A trust exists where a person called the “Trustee” has an equitable obligation to handle property for the benefit of a person called a “Beneficiary”. The person who created the trust is called the “Settlor”.
A trust can be created by a written document, called an express trust, or it can be created by implication, called an implied trust.
A trust is usually created by:
- a written trust document created by the settlor and signed by both the settlor and the trustee (often referred to as an inter vivos or “living trust”);
- an oral declaration;
- a will, also called a testamentary trust; or
- a court order (for example, in family proceedings).
A trust requires three certainties:
- a clear intention to create a trust;
- clear identification of the property or subject matter of the trust, and
- clear identification of the beneficiaries (objects) of the trust.
Trusts can be useful in estate planning:
- centralize ownership and management of assets,
- provide flexibility in future wealth distribution,
- protect assets from third parties,
- shield asset ownership for privacy, and
- delay or avoid probate procedure and probate claims.
There are numerous types of trusts used for estate planning purposes, including but not limited to:
- Spousal/Common-Law Partner Trusts
- Alter Ego Trusts and Joint Partner Trusts
- Multiple Testamentary Trusts, and
- Special Needs Trusts
SPOUSAL/COMMON-LAW PARTNER TRUSTS
A spousal trust is a trust where the settlor’s spouse is the only one who receives income from the trust. The settlor and the trust must be resident in Canada. Spousal/Common-law partner trusts can be created either as inter vivos trusts (between living persons) or as testamentary trusts (in a will).
A benefit of a spousal trust is that it permits the deferral of taxable capital gains, allowable capital losses, recaptures of capital cost allowance and terminal losses until after the spouse has died.
There have been recent tax changes affecting the marginal tax rates and year-end dates applicable to some trusts. Testamentary trusts are now taxed at the highest marginal tax rates, although some deferral is available by creating a Graduated Rate Estate. Legal advice is important in setting up or managing trusts.
ALTER EGO AND JOINT PARTNER TRUSTS
An alter ego trust is a trust created by a settlor after the age of 65 to provide the settlor with income for the rest of the settlor’s life. A settlor can transfer property to an alter ego trust on a rollover (tax deferred) basis. However, on the death of the settlor, the alter ego trust will be deemed to have disposed of any property it holds.
Joint partner trusts are similar to alter ego trusts except that they are created by married/common-law spouses, and the trust is deemed to have disposed of property it holds on the death of the last surviving spouse.
Alter ego and joint partner trusts can serve as an alternate option instead of a will. These trusts avoid payment of probate fees on the assets in the trust, because the assets are not included in the estate of the deceased. Further, these trusts can potentially serve as substitutes for powers of attorney and as mechanisms for creditor protection.
MULTIPLE TESTAMENTARY TRUSTS
Wills with multiple testamentary trusts can serve to minimize taxes, although there are new tax rules affecting taxation of testamentary trusts and creation of Graduated Rate Estates. A testamentary trust may be the estate of a deceased individual or a trust created under the terms of a will. Both an inter vivos trust (a trust created during someone’s lifetime) and a testamentary trust are now subject to tax at the highest marginal rate, while a Graduated Rate Estate can be created to provide graduated tax rates for three years following the testator’s death.
SPECIAL NEEDS TRUSTS
In BC, if a person with a disability has either income or assets above prescribed limits, that person will lose benefits and services that would otherwise be available under the Employment and Assistance for Persons with Disabilities Act.
Currently, persons with disabilities can earn up to $12,000 per year and can have savings up to $100,000, all of which would be exempt, in addition to assets held in a discretionary trust. Persons with disabilities are also entitled to receive certain monies that are exempt, such as tax refunds or settlements from some lawsuits.
If a person with a disability is a beneficiary of properly drafted discretionary trust in a will, the beneficiary will not lose access to government services or benefits. Because the beneficiary of a discretionary trust has no right to demand any of the income or capital of the trust, the beneficiary cannot be considered to own any of the trust property or to be entitled to any of the trust income. Only the amounts actually distributed out of the trust would be included in determining the beneficiary’s income and entitlement to government services and benefits.
Money can be spent by a trustee on certain things without affecting the beneficiary’s monthly disability benefits:
- Medical aids or supplies,
- Education or training,
- Home renovations required to make the residence more accessible for the beneficiary, or
- Home maintenance and repairs.
If proper estate planning has not occurred or the disabled person receives a lump sum payment, such as from an accident settlement, a non-discretionary trust can be set up. A non-discretionary trust is a trust where the beneficiary has control over the trust spending decisions. Up to $200,000 can be put into a non-discretionary trust without affecting disability benefits. The Ministry of Social Development and Social Innovation may allow more in some circumstances.