Trust is an important topic when it comes to Estate Planning.
However, given there are so many different types of trusts, it can come off as intimidating.
Not to worry – today, Sabrina, Lawyer at Varity Law, will explain the basic structure of trusts and the 3 main benefits of having a trust.
What is a trust?
Trust is a type of legal relationship between the settlor – the person who creates the trust; the beneficiaries – the people who receive funds and assets from the trust; and the trustee – the person who manages the trust.
There are many different types of trusts in Canada, and each has its own purpose, benefits, and disadvantages. In general, trust is a long-term legal relationship that can be used both during the lifetime of the settlor and after he/she passes away as an estate planning tool.
Depending on the type of trust, the settlor, trustee, and beneficiary can be the same person, or they can be different people.
Only formal legal documents are required to create and maintain a trust. To ensure the parties’ privacy, the trust is not registered and does not form part of the settlor’s estate. In essence, only the parties named in the trust, and the professionals who help to create and maintain the trust (e.g. lawyers, accountants) know about its details.
What are the benefits of having a trust?
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Protect Family Assets and Maintain Business Control
At Varity Law, we excel at helping families protect their assets – and trust is a great option for doing so. We will show this through an example – let’s look at Sam’s family.
Sam runs a very successful IT consulting firm. He considered buying some assets, such as real estate, to put under his personal name or company name. However, if there are disputes in his business, such as an unhappy client, or lawsuits directed against him personally, such as a neighbour having a boundary dispute – both his business and personal assets are at risk. Having a trust would offer protection for the assets he has placed into the trust.
A key point is that Sam should set up a trust before things turn sour – meaning, he should not set up a trust to hide assets after a lawsuit has commenced against him. Asset protection trusts are meant to offer protection before bad things happen, not as a way to run away from legitimate creditors.
Sam is also devoted to his family and he have young children. He wants to give some business income to his family members, but he does not want them to be involved in the decision-making of his business. Trust presents another good option – the trust can be a shareholder of his IT consulting company and receive dividends & assets. Then, his family members can be the trust beneficiaries and receive funds from the trust. This way, he is able to distribute income to his family, while at the same time, not giving them any control of his business.
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Avoid Probate and Probate Taxes
Trusts is also an excellent Estate Planning tool.
For our audience who followed our blogs and Youtube Videos, they know we divide estate assets into automatic transfer, meaning assets that do not form part of the estate and can be transferred only with a death certificate, and probate transfer, meaning assets that are part of the estate and must go through probate.
Trusts are a type of estate that is automatically transferred. This is amazing news! Beneficiaries can receive estate assets immediately after the settlor passes away, instead of having to wait for the lengthy probate process to finish. Also, the estate does not need to pay probate taxes for trust assets.
Trusts also help to protect assets. As the trust assets do not form part of the settlor’s estate, they are not liable for seizure by estate creditors – they belong only to the beneficiaries.
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Prevent Beneficiaries from Spending Everything In One Night
Many of our estate clients are worried when they have young beneficiaries. What if after they receive all the estate assets in one lump sum, they decide to splurge it all in a crazy weekend?
Here, trusts offer another solution. The settlor can set up rules and gradual distributions to the beneficiaries. For instance, Sam can state that his young children only get a fixed amount of distributions per year, and/or only for specific purposes such as education. Of course, Sam would have to appoint a secondary trustee to manage the trust after he passes away.
Conclusion
Trusts offer asset protection during one’s lifetime, and remains a great estate planning tool after one pass away. Also, it is a great tax planning tool to avoid probate taxes, and it can prevent beneficiaries from spending all their inheritance in one go.
Keep in mind that trusts should be set up early – it should not be established after lawsuits have commenced as a way of hiding assets, and it needs to be established when the settlor is still of sound and independent mind.
Varity Law is proficient at all aspects of estate planning, including wills, trusts, and probate. If you have questions, please contact us at 905-597-9357 or hello@varitylaw.ca to book a free initial consultation.
