LIVING TRUSTS

On Wills, Estates, Trusts Law for residents in Canada  

A “trust” is a legal arrangement that assist in benefiting people who wish to privately structure their affairs, or who wish to control assets without actually owning those assets, or, in certain circumstances, who wish to take advantage of certain tax-planning opportunities.  

In Canada, while one is alive, one can set up an alter ego trust or a spousal trust, to provide care for a spouse or a disabled child after he dies.  The other alternative is when in the will, one can create a testamentary trust that takes effect on death, and has certain income tax benefits.  With these estate planning trusts, one needs to follow certain income tax rules in order to get the benefit sought.

The general living trust can be created for tax or business planning or asset protection purposes.  Living trust, for technically minded people can also be termed as inter vivos trusts; that is, a trust that is in effect while the person who made the trust is alive, as opposed to a testamentary trust that only takes effect when the trust-maker dies.

Creation of a Trust

A trust is created when a settlor (the person who makes the trust) transfers certain specific property to another person called the trustee.  Both the settlor and the trustee agree that the trustee must hold the trust property for people called the beneficiaries of the trust for a certain length of time (typically, not longer than 80 years in British Columbia). Despite the trustee is listed as the “legal” owner of the trust property, it is the beneficiaries who are the true owners of the trust property.

In creating your living trust, one is required to consider these further distinctions:

Beneficiaries should be distinguished between income beneficiaries (that is, those beneficiaries who are only entitled to receive any income earned on the trust property) and capital beneficiaries (that is, those beneficiaries who are ultimately entitled to receive the capital of the trust property).

Discretionary and non-discretionary trusts must be defined: In a discretionary trust, the trustees have the power and authority to decide which beneficiary or group of beneficiaries will receive which part of the income or capital that they are entitled to while in a non-discretionary trust, the trust document specifies exactly which beneficiary gets what item of trust property.

Benefits from a Living Trust

The major benefits of a Canadian living trust includes Privacy, Asset Protection, Control, and Tax Planning.

Privacy

Trusts are created by written agreements known as deeds or trust settlements or even simply trusts and usually don’t have to be registered anywhere and are valid as soon as they are signed.

Asset Protection

The essence of such a trust arrangement is that it allows one to have his cake and eat it as the trustee is only a legal owner of the trust property and the trust document does not necessarily give the trust property outrightly to a beneficiary.  This sort of benefit is directly useful for asset protection.

Control

Additionally, a trust can give control over how the assets are divided among the family members.

Tax planning

Generally, in Canada trusts are not a great vehicle for tax planning, because they are taxed on income at the highest marginal rates but of course they can be used meticulously for income splitting to either or both of spouses or adult children, if those people are themselves in one of the lower tax brackets.