Estate planning is something that should be considered by everyone who has substantial amount of assets to protect. This ensures that your assets are managed and distributed in a way that you wished it to be after your death. Trusts are powerful tools when it comes to reaping the benefits of estate planning. This blog will delve deep into how trusts can improve your estate plan, and other key benefits that comes along with it in Canada.
What is a Trust?
A ‘trust’ is a legal arrangement where one party, known as the ‘trustee’, holds and manages assets for the benefit of another party, the ‘beneficiary’. The person who creates the trust is called the ‘settlor’. As a settlor, you can do more than simply create and transfer legal ownership; you can provide instructions on how you wish the trust to be managed and invested, as well as how you wish the trust to be distributed in the end. All these specifications will be detailed in the ‘terms and conditions’ section of the trust document or will.
Types of Trusts
There are several types of trusts, each serving different purposes and offering unique benefits.
For tax benefits there are two types of trusts:
Testamentary Trust: As the name suggests, this type of trust is a ‘testament’ of your will and takes effect after your death. The assets that form this trust will be subject to estate fees or taxes, as they are considered part of your estate. It’s important to note that you can change your will at any time before your death.
Living Trust (Inter Vivos Trust): This type of trust is established during the settlor’s lifetime. The property ownership will be passed to your beneficiaries immediately. Over time, additional funds or property can be added to increase its value. Since the trust is created during the settlor’s lifetime, it is excluded from the estate and bypasses the probate process.
Other types of trust include:
Spousal Trust: This type of trust ensures that the settlor’s spouse, i.e. the surviving spouse is cared for and the risk of assets being diverted is eliminated. It is also crucial to note that the ‘settlor’ and the ‘trust’ must reside in Canada for the transfer to take place.
Alter Ego and Joint Partner Trusts: Created during the settlor’s lifetime, these trusts are designed for individuals aged 65 or older. This allows the settlor to retain the right to income from the trust, ensuring that no one else can claim it. It also helps in planning for the future incapacity of the settlor.
Family Trust: This is majorly established by a family, to protect and manage their business interests and investments smoothly. Setting up a family trust can be beneficial for a family as it allows secure transfer of wealth from one generation to next. Other than this there are several income tax benefits that comes with it, which is discussed later in the blog.
Insurance Trust: Funded entirely by life insurance proceeds and established outside of the settlor’s estate, providing benefits such as avoiding probate and protecting assets for minors.
Why are Trusts Important in Estate Planning?
Trusts offer several benefits that make them an essential part of estate planning:
Trusts can protect your assets from creditors, lawsuits, and claims from family members. For instance, an irrevocable trust removes the assets from your estate, shielding them from claims. This protection extends to ensuring that beneficiaries, such as children with special needs, are provided for without jeopardizing their eligibility for government benefits.
- Tax Advantages
Trusts can offer significant tax benefits. By transferring assets into a trust, you can reduce estate taxes and probate fees. For example, an inter vivos trust allows for income splitting among family members, potentially lowering the overall tax burden. Testamentary trusts, on the other hand, benefit from graduated tax rates, providing tax-efficient income distribution to beneficiaries.
- Control Over Asset Distribution
Trusts give you control over how and when your assets are distributed. You can set conditions for distribution, such as age milestones or specific needs. This is particularly useful for ensuring that minor children or beneficiaries who may not be financially savvy receive their inheritance in a controlled manner.
Income Tax Benefits of a Family Trust in Canada
Family trusts can provide significant tax advantages, including:
Income Splitting: By distributing income to family members in lower tax brackets, you can reduce the overall tax burden. This is especially helpful in high-income families, where you can spread income among multiple beneficiaries to benefit from lower tax rates.
Capital Gains Exemption: You can use the trust to take advantage of the lifetime capital gains exemption for multiple beneficiaries, reducing the taxable gains on the sale of appreciated assets.
Tax Deferral: By keeping assets within the trust, you can defer taxes on income and capital gains. This allows you to better control when taxes are paid, potentially deferring them to a more favorable time.
Reduced Estate Taxes: Trusts can help minimize estate taxes by structuring the transfer of assets in a tax-efficient way. This can involve transferring assets to beneficiaries in a manner that reduces the overall tax liability of the estate.
Conclusion
Trusts are a powerful tool in estate planning, offering several benefits, however, they can be complex to set up and manage. Hiring a wills and estate lawyer can help you meet your wills and estate planning needs.
For expert guidance consider consulting with Nanda & Associate Lawyers. Our experienced team can help you create a comprehensive estate plan that protects your assets and provides for your loved ones.
We can provide you with all the services listed above and more. Visit our website to learn about our offerings in detail and book a no obligation consultation call at 905-405-0199 today!
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