Types of Trusts:
Alter Ego and Joint Partner
Cottage and Principal Residence
- Planning and preparing trusts
- Maintaining trust records
- Preparing trust accounts in legal format (called "court passing" format)
Trusts are a relationship with respect to property and not a legal entity, unlike a corporation. They form a sort of legal connection between the person establishing the trust (settlor), the person(s) who will manage the trust (trustee(s)) and the persons who will benefit from the trust (beneficiaries).
The settlor establishes the trust by setting its terms, including who will be the beneficiaries, and transferring the initial assets to the trustees. The trustees, upon accepting their appointment, take over managing the trust property according to the rules for the particular trust. Beneficiaries have rights and can request information about the trust and how it is being administered.
There are many different kinds of trusts and deciding which one to use, if any, will depend on your personal circumstances. The two main categories of trusts are inter vivos and testamentary. Inter vivos trusts are ones created by a settlor to take effect while they are alive. Testamentary trusts arise as a consequence of death although not necessarily that of the settlor.
The importance of the distinction between the two types of trusts is related to how they are taxed. Inter vivos trusts are taxed in Canada at the top marginal rate on all income retained in the trust. Testamentary trusts, if structured properly, are taxed at the graduated rates applicable to natural persons. Clearly there can be advantages to using testamentary trusts which can be set up in Wills as well as other forms of documents.
Within the two main categories of trusts, there are other forms such as spousal trusts, Henson trusts. and cottage or principal residence trusts. These can be either inter vivos or testamentary. Alter ego or joint partner trusts are special forms of inter vivos trust and may not be able to give rise to a testamentary trust later based on the Canada Revenue Agency's current policy.
Another form of inter vivos trust is the bare trust which is ignored for income tax purposes and all income is attributed back to the settlor to be taxed in his/her hands as if they still owned the property personally. Initially it looks like there is no benefit to using this type of trust but is can be helpful for long term asset management and there are potential estate administration tax savings if the strategy is structured properly.
Insurance can be a valuable part of a person's estate but it may not always be desirable to have the proceeds paid directly to the beneficiary. In those instances, an insurance trust can be useful and, if done properly, it can be structured to avoid the estate administration tax. Ideally most insurance trusts should be done as a stand alone document and not in a Will.
Trusts have been an important part of the estate planning and administration process for a long time. While somewhat complex, they offer asset protection and possible tax savings. Blair has extensive experience preparing a wide range of trusts as well as advising trustees and beneficiaries with respect to their obligations or entitlements.