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Trust Me: As a Financial Planning Tool, Trusts are Easier than You Think

Trust Me: As a Financial Planning Tool, Trusts are Easier than You Think

Once upon a time, as a financial planning tool, the word “trust” seemed to be reserved for snooty socialites and the ultra-wealthy. Those days are no longer. If you have assets and you’re looking for the best way to pass them on to your beneficiaries, you may want to consider a trust.

In its simplest sense, a trust is a legal relationship where money is kept in an account and administered by a trustee. The person opening the trust (the “settlor”) can dictate exactly when and how the money can be used, and the trustee’s job is to ensure those directions are followed. Trusts can be created when you are alive (an inter vivos trust), following your death (a testamentary trust), or a beneficiary designation for a RRSP, TFSA, or life insurance policy.

Here are the key elements:

A trust is a legally recognized relationship

A trust is a legally recognized relationship between someone who puts money into it (the “settlor”), someone who manages it (the “trustee”), and someone who benefits from it (the “beneficiary”). The terms of the trusts can vary, as they depend on your individual circumstances and your key planning objectives.

The Trust is Legally Documented

The trust is legally documented, containing specifics including:

– the property going into the trust

– who the initial trustee and successor trustee are, and their authority

– who the initial beneficiaries and successor beneficiaries are, and exactly how they are going to benefit

– how the trust comes to an end

The trustee has a fiduciary duty to comply with the objects and terms of the trust. This duty is among the highest legal duties which one person can have to another under the law, including the duty to act in good faith, to avoid conflicts of interest, and to refrain from any conduct that would breach such duties. Trustees can be held personally liable for any loss or damage suffered by the trust due to a breach of these duties.

A trust cannot be created specifically to avoid or protect property from creditors because that would arguably be fraudulent. However, a trust set up for a legitimate financial planning purpose can be a way to protect assets from creditors.

The trust deed created during the lifetime of a Settlor is a secret document and is not available for viewing by the public. Trusts created in a Will may become public knowledge if a probate order is required, but probate is not always required and a trust can be used to avoid the probate process. Trusts created through the beneficiary designation for an RRSP, TFSA, or Life Insurance Policy usually remain private as well.

As with any financial planning or estate planning you wish to do, the costs associated with creating and administering a trust must be balanced against its benefits. However, depending on your planning goals, sometimes a trust might be the best way to achieve your objectives.

If you think a trust might be for you, talk to a lawyer. He or she can provide valuable advice to help identify your goals and avoid adverse income tax consequences or legal difficulties during your planning process.