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TRUSTS

The World Wide Legal Information Alliance defines a trust as ‘a legal obligation with respect to property given by a person (donor) to another (trustee) to the advantage of a beneficiary’.


Benefits to establishing a trust

Trusts can be used by individuals and families for a variety of reasons. Trusts can be an effective way of protecting assets from creditors, and can be used to provide benefits to any number of beneficiaries, without the beneficiary having any legal title or claims to the assets providing the benefits.

By placing assets in a trust, an individual can benefit from the use of the trust property, or receive an income from the trust property, if the benefits are administered by a trustee who has the discretion to benefit the individual. At the same time, a creditor may be unable to make a claim against the property held by the trust, provided careful planning and drafting of the trust agreement is undertaken. This can be useful where, for example a trust is established to hold the shares of a family corporation for the benefit of the owner’s children, without exposing those shares to matrimonial disputes of the children.

ransferring assets to a trust may give rise to taxes if the assets have appreciated in value since acquired by the transferor. Careful planning may be able to reduce or eliminate these taxes altogether. For example, transfers to trusts benefiting the transferor or his spouse may be transferred to an alter-ego, spousal, or joint partner trust free of tax. Another example is by performing an estate freeze, as outlined above.

Distributions From a Trust

Distributions from a trust become the property of the beneficiary, and can typically be used by the beneficiary to assist with living expenses or to make their own investments. Care must be taken in the administration of a trust to ensure that the income and distributions are properly documented, and that trust funds are not circuited back to the trustee. Distributions from the capital of the trust can typically be made to the beneficiary without adverse tax consequences, since the assets are held ‘in trust’ for the beneficiary.


Types of trusts

Trusts can be ‘testamentary’ (created through a will) or ‘inter-vivos’ (created during a person’s lifetime). In addition to the type of trusts mentioned above, other recognized forms of inter-vivos trusts are:

  • Principal residence trust
  • Alter-ego trust
  • A foundation
  • Self-benefit trust
  • Offshore trusts
  • Disability trusts

A note on Family Trusts

The Canada Revenue Agency has implemented rules which severely curtail the use of family trusts, which have been traditionally been used to split income and ownership of assets. If you have a family trust, it might be time to wind it up – but you should obtain professional advice before taking any action


21 Year Rule

Under Canadian Income Tax laws, all trusts are deemed to dispose of their assets after 21 years. This means that tax will become due on the appreciation of assets held by the trust at that time. Carefully planning for this event can result in minimizing or avoiding taxes entirely. A number of methods can be used, including distribution of the assets to the beneficiaries before 21 years is up, establishing a new qualifying trust, or reducing the value of the assets in the trust.

As you can see, trusts can be very useful. Before establishing a trust, you should consult qualified, experienced professionals. Call van Wensem & Vukets for a unique approach to your situation.

Disclaimer:

The information contained on these pages is for general use only. As it is not possible to include all situations and circumstances in a short information piece, all situations should be reviewed with a qualified professional. While all reasonable efforts have been made to ensure the information provided is accurate, no individual or organization involved in preparation or distribution of this material accepts any responsibility or liability for its content. If you have any questions, please give us a call.

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