If you were to imagine someone establishing a trust, you may picture an individual leaving their hilltop mansion and being driven by their chauffeur to stately law offices visited only by the rich and famous. In reality, a trust can be used by just about anyone to meet a variety of estate planning needs. One of the most common uses is controlling how an heir or heirs will receive their inheritance.
The person who establishes the trust is the settlor. The settlor appoints someone to manage the trust, called the trustee. This could be a friend, family member, professional or trust company. The beneficiary is the person who will ultimately receive income or capital according to the terms of the trust.
There are two basic types of trusts. An inter vivos trust, or living trust, takes effect during the settlor’s lifetime. A testamentary trust comes into effect upon the settlor’s passing. The following applications all use a testamentary trust.
BENEFICIARIES LACKING FINANCIAL EXPERTISE
It’s an uneasy feeling to leave a large lump sum of hard-earned money in a will to someone you suspect will spend it quickly and unwisely. A trust allows you to give explicit instructions to the trustee to control the inheritance, including the distribution amounts and frequency.
A beneficiary may be trustworthy but require guidance in managing investments. By choosing a trustee with investment acumen, you can feel comfortable knowing the inheritance will be properly managed to meet income and growth needs.
PARENT IN A SECOND MARRIAGE
If someone is in a second marriage and has children from their first marriage, estate planning can be a little different. Say the individual wants to provide for their current spouse but also wishes to leave an inheritance for the children from their first marriage. Several solutions are available, and one uses a spousal trust. The spouse would receive income from the trust, and possibly some capital, during their lifetime. When the spouse passes away, the trust assets would go to the children.
CARING FOR A CHILD WITH SPECIAL NEEDS
Establishing a trust for a minor or adult child with special needs can help you be confident they’ll always be cared for in the best manner. A tax professional can advise you on how a trust can be set up without affecting government benefits.
A TRUST FOR MINORS
If you have beneficiaries who haven’t reached the age of majority, you can direct their inheritance to a trust. The trustee can manage the funds until each beneficiary reaches the age that you determine. At that point, a beneficiary can either receive a lump sum or periodic distributions according to the terms you establish.
FULFILL YOUR PERSONAL PREFERENCE
Trusts can be flexible. The terms and conditions you put in a trust are almost limitless and may primarily reflect your personal wishes. For example, a beneficiary may be financially reliable, but you might have their inheritance distributed periodically because you don’t want to chance a lump sum inheritance disrupting their work ethic. Or perhaps a settlor will make college or university graduation a condition of receiving their inheritance. A trust gives you the ability to help ensure the inheritance enhances a beneficiary’s life, rather than drastically changing it.
If you would like more information about trusts, contact us or talk with your lawyer or tax professional.
NEW REPORTING RULES
According to the Canada Revenue Agency (CRA), Budget 2018 proposes that trusts are required to report additional information beginning with the 2021 tax year, and more trusts must file a tax return.
Previously, trusts that didn’t earn income or distribute income or capital to beneficiaries didn’t have to file a tax return. With the changes, however, most trusts must file a T3 trust income tax return – even if they had no tax owing or activity during the tax year.
Also completely new, most trusts must now submit an information return that includes the name, address, date of birth, jurisdiction of residence and tax identification number of the settlors, trustees, beneficiaries and those who are able to influence certain trustee decisions. Some trusts are exempt from the new reporting rules, including qualified disability trusts.
Please note: At the time of publication, the CRA outlined the new rules online, but these amendments had not yet been passed into law. For up-to-date information, go to canada.ca and search “Reporting requirements for trusts.”