Introduction to Trusts

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Trusts can be very powerful financial planning tools. They can, however, become complicated. In this article, we briefly introduce the concept of a Trust.

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A trust is a legal arrangement that allows individuals (settlor or grantor) to transfer assets to a trustee to hold and manage for the ultimate benefit of a beneficiary. In this arrangement, the trustee holds the legal title over the asset whereas the beneficiary enjoys the asset with an equitable title.

Depending on the type of trust, a trust can have the following benefits:

• Some assets within the trust may be able to bypass probate;
• Trust assets may be protected from creditors, lawsuits, and other claims;
• The trust may offer tax advantages such as income splitting among beneficiaries and tax savings; and
• Settlors can make specific instructions for how trust assets are distributed, tailored to their beneficiaries’ unique needs.  

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All trusts can be set up either of two ways: (1) while the Settlor is living (Inter Vivos Trust), or (2) through a Settlor’s Will (Testamentary Trust).

There are three certainties required for a trust:

1. The settlor must have intentions for creating the trust;
2. Assets must be transferred to the trust; and
3. Beneficiaries of the trust must exist.

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KEY COMPONENTS OF TRUSTS

SETTLOR/GRANTOR

The individual who transfers assets into the trust, and is the original owner of the assets within the trust. The settlor chooses the trustee(s), the terms of the trust, and which assets will be distributed by the trust.

TRUSTEE

The individual who is responsible for managing and distributing the asset(s) for the benefit of the beneficiaries. Once the trust comes into effect, the trustee has full control over the assets, a duty to administer the trust according to the trust agreement and common law, and manage the assets solely for the benefit of the beneficiaries.

BENEFICIARIES

The recipient(s) of benefits from the trust with equitable title.

TRUST CORPUS

The assets and property that can be held in a trust, such as real estate, investments, bank accounts, business interests, personal belongings, and other valuable assets.

TRUST DOCUMENT

With the help of an estate planning lawyer, the settlor/grantor will create a trust document, also referred to as a trust agreement or trust deed. This is a legal instrument that outlines the terms and conditions of the trust, the powers and duties of the trustee, the rights of the beneficiaries, the purpose of the trust, and the rules for managing and distributing the trust corpus.

TRUST PURPOSE / SETTLOR’S INTENT

The settlor’s intent or intent for creating the trust may include providing financial support for beneficiaries, managing assets for minors or individuals with disabilities, charitable purposes, tax planning, asset protection and more.

TYPE OF TRUST

The type of trust that an individual establishes usually depends on the settlor’s intent. Learn more about types of trusts here!

REVOCABILITY

A trust may be revocable and amendable during a settlor’s lifetime or be irrevocable and barred from modification. The revocability and ability to modify a trust is primarily determined by the terms agreed upon in the trust document as well as applicable trust laws and legal principles.

TAXATION

In Ontario, trusts are considered tax-payers and must pay tax on any taxable income that is not distributed to the trust’s beneficiaries. Trusts can be taxed differently depending on which type of trust is being taxed.

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It is important to consult a tax professional and/or an estate planning lawyer to ensure that you are complying with legal and tax requirements when setting up and managing a trust.

The lawyers at Sweatman Law have decades of experience creating and advising on matters relating to trusts. Click here to get in touch with us today!

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DISCLAIMER: This blog post should not be interpreted as legal advice for your specific situation, concerns, or challenges. All trusts are unique and should be reviewed by legal, financial, and tax professionals. Trusts are very complicated: this article should not be interpreted as a comprehensive legal guide to understanding and creating trusts. Please be advised that the information on this website relates to laws specific to Ontario or Canadian federal law; legal advice, procedure, and legislature may vary in different jurisdictions.