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Trust Funds 101: The Basics


According to Clifford Lachmansingh, national lead, private trust, MD Financial Management, trusts offer some clear advantages in terms of planning and security.

“Life circumstances change,” Lachmansingh says. “Incapacitations and major events, such as death, are traumatic enough for families. Loved ones are left with many responsibilities at a highly emotional time of their life. This is why planning ahead with an estate and trust strategy can help minimize stress while ensuring loved ones will be looked after in the future. A trust describes a relationship where one party, the settlor, passes property to another party, the trustee, to manage assets for a third party, the beneficiary. From a Canadian estate planning perspective, trusts are typically used for protection, asset management and security for your loved ones.”

He continues, “Trusts can be established at any time. A trust established during your lifetime is referred to as an inter-vivos (living) trust; a trust that arises on the death of the settlor is called a testamentary trust. Trusts can be used for a variety of situations and purposes. Some forms of trusts are most effective for high net worth individuals and families, though, so it is important to consider the specific circumstances. It is critical to get proper estate planning, tax and legal advice before considering or utilizing such a solution.”

Henry Villanueva, legal council, MacMillan Estate Planning, agrees. “Trusts are created for various purposes and they apply to various income levels. From my experience, trusts are more suited for families with a net worth in excess of 1 million dollars; however, if your main concern is to protect certain assets, regardless of their value, a trust may be worth setting up.”

“To build an effective trust and draft customized solutions for families,” Villanueva explains, “we take into consideration, among others, the following factors: the parties involved – who will be the settlor, trustee, and beneficiaries; the purpose of the trust; successor trustee issues; governance clauses and restrictions; powers of trustees and variations, or whether the trusts can be amended in the future.

“Families often dread trusts as being complicated, and they are apprehensive that maintaining a trust may be difficult and costly. Note that trusts may be as complex or as simple as you set them out to be. Maintenance costs usually entail banking fees for the trust’s account and yearly T3 tax return preparation fees. The trustee may also charge a fee for acting as such, but usually this is a family member anyway. Bookkeeping is usually not too much of a concern since the trust is not an active business and there are only a few transactions to record.”

“Trusts are a valuable tool that any individual can deploy regardless of their income, age, complexity of financial situation, or asset base,” say Martha Moen, head of trust; and Diane Tom, VP, business relations and initiatives, Concentra Bank. “It’s important to note that some Canadian trust companies require minimum asset levels to be a client, however, there are accessible companies, such as Concentra Trust, with no asset minimums and trust services that are open to all.”

Since “a trust is a method of holding and protecting assets,” Moen and Tom point out, it “can be used for many purposes, such as providing a gift to a minor, ensuring appropriate care and financial security of a spouse or disabled child, supporting philanthropic objectives, supplementing retirement benefits, or holding assets such as cottages and private businesses that are to be managed over the course of multiple generations.”

Moen and Tom also note that there are many benefits: trusts avoid probate or double probate, offer creditor protection, preserve confidentiality/privacy, provide protection against possible will challenges, preserve disability benefits and support incapacity protection, enable a dependant’s relief claims, simplify estate administration and enable continuity post death.

“The real advantage of a trust,” they emphasize, “is that you can be very creative in setting up what the trust will be used for and how it will work. The trust can pay lump sums to beneficiaries based on key milestones, it can expand or narrow its uses through different triggers, and it can be designed in a specific way to best serve its overall purpose. The creative possibilities are endless! And yes, if you even want to have a hamburger delivered every day to the beneficiary for the rest of his or her life, you can do that too!”

There are also several tax advantages involved in setting up a trust.

Maya Claire Gordon, partner; and Bethany Schatz, lawyer, Reynolds Mirth Richards & Farmer LLP, list income splitting, capital gains, and estate freezing as the key tax advantages involved in establishing a trust.

“Some other advantages and reasons for creating trusts include looking after children and disabled dependents,” they add. “Trusts can ensure that disabled dependents receive suitable care and have sufficient resources available to them after you die. In fact, if you have a family member on Assured Income for the Severely Handicapped (AISH), putting assets into a trust can protect AISH entitlement, due to legislative changes that took place in 2018. Trusts also enable you to provide gifts to minor children or grandchildren, which can take care of the minor during the trust’s existence and enable the trustee to pay out the remainder of the trust at an age when the child is more responsible. You can also increase the age of payout past the age of majority (18) to an age where you feel the child is best suited to receive a large amount of funds.”

Gordon and Schatz continue, “The main benefit to creating a trust for a child is to ensure that the property is managed responsibly and isn’t wasted. It allows the parent to determine the terms under which the child will receive the property (amounts, age restrictions, purposes, etc.), and to appoint a person with the necessary financial acumen to handle the property. A potential downside is that a trust limits the child’s autonomy and decision-making authority. The trustee is the one that determines how the property will be managed and distributed, which some children can find restrictive.”

“For minor beneficiaries in a will,” they add, “a testamentary trust is always recommended. Minors are not entitled to inherit property, so if the will doesn’t have a trust, the Office of the Public Trustee will hold the property until the minor beneficiary reaches the age of 18.”

There are a few alternatives to trust funds for those who are looking to share their wealth responsibly with their children.

“You can open up a Registered Education Savings Plan (RESP). Some benefits include tax-free investment earnings and government contributions through the Canadian Education Savings Grant. You can also contribute to your children’s Tax Free Savings Accounts (TFSAs). Some benefits include tax-free investment earnings and tax-free withdrawals.  You can make inter-vivos gifts to your children while you are still alive. Gifts may be most helpful in certain stages of your children’s lives, such as when they are in post-secondary education, starting their careers, or growing a family of their own.”

Rick Harcourt, a family business successor with Capital Estate Planning Corporation and board member of the Family Enterprise Xchange suggests another alternative for business owners who are concerned about the complexity of a trust – or in the event that their level of assets may not warrant it. “They could arrange to have the assets in their estate purchase an annuity that would pay out regularly to their children over the course of their whole lives. While this may not have the same tax advantages as a trust, it is much simpler to set up. There are even some life insurance policies that can be set up to pay out as an annuity rather than a lump sum of cash. This can be really helpful, especially if business owners are concerned about the effect on their heirs of having one large lump sum paid out all at once – and then nothing ever again.”

One final thing to note, stress Gordon and Schatz, is the importance of the trustee: “The trustee owes certain duties to the beneficiaries as a fiduciary. Some of these duties include: complying with the trust agreement established by the settlor (inter-vivos trusts) or the will (testamentary trusts), managing the trust property solely for the benefit of the beneficiaries, acting impartially between the beneficiaries, acting honestly and discharging duties with a level of ordinary care and prudence, keeping a proper account of the trust property and providing information to the beneficiaries.”

“It’s important to carefully consider who to appoint as trustee,” they conclude, “and whether a corporate trustee is appropriate.”