While some wealth is needed to justify the creation of a trust, there are many good reasons why average people should consider including trusts in their planning. A trust can be created when you are alive (an inter vivos trust) or as a result of your death (a testatmentary trust) under a Will, or a beneficiary designation for a RRSP, TFSA, or life insurance policy.
A trust is a legally recognized relationship between the person who puts money into it (the “settlor”), the person who manages it (the “trustee”), and the person who benefits from it (the “beneficiary”). The distribution of your estate under your Will is a trust arrangement.
The trust is documented, outlining who the parties to the trust are and other matter relevant to the trust including: who the initial trustee is; who the successor trustee will be or how a successor trustee should be appointed; who the initial beneficiaries of the trust are; who the successor beneficiaries are; whether a beneficiary can be added or removed; how the beneficiaries are going to benefit; the authority of the trustee over the investment management and distribution of the trust property; how the trust deed can be amended or changed and what parts of the trust should not be changed; how the trust comes to an end; and what happens to the property remaining in the trust when the trust does come to an end.
In certain circumstances like an alter-ego trust, or a joint partner trust, the settlor and trustee and the beneficiaries of the trust can all be the same people. In other situations, like a family trust or a testamentary trust (established by a Will, RRSP, TFSA or Life Insurance beneficiary designation), the settlor is usually a different person from the trustee. The settlor typically cannot be a Beneficiary of a family trust.
The trustee has a fiduciary duty to the beneficiaries to comply with the objects of the trust and terms of the trust deed for the benefit of the beneficiaries. A fiduciary 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 are personally liable for any loss or damage suffered by the trust due to a breach of these duties.
The trustee is entitled to be paid for their services to the trust, in accordance with the compensation arrangement is provide for in the trust deed or if such compensation is not specifically provided for or even restricted or prohibited in the trust deed itself, trustee compensation is set out in sections 88 and 89 of the Trustee Act.
The beneficiaries may be named specifically or be described as a class of persons (e.g. sons, daughters, grandchildren or other defined eligible beneficiaries). There is flexibility in determining who the beneficiaries are; however, care must be taken to ensure that no one is appointed a beneficiary who ought not to have such status. The beneficiaries may be entitled to receive fixed or specifically defined benefits from the trust; however, in most other cases, a beneficiary’s entitlement to the trust is discretionary where the timing and amounts of distributions to the beneficiaries and even the beneficiaries who receive benefits are all determined in the discretion of the trustee.
A trust cannot be created specifically to avoid or protect people involved in the trust from creditors because that would arguably made transferring property to a trust for that reason a fraudulent transfer which can be set aside. A trust set up for a legitimate purpose, such as estate planning, wealth succession, or tax planning, can provide a level of protection for the assets in the trust from creditors.
A discretionary trust is a useful way to benefit a disabled beneficiary in B.C. because property held in a discretionary trust for the benefit of a person receiving disability benefits is not considered to be the beneficiary’s property,and will not interfere with the receipt of future benefits. A discretionary trust usually enables the trustee to structure the distribution of benefits from the trust in a way that allows the trust to improve the lifestyle of a beneficiary while maintaining his or her ability to collect government benefits.
The trust deed created during the lifetime of a Settlor is a secret document. It is not recorded anywhere and is not available for viewing by the beneficiaries or members of the public. Trusts created in a person’s Last Will and Testament however may become public knowledge if a probate order is required to administer a deceased person’s estate. Probate is not always required with respect to the administration of a person’s wealth and using a trust can be a useful to avoid the probate process and costs associated with it. Trusts created through the beneficiary designation for an RRSP, TFSA, or Life Insurance Policy can usually remain private unless there is some litigation involving the trust.
It is important for a trustee to ensure that all Income Tax Act filings and remittances are made in relation to trust distributions are filed and made. Special care is required to address non resident issues such as dealing with a trust located or resident outside Canada, or distributing money from a trust to a beneficiary resident outside Canada.
As with any financial planning or estate planning you wish to do, the costs associated with creating and administering the trust (i.e. filing annual trust tax returns etc.) have to be balanced against its benefits. Sometimes however, depending on your own planning goals, the trust may be the only way to achieve your objectives so the costs associated with it are necessary and must be incurred. It is important to get qualified accounting and legal advice before creating a Trust to help identify your goals, and to avoid adverse income tax consequences or legal difficulties during your planning process.
The information set out in this article reflect generally on this area of law and is not meant to constitute legal advice. The impact of the law on any given situation depends upon each individual’s circumstances and the opinions contained in this article should not be relied on for assessing anyone’s legal position. Advice should be obtained directly from our lawyers regarding your personal situation.