Using trusts in estate planning

You can establish a trust that takes effect during your lifetime or upon your death. Either way, trusts can be used to accomplish a number of estate planning goals.

While trustTrust An account set up to hold assets for a beneficiary. A trustee manages the assets until the beneficiary reaches legal age.+ read full definition strategies can be complex, the concept of a trust is relatively straightforward. A trust is created when you transfer ownership of your assets to a trusteeTrustee A person or company that you appoint to manage the assets of a trust. You can name more than one trustee.+ read full definition (either an individual or a trust companyTrust company A company that offers the same services as a bank, but can also manage estates, trusts and pension plans, which banks cannot do.+ read full definition) with instructions for them to use those assets for the benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition of a beneficiaryBeneficiary The person(s), institution, trustee or estate you choose to give money, property or other benefits when you die. You may name beneficiaries in your will, insurance policy, retirement plan, annuity, trust or other contracts.+ read full definition.

2 main types of trust

1. Testamentary trust

A testamentary trust is created in your will and takes effect upon your death. The assets relating to a testamentary trust form part of your estateEstate The total sum of money and property you leave behind when you die.+ read full definition, so they are subject to any estate fees or taxes that apply. The trust can be changed at any time before your death by simply having a new will prepared.

2. Living trust

When you establish a living trustLiving trust A formal account set up to hold assets for a beneficiary. You cannot take back the assets of the trust. A trustee manages them until the beneficiary reaches legal age. The person who sets up the trust can be the trustee or can appoint someone else.+ read full definition (also known as an inter vivos trust), property ownership is passed immediately to your beneficiaries. You can add more property to the trust over time. Because the transfer of ownership is during your lifetime, the trust assets do not form part of your estate and are not subject to probateProbate Fees to settle your estate after your death. The probate process includes reviewing your will to ensure it’s valid. Also includes paying any debts and giving your money and property to the beneficiaries you have named in your will.+ read full definition.

The decision on whether to set up a living trust or a testamentary trust depends on many factors, including your need for the assets during your lifetime. A lawyer or other professional adviser can advise you on the best strategy for your specific estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals may include leaving the most money possible to your loved ones, with the least amount of taxes. Other goals may include caring for children, paying off debt or passing on a business.+ read full definition needs and goals.

7 common uses for trusts

Whether it’s best to establish a trust during your lifetime or upon your death will depend on the intended use and your personal situation.

1. You have children from a previous marriage

If you remarry, a trust can provide support for your spouse during their lifetime, while ensuring that your children from a previous marriage eventually inherit any remaining assets.

2. Your spouse lacks financial expertise

If your spouse needs help with money management after you die, a testamentary trust allows a qualified trustee to manage the trust assets on behalf of your spouse.

3. Your spouse or child is disabled

A trust can be used to ensure a disabled spouse or child receives an appropriate level of care and has sufficient assets to maintain this care after you die.

4. You want to provide a gift to minors

You can use a trust to provide income to minor beneficiaries (for example, children or grandchildren) in their younger years and to pay out the capital when they reach a specified age.

5. Tax planning

Income earned in an inter vivos or living trust is taxed at the highest marginal tax rateMarginal tax rate The amount of tax that you have to pay on each extra dollar of income you make. As your income rises, so does your tax rate.+ read full definition, but any trust income that is distributed to adult beneficiaries is taxed in their hands. So if your beneficiaries are in a lower tax bracketTax bracket The rate at which you pay tax, based on your income level.+ read full definition, the investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition income can be taxed at their lower rate.

Beginning in the 2016 taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition year, testamentary trusts will no longer enjoy graduated tax rates. Instead, income earned in a testamentary trust will be taxed at a flat rate of 29%, the top federal personal tax rateTax rate The rate at which you or a business pays tax on income. Often stated as a percentage, such as 25%.+ read full definition, plus the top provincial or territorial tax rate. As a result, there will no longer be an opportunity to pay less tax by retaining income in a testamentary trust before paying it out to beneficiaries in the top tax bracket.

However, an estate that arises upon death and is a testamentary trust will be able to use the graduated rates for 36 months from the date of death. Graduated rates will also continue to apply to a trust if the beneficiaries are eligible for the federal Disability Tax Credit.

6. You want to provide a future gift to charity

You can use a trust to provide trust income to your beneficiaries for their lifetime. Upon their death, the remaining money in the trust is donated to the charity you’ve specified.

7. You want to bypass probate

With a living trust (but not a testamentary trust), you bypass probate for any assets held in the trust, and gain the certainty of knowing that assets are transferred and distributed as you intended. This also offers greater privacy for trust assets, as probate is a public process and anyone can access these records.

Get professional advice in setting up a trust

Trusts are sophisticated arrangements that can involve a number of tax and estate planning issues. A trust must be properly structured to achieve your estate planning goals. Get professional advice before taking action.

Key point

There are 2 main types of trust:

  1. Living trust: created during your lifetime
  2. Testamentary trust: created upon your death
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