

The trustee should be an individual that you trust to distribute the property as explained and intended. In certain cases listing a family member or a close family friend may be the most obvious choice, but you should also consider appointing a third party.

Trust companies make sense if you cannot decide on who should act as the trustee, but they also help when you are establishing a trust in another province. This is also a good choice if you want to reduce any chance of conflict surrounding the trust after your death.

The beneficiary (or beneficiaries) of a trust is the one that you intend to pass property onto, regardless of age or relation to you. The beneficiary can even be a non-profit, but they should be directly named to avoid confusion.

Setting up a secondary beneficiary for contingency is a good idea in case the original beneficiary dies before the trustor.

 

Final Thoughts

A trust is a useful tool that many benefit from when estate planning. It can be used alongside a will for a more thorough and precise distribution of assets.

Because there is a lot of variation in trust rules, working with an experienced advisor is essential for ensuring the proper transfer of assets. Contact Sim Gakhar to explore your options using trusts for estate planning.

 

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