You know about trusts; they’re often referred to as family trusts, private trusts or corporate trusts.
And you’ve probably also heard of offshore trusts or international trusts. Generally there’s a mystique about trusts, and a lot of unnecessary confusion about what they are, and when they should be used.
Many people think trusts are just for the rich, for instance, or for people with complex financial and investment affairs. But this is not the case.
Trusts are a common way of dealing with a range of personal choice, family or business options. And after you have some additional insights into trusts and their uses, your clients will realize one or a number of trust options could meet their financial, estate and tax-planning needs.
Basically, a trust is a legal structure whereby a trustee deals with property or assets (such as cash, stocks, or bonds) over which the trustee has control, for the benefit of persons called beneficiaries. In some cases, the trustee could also be one of the beneficiaries. Although the trustee has legal title to the trust property, beneficial ownership rests with the beneficiaries.
There are two main types of trusts: living trusts and testamentary trusts. A living trust (also referred to as an inter-vivos trust) is established while an individual is alive, and comes into effect once the trust agreement is signed and the trust is funded. A testamentary trust is created under the terms of a person’s will and is therefore activated on the person’s death. It is funded from the proceeds of the deceased’s estate. These trusts serve different purposes and objectives and can have different tax implications.
Here is an overview of how trusts can be used.
There are a number of creative ways that you can use a living trust. For example:
In this situation, you could have some of the shares in a company owned by a spouse held in the name of a family trust. Say the shares are non-voting. This family trust could be comprised of the other spouse and the children. If it is structured in the right way, the monies going to the trust by means of dividends could then be distributed through dividends to each of the members of the trust. If the members of the trust were not receiving any other income, they could each take out $23,756 of dividend income each year, tax-free. If the family members were minors, the attribution rule would not apply, if the trust was formed properly. That is, the normal Revenue Canada policy of attributing income for a minor to the parents for tax purposes would not be applicable.
If you own a company or have other assets that have shown a consistent pattern of growth over a period of time, and you anticipate that the growth will continue, an estate freeze using a corporation set up for that purpose, along with a living trust agreement, could be an effective strategy to consider. The practical effect of this technique is to freeze the value of the assets in your name as of the effective date of the agreement. All future capital gains will accrue to the benefit of your beneficiaries.
Providing for family members with special needs If you have family members who are not able to handle their own affairs (due to mental or physical incapacity, for example), a living trust could be established to provide for their financial needs. On the recipient’s death, the rest of the funds in the trust could be left for some other party, such as a charity.