Assets do I put my “Trust”

BY ANDREW STEWART

Instead of using a will to transfer their estate, some individuals transfer assets into a family trust during their lifetime. Trusts are often used in tax and estate planning because of the flexibility they offer over the control, management and distribution of appreciating assets.

Transferring assets into a family trust gives the settlor the opportunity to establish the terms of the trust in the trust document. A family trust also gives the settlor flexibility over the timing of distributions, type of distributions and amount the trust’s beneficiaries receive.

What is a Trust?
The trust relationship is created when a person who initially owns certain property (the settlor of a trust created during lifetime or a testator of a Will) transfers possession and legal and beneficial ownership of the property, to someone else. The person who receives possession of the property, and the legal ownership, is the trustee of the trust. The person who receives the beneficial ownership is the beneficiary of the trust. The trustee is given authority to manage the property according to the terms outlined in the trust agreement, for the benefit of the beneficiary. A trust is not a legal entity but is considered a separate taxpayer for income tax purposes.

Some reasons to set up a Family Trust include:

• To provide for the maintenance and financial well-being of children and ensuring the financial care of children with disabilities. For parents and grandparents looking to invest for children, taking the time to pick the right investments is a worthwhile endeavor. However, if the child is under the age of eighteen, he or she cannot yet invest as an adult. If you want to build an investment portfolio for a child, then an informal in-trust account is a low-cost and flexible option
• To benefit a spouse or common-law partner, or an ex-spouse or ex-common-law partner
• To provide for the maintenance and financial well-being of elderly family members
• To maintain and administer a cottage or vacation property for the benefit of future generations
• To protect privacy, since the trust agreement, the nature of its assets and beneficial interests do not have to be disclosed to the general public
• To save probate fees, since assets in a trust do not form part of the estate and are not subject to probate fees
• To ensure the settlor’s wishes are carried out, since a trust arrangement may be protected from legal changes that may otherwise apply to wills

A formal trust can be used in many tax and estate planning contexts to provide tax savings, control and protection, and as a vehicle to transfer wealth to future generations. From a Canadian tax perspective, an inter-vivos family trust can facilitate income-splitting to lower the overall family tax burden through the funding of family expenses, such as children’s educational costs in excess of RESP limits.

While the use of a family trust can facilitate an income splitting strategy and provide control and protection over family assets, a trust structure may not be appropriate for every family. Some other considerations in establishing a family trust include:

• The additional complexity and administrative tasks and costs
• The legal fees involved in retaining a trust and estate lawyer to provide advice and draft the trust agreement
• The annual costs of maintaining the trust, including legal and accounting (bookkeeping) fees and tax return preparation
• Annual trustee fees that may be charged by the trustee(s) unless waived.

Given these costs, unless there are valuable non-tax reasons for establishing a trust structure, it is generally suggested that a trust should not be established with less than $500,000 of capital.