What is a trust?

A trust is a type of fiduciary relationship in which a third party, called a trustee, holds assets on behalf of another party, called a beneficiary. The trustee follows the wishes of the individual that established the trust (referred to as the settlor in the case of a trust established during life, or a testator in the case of a trust established in death) to manage the distribution of assets to the beneficiary, either at predetermined dates or for certain purposes.

There are two main types of trusts in Canada:

• Intervivos Trust: established during the lifetime of the settlor; and
• Testamentary Trust: established as a result of death, and in accordance with the terms of the deceased’s will.

How are trusts taxed?

A trust is a separate taxpayer and must file a tax return each year. Most trusts are subject to the highest marginal tax rates for income earned and retained within the trust, except under special circumstances, such as in the case of Qualified Disability Trusts or Graduated Rate Estates.

Why set up a trust?

Trusts can be established for a variety of reasons, including:

1. Income Splitting: income earned within the trust can be distributed to several beneficiaries and taxed at their individual marginal rates.
2. Asset Protection: under certain circumstances, assets held in trust can be considered separate from a beneficiary’s assets, providing protection in the case of marital breakdown, legal disputes, or claims from other creditors.
3. Spousal Support: trust assets can provide income to a spouse for their lifetime, with the remainder transferred to children of the testator or other specified beneficiaries.
4. Prudent Management: a trust structure can provide assistance to beneficiaries that lack the knowledge and skills needed to independently manage their inheritance.
5. Special Purpose: such as for charitable intentions, environmental protection, child support, or other specific purposes.
6. Estate Planning: a trust can be an appropriate component of an overall estate plan, to achieve continuity of management, efficient transfer of assets to the next generation, reduced probate and estate related taxes, or to provide privacy to the testator/settlor.

While a trust can be a very powerful tool, it may not be useful for every estate. Ensure you consult with legal and tax professionals when deciding whether a trust might be an appropriate tool for you and your loved ones.

Guardian Estate Company provides independent will and estate planning services, and is proud to be Canada’s first brokerage for estate solutions offered through trust companies and other fiduciaries. Read all about trusts and estates in our most recent blog posts.

The above is for informational purposes only. It is not intended to be legal or financial advice. We accept no liability for any losses arising from use of the above information. We recommend you speak to your lawyer to obtain specific advice or guidance regarding your unique situation.