Estate Planning

Personal Trusts

Personal Trusts are extremely flexible tools for distributing property and income, and can be used to satisfy many financial planning objectives.

There are two main reasons for using trusts. First, trusts can be used to control how assets are distributed to your beneficiaries, by placing the assets in the hands of a trustee instead of giving those assets directly to the beneficiaries. Second, trusts can often be used to minimize taxation, either by deferring capital gains or by providing a mechanism for distributing income to beneficiaries with a lower marginal tax rate that the settlor.

Trusts are legal entities for which you need a lawyer and a trustee (either a family friend who works for free or a professional who needs to be paid); some trusts get special tax treatment from the CCRA others don't. There are many types and the differences can be daunting. To help you decide if your financial plan should include this strategy, consider the following:

The Basics

Although trusts vary in design and execution, they all get their assets from a cash deposit, a transfer of substantial holdings, or both. Regardless of the assets held in the trust, a trust always has three players: the settlor transfers the assets to the trust; The trustee administers those assets and pays out returns generated from them; The beneficiary receives those payments.

There are two main types of trusts for Canadian residents:

1.   A living, or inter vivos trust, where assets are transferred into the trust while the settlor is alive; the assets are taxed at the top tax rate.

2.   The testamentary trust, where assets transfer into the trust upon death according to the deceased's Will after his/her estate is settled; the assets are then taxed at graduated rates.

In situations where the beneficiary of a testamentary trust is already subject to the highest marginal tax rate due to other income, the trustee can elect for the trust to pay tax on all trust income at the trust's rate, providing post-mortem income splitting.

Setting up a testamentary trust can add up to $1,000 or more to the writing of the will, since it involves additional legal fees for designing the trust and setting out its terms.

With exceptions (alter ego and joint partner trusts), an inter vivos trust pays tax on all income (net of payments to beneficiaries) at the highest marginal tax rate.

Transferring assets into a testamentary trust does not trigger a capital gains liability (at the time of the settlor's death, capital gains tax is payable on the difference between the asset's price when the settlor bought it and its fair market value when the settlor dies). However, with few exceptions, transferring assets into an inter vivos trust triggers capital gains exposure. In this situation, the calculation is based on the difference between the price the settlor paid and the fair market value at time of transfer.

here are some examples of how trusts are commonly used:

►    A Discretionary Family Trust

►    A Charitable Trust

►    A Charitable Remainder Trust

►    A Cottage Trust

►    A Disability trust

►    An Alter Ego Trust

►    A Spendthrift Trust

►    A Spousal Trust

►    A Trust Beneficiary Declaration 

The use of personal trusts is growing in popularity, especially in estate planning where they can be used to provide long-term security for one's family.

The information contained in this commentary is designed to provide you with general information only, and is not intended to be comprehensive advice applicable to the circumstances of any individual. We strongly urge you to seek professional assistance before acting upon information included herein.