There is often talk about the use of a trust as part of a financial or estate plan. There are many different types of trusts commonly used in Canada each of which has a different purpose. There are a few common threads between them. Let’s start with the basics.

A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. 

Trusts are created by settlors (an individual along with his or her lawyer) who decide how to transfer parts or all of their assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depend on the terms on which it was built. In some areas, it is possible for older beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime beneficiary and a trustee at the same time.

For high net worth families, a trust can be used to determine how a person’s wealth should be managed and distributed while that person is alive, or after their death. It is also one way to provide for a beneficiary who is underage or has a mental disability that may impair his ability to manage finances. A trust also helps avoid taxes and probate, and can protect assets from creditors. The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked.

One of the most common uses of a trust is a family trust. This is a formal trust in which a family has after-tax personal wealth they wish to transfer to their minor children for their benefit. The trust is established with the help of professionals (accountant and lawyer) for the purpose of transferring assets and the income they generate to minor children. If structured properly these trusts can be used for the purpose of funding expenses the family would pay on behalf of the children (school, camp, clothes, etc.) and the income will be taxed at the beneficiaries marginal tax rate. This can generate significant annual tax savings for the family which is why it is so commonly used.

Are there considerations whether or not a trust is right for a medical physician? or if there are any other questions about the process of setting up a trust? our advisors are here to help! Contact us here today.


About the Author: Alex Powell

CPA CA, Director

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