Trusts are an estate planning tool that can be used for many purposes, including centralizing the management of assets, protecting assets from third parties, arranging for the care of vulnerable family members in the event of the caregiver’s death or incapacity, reducing income tax liabilities, and delaying or avoiding probate to name a few.
Trusts require initial legal costs, ongoing accounting costs for additional income tax filings and advice, and ongoing trustee fees. At Sabey Rule LLP, our Kelowna lawyers will review different trust options with you and will discuss whether a trust is the best option for your situation and when the best time is to develop a trust.
Trusts are often associated with the mega-wealthy, however in actuality they are used by people in many income brackets and many walks of life.
There are several terms that are often heard when discussing trusts:
Settlor = The person setting up the trust.
Trustees = People who run the trust. Trustees legally become the “owners” of the trust and control its assets and have an equitable obligation to handle property for the beneficiaries.
Beneficiaries = the ones who receive income, capital, or both, from the trust.
Every trust is either a living trust or a testamentary trust:
- Living trusts or Inter-Vivos trusts are set up and used by beneficiaries during the settlor’s lifetime. They make assets more easily transferable. Most importantly, they help the settlor avoid the delay and expense of probate.
- Testamentary trusts are planned for use with assets from the settlor’s estate. They’re particularly useful for blended families or beneficiaries with disabilities. Testamentary trusts are generally created on, and as a result of the death of someone, the terms of which are established by the will or by court order.
There are many different types of trusts, however some of the most common that may be useful in an estate plan include:
- Family trusts – These are useful to have when there is a desire to split your income and save on taxes, or in preparation for the sale of your business.
- Spousal trusts – A testamentary spousal trust is established for the benefit of the surviving spouse or common- law partner and the next generation, essentially allowing estate taxes to be delayed until the second spouse’s death.
- Alter-ego and joint partner trusts – In alter ego trusts, the settlor is only entitled to receive the income during his/her lifetime. If the settlor makes his/her spouse or common-law partner the beneficiary, then it is a joint partner trust. These trusts are very popular for the distribution of assets outside of estates, reducing tax.
- Discretionary Trusts – The trustee has absolute authority over distributing capital and income from this type of trust. They are useful tools to provide for disabled children, for children with creditor issues, or for adult children with addictions.