Trusts can be flexible vehicles to ensure your fortune is passed on to the people and causes that are important to you.
For Canadians seeking to ensure that their finances are well managed as they pass their fortunes on, it’s often a matter of trust.
Trusts are helpful for high-net-worth (HNW) individuals and families who want to make sure that their money is directed toward the people and causes that are important to them.
“Basically, a trust is a vehicle that offers flexibility in tax and estate planning,” says Sophie Ducharme, associate vice-president at National Bank’s Private Banking 1859. “A trust divides the ownership of an asset (or assets) into legal ownership and beneficial ownership.”
Put simply, trusts are meant to hold property for the benefit of someone other than the person who put that property in the trust. The individual who puts money into the trust is called the settlor; putting money into the trust is called settling the trust.
“The trustee or trustees are appointed to control and manage the assets, and the beneficiaries are the people entitled to the income and capital in the trust,” says Ms. Ducharme.
While trusts aren’t difficult to understand, paradoxically they can be complicated, because there are different types of trusts used for different purposes.
There are lots of good reasons why HNW individuals (and others) set up trusts, says Robert Kepes, partner at Toronto law firm Morris Kepes and Winters LLP.
One of the most common types of trusts is a family trust, he says. An individual can set this up for the benefit of other family members.
“People do it to preserve their assets,” Mr. Kepes says. “For example a person might own a cottage and put it in trust, so that when they die, the spouse can use it until they pass away, and then it can go to the children or grandchildren.”
Simply willing the cottage to the offspring might lead to a situation where the kids lock out the surviving spouse, says Jennifer Leve, a lawyer at Mr. Kepes’ firm.
Trusts can help direct where money should go and to whom, “whether those who set up the trust are still alive or after they have died,” says Ms. Ducharme. In addition to property, it can work for HNW individuals who worry that their kids will squander their inheritance.
“If you have beneficiaries in your will and you are not comfortable with them receiving their entire inheritance outright when you pass, you can create a testamentary trust in your will,” she explains. “That way you can make sure they don’t receive what might be a substantial inheritance until they reach an age when you think they’ll be ready.”
Trusts can also be set up that allow control over the assets while you’re still alive. For example, trusts known as “inter-vivos” trusts can allow the beneficiaries to reap the benefits — interest or dividend payments, for example — while control remains in the hands of the settlor or the trustee.
“With careful advice and planning, a trust enables a family to divide the tax liability on income earned in the trust among the family, thereby taking advantage of the lower tax rates of certain members,” says Ms. Ducharme. This benefit can apply to any group of individuals designated as beneficiaries in the trust.
In certain situations, the tax benefits also apply to capital gains earned on the sale of capital property within the trust. In this way, trusts provide income-splitting opportunities that are not otherwise available to Canadian taxpayers – the gains can be split among the beneficiaries.
Trusts can last for a long time, but not necessarily forever, says financial author Sandra Foster, President of Headspring Consulting Inc. in Toronto. It’s up to those who set up the trust to decide when it is to be wound up.
“All trusts should have an ultimate distribution clause that states when and how the assets are to be distributed,” she says.
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