The use of a trust in any estate plan can be a helpful tool. Clients ask about trusts, what they are, how they are created, and how they can be used to achieve estate planning objectives.

What is a Trust?

A trust is a legal relationship between a person (the “Settlor”) who transfers property to someone else (the “Trustee”) to manage the property for another person (the “Beneficiary”). There are three certainties which must be met to establish a trust:

• Certainty of Intention – clear intention of settlor to “settle” the trust;
• Certainty of Subject Matter – trust property must be certain; and
• Certainty of Object – beneficiaries must be certain.

If any of the certainties are missing, a trust will not be created. Settlor incapacity, unclear terms about who is a beneficiary, or failure to identify trust property are examples where a trust may not be created.

Types of Trusts

An “inter vivos”trust is created when the settlor is alive and involves a trust instrument to create the trust. A “testamentary”trust is created on the death of the testator, pursuant to the terms of the deceased’s Will. Trusts can also be “discretionary” or “non-discretionary” giving more or less discretion to the Trustee as to how the trust property is managed.

Common Uses

While not exhaustive, some common uses of trusts are:

• Manage assets for minors or dependent (i.e. disabled) beneficiaries;
• Control distribution of assets to an “irresponsible” or “unsophisticated” beneficiary;
• Hold business or corporate assets to manage income and capital distributions and achieve tax savings (including multiplication of lifetime capital gains exemption);
• Provide support to spouse while protecting assets for children of the settlor/testator; and
• Provide privacy or avoidance of probate disclosure and fees.

Taxation of Trusts

Generally, transfer of property to a trust will trigger a disposition for tax purposes¹. Trusts must report annual trust filings in a T3 trust return. Trusts are taxable at the highest marginal rate, unless they qualify as a Graduated Rate Estate (“GRE”)². Many trusts are deemed to dispose of property every 21 years, subject to exceptions.³ Trust residency issues must be considered, including avoidance of appointing non-resident trustees.

Despite these complexities, certain tax benefits can be achieved. These include income distributions to beneficiaries (including those in a lower income bracket), using a trust in an estate freeze to enable deferral of capital gains tax on corporate shares, or the multiplication of the lifetime capital gains exemption (“LCGE”) on a disposition of shares.

Proper planning should be conducted including reviewing varied tax considerations in setting up a trust.

Conclusion

There are many considerations in setting up a trust, including settling a trust during your lifetime or in your Will. Legal and accounting advice should be consulted throughout the process to best reflect your wishes and protect your assets.

For more information, please contact Eric Dalke at edalke@walshlaw.ca / 403-267-8454 or any member of our Walsh Tax & Estates team and we would be happy to answer your questions.

Note: This article is of a general nature only. Tax laws may change over time and should be interpreted only in the context of particular circumstances. These materials are not intended to be relied upon or taken as legal advice or opinion.

1 Exceptions to this rule exist including transfers to alter ego or spousal trusts.

2 Subsection 122(1), Income Tax Act, RSC 1985, c 1 (5th Supp) (“ITA”).

3 Exceptions to this rule include spousal trusts or alter ego trusts; deemed disposition of property can also be managed through a tax-deferred transfer to beneficiaries under subsection 107(2), ITA.