A Trust is a special type of legal relationship, often evidenced in writing, that permits a responsible person (the “trustee”) to hold property on behalf of one or more other people (the “beneficiaries”). Trusts are often created or “settled” by a person (the “settlor”) through the creation of a trust document during that person’s lifetime (an “Inter Vivos Trust”) or through a will with specific terms intended to apply upon the will-maker’s death (a “Testamentary Trust”). Inter Vivos and Testamentary Trusts are used as a means of controlling the management and distribution of property and are a tool to minimize tax, minimize disputes among family members, and limit access to funds for certain beneficiaries by establishing a means of control. These particular varieties of trusts are considered separate entities and as a result are required to file their own annual income tax returns. In other cases, a trust can be used more simply to express a beneficial split in ownership and no separate tax returns are required (this being a “Bare Trust”). Trusts can also be established through the operation of law (called “Constructive Trusts”).
Let’s look in more detail at some of the varieties of trusts used in estate planning.
Alter Ego Trusts
An Alter Ego Trust is generally established by a person who is over the age of 65. The settlor creates the Trust and names him or herself as the trustee and sole beneficiary during his/her lifetime. The benefit of an Alter Ego Trust is that the settlor’s assets can be transferred into the trust on an income tax-deferred basis. When the settlor dies, the assets will be divided according to the trust terms without triggering government probate fees that otherwise would apply if those assets were not in a trust and flowed through the settlor’s estate. The Alter Ego Trust also provides some protection for assets held in the trust from a person making a will variation claim under the Wills, Estates and Succession Act, which is when a child or spouse argues in court they were improperly provided for under the deceased’s will and accordingly the court should award them a larger portion of the estate.
Joint Spousal Trusts
A Joint Spousal Trust is similar in many ways to the Alter Ego Trust, except it is used for spouses instead of individuals. The spouses generally settle the Trust if they are over the age of 65 to allow the assets to be rolled into the Trust on a tax deferred basis. The spouses will be the are named trustees and beneficiaries of the trust during their lifetime. Once the survivor of the two dies, the assets are divided according to the trust terms. The benefits of a Joint Spousal Trust are mostly the same as those of an Alter Ego Trust.
Family Trusts are typically used where there is a family business run by spouses who have children (or who anticipate having children). A Family Trust will be settled with the trust subsequently taking shares in the family company. The parents will usually act as trustees to maintain control, then the company will transfer its profits to the trust where they can be divided by the trustees between the beneficiaries (who often include the family’s children) as an income tax splitting tool. When the parents are ready to retire, the children can be appointed as the new trustees to take control of the Family Trust and the company.
A Disability Trust usually is settled for one of two reasons: (1) to establish a means of providing for a disabled child after the parents die; or (2) to transfer the disabled person’s assets into a trust with specific trust restrictions to allow the disabled person to meet the requirements necessary to obtain government disability benefits.
There are two aspects to owning property (real estate or otherwise) (1) legal ownership (who is named as the owner); and (2) beneficial ownership (who receives the financial benefits and burdens of the property). A Bare Trust is often settled to give beneficial ownership to a property to a person whose legal ownership of a property does not accurately reflect that person’s beneficial ownership. They are used regularly in real estate transactions where it is necessary to give one owner a larger legal share of the property than the other. In this circumstance, the property owner with the larger share of legal ownership may declare they hold in trust a portion of the subject property for the benefit of the other person with the smaller share of legal ownership for the purpose of balancing the financial benefits and burdens of the property.
Bare Trusts are also used where a parent has added a child as a joint owner on title to a real property for estate planning reasons. The child in that case declares that despite being registered as one of the owners, she is holding her share in trust for the benefit of her parent, which will avoid the unfair assessment against her of capital gains tax if the parent sells the property in circumstances where the child has not been using it as her principal residence.