Trust and Estate Planning

Trust

Do we trust or not?

Interesting creatures are Trusts – and they can be very useful too!

A Trust is a legal entity established under Federal or Provincial Legislation, depending on the type. Testamentary Trusts are established under the provisions of Provincial and Territorial Trust Acts. Inter-vivos (living) trusts, including so-called alter-ego trusts, are established under Federal legislation.

All Trusts have some common features:
a) The Settlor – the person who puts assets into the Trust;
b) A Trustee – who carries out the wishes of the Settlor;
c) Capital beneficiary(ies) – legal entity, person or people who receive the capital value
of the assets upon certain conditions, at certain dates or occurrences;
d) Income beneficiary(ies) – legal entity, person or people who receive income from
the trust assets upon certain conditions, at certain dates or certain occurrences; and
e) A Trust Deed or Document – sets out all of the details – who gets what, when, how,
etc.

All Trusts have to file an annual income tax return – currently a T-3. This can be complicated depending on the types of assets left in the trust and the terms under which distributions are made. Trusts are liable for taxes on their retained income – and the treatment of income and the rates of tax vary depending on the type of Trust.

Let's review Testamentary Trusts first. These are created under the terms of a person's Last Will and Testament. Typically such Trusts would be for a surviving spouse or children and are designed to ensure that assets left in the Trust will be properly managed to provide long-term income to the beneficiaries – not letting them spend it frivolously. Specific assets such as a family cottage could be included in such a Trust to ensure that all beneficiaries had the ongoing right to use and enjoyment rather than forcing the immediate sale and distributing cash.

Moving on to inter-vivos or living trusts now – these are created for many reasons. I will cover alter-ego trusts later in this article as they are a specialised version of a standard living trust.

One of the primary reasons given by people creating living trusts is privacy – and the ability to ensure that no-one can contest their wishes! When a person dies, their Will (their own written version or the free version provided by our thoughtful Provincial and Territorial governments) is open to the public – assets, liabilities, trustees, executors, beneficiaries, amounts being distributed, etc. Rightly so, this bothers many people.

Wills can be contested under the terms of Provincial or Territorial Wills Variation Acts – sometimes under a slightly different name. A disgruntled relative – close-at-hand or distant

– it doesn't matter – or a close friend who feels they are entitled to something from the deceased's estate. Whether or not a claim succeeds is up to a judge of the Provincial or Territorial Supreme Court to make a final determination. Win or lose, the estate has to hire legal representation which ultimately reduces the amount available for distribution. The "winner" is the legal advisor who is paid regardless of the outcome! Such actions are time- consuming but also very stressful for all involved and remember, the person who wrote the Will

A common scenario today arises in the case of "blended" families where one part may feel they have been hard-done-by on the death of a step-parent or even their own natural parent – never pretty but interesting to watch. Remember the courts are open to the public and that includes cases involving contested Wills which can, from a rather perverse perspective, offer

There is no provision to contest the terms of a Trust (in the absence of fraud or commission of a criminal offence) nor are the terms open to public inspection. The names of beneficiaries are likewise protected from disclosure to the public or even each other – they only know of their own potential rights to receive some form of capital and/or income. The only person completely in the know is the Trustee – and that entity or person is specifically prohibited from

Alter-ego Trusts – more properly called Joint Spousal Remainder Trusts – are a relatively new creation by the Federal Government. There are a number of pre-conditions to establish such

These were created to provide mature Canadians with the option of creating a special type of Trust they can use to distribute their assets and income during their lifetimes and past their deaths in an efficient, effective and privacy-protected manner. This type of Trust allows assets to be transferred from personal name to the Trust without triggering a taxable event – such as capital gains tax. Taxes of this type can be deferred until the Trust makes its final distributions

Wills and Trust documents need to be carefully prepared – a small error can create unintended and disastrous results – including massive amounts of tax. You will need to seek the advice of a legal advisor who has Trusts as their preferred area of practice and please remember, it is a narrow specialty – just because a person can put LL.B. after their name, does not, in itself, qualify that person to draft these complex documents. It also makes sense to consult a CLU – Chartered Life Underwriter or the holder of the TEP designation – Trust and Estate Practitioner – to determine whether a Testamentary Trust, Inter-vivos Trust or Alter-Ego Trust even makes sense. The advice of a CA – Chartered Accountant or CGA – Certified General Accountant, should also be sought before a final decision is made – as the use of Trusts always involves some level of impact on your income tax situation. Make sure Trust accounting is part of their

As a GENERAL GUIDELINE ONLY, these options are beneficial only to people with distributable assets in the $250,000 plus bracket – simply due to the costs of establishing the Trust, ongoing tax returns, etc. Inter-vivos and Alter-Ego Trusts have costs ranging from about $3,000 to create – on up of course, depending on complexity. Wills that include Testamentary Trusts are

This commentary is not intended to offer legal, accounting or estate planning advice. Always consult with your professional advisors before taking any action in this regard.

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