Types of Trusts

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Trusts can be very powerful estate planning tools. They are, however, incredibly complicated. In this article, we briefly introduce different types of trusts and their purposes.

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Generally, a trust is a legal arrangement to allow 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 will hold the legal title over the asset whereas the beneficiary will enjoy the asset with an equitable title.

All trusts can be set up either of two ways:

1. Inter Vivos Trust: During the Settlor’s lifetime; or
2. Testamentary Trust: Through a Settlor’s Will that will come into effect after death.

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TYPES OF TRUSTS

The type of trust that an individual establishes usually depends on the settlor’s intent. Let’s review the different types.

INTER VIVOS TRUST (LIVING TRUST)

These trusts come into effect once the trust agreement is signed and the trust is created. These trusts may continue operating after the settlor dies, or the trust agreement may direct the trustee to collapse the trust upon the settlor’s death and distribute the assets directly to the beneficiaries.

These trusts may be revocable, allowing the settlor to retrieve some or all of the trust assets.

Although disadvantageous in that aspect, the permanent legal change of ownership through the creation of the trust can enable the settlor to bypass estate administration tax on trust assets and create privacy of disclosure.

The terms of an inter vivos trust also remain confidential unlike a Will when it is probated.

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TESTAMENTARY TRUSTS

A testamentary trust is created through a settlor’s Will, coming into effect upon the testator’s death. These trusts are funded out of the deceased settlor’s estate according to the provisions in the Will. The trusts can enable a settlor to protect their dependants and loved ones, and family property and assets upon death from divorce proceedings, mismanagement, or creditors.

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DISCRETIONARY TRUSTS

A discretionary trust is a type of trust where the trustee has full discretion or authority over how the trust will be distributed among the beneficiaries, based on the terms of the trust document or implied by law. This type of trust can be set up through an Inter Vivos trust agreement or upon death as a Testamentary Trust through a Will.

HENSON TRUSTS

These are fully discretionary trusts that are used to plan for the vulnerable or disabled. These trusts are a vital component of estate planning for individuals with disabilities. Structured properly, these trusts enable beneficiaries with a disability to sustain their eligibility for government benefits (e.g., the ODSP) as well as benefit from their inheritance.

FIXED TRUSTS

These trusts create a fixed entitlement for beneficiaries in specific proportions or shares of the trust assets which are predetermined and cannot be changed by the trustee’s discretion, with possible exceptions in the terms of the trust agreement. This trust creates an enforceable vested interest in the trust for the beneficiaries, in which they have an immediate right to access their allocated share of trust assets.

ALTER EGO TRUSTS

Permitted under the Ontario Income Tax Act, these trusts enable adults (65 years or older) to create a legal arrangement in which they are the settlor, trustee, and beneficiary as long as they are alive. The settlor, in creating the trust, transfers their personal ownership of the trust property onto the trust and manage the trust property for their own benefit. The settlor may choose who will benefit from the trust after passing, and the trust assets do not fall into the deceased’s personal estate, bypassing probate.

JOINT PARTNER TRUSTS

Similarly, Joint Partner trusts enable one or both partners to manage trust property for their benefit without retaining personal ownership of trust property, up until both partners have passed. The settlor’s partner must be at least 65 years old.

BARE TRUSTS

This trust is created to separate legal ownership from beneficial ownership. Upon creation of the trust, the trustee holds legal title of the trust property but their control over trust property is dictated by the discretion of the beneficiary. In this way, the owner of the trust property can maintain control over the trust property as the beneficiary but relinquish their legal ownership.

IMPLIED TRUSTS

These trusts are imposed by a court to achieve fairness or give effect to the parties’ intentions when no formal trust is established. An implied trust is created without a clear statement of trust by a settlor and rather from an intention presumed or imposed by the courts in certain circumstances. There are two main types of implied trusts: Resulting and Constructive Trusts.

RESULTING TRUSTS

This trust occurs when the court presumes a trust was intended, such as when an individual holds property or financial assets in the name of or for the benefit of another. If the individual in this case holding the assets for another is not a relative to the purchaser, the holder of the assets is deemed to be a trustee.

CONSTRUCTIVE TRUSTS

This trust is imposed by the court as an equity-based remedy for “unjust enrichment” or to prevent someone from retaining property or benefits acquired through unfair or wrongful conduct. These trusts are created by the court to achieve equity and fairness, rather than made in consideration of parties’ intentions like a resulting trust.

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The lawyers at Sweatman Law have decades of experience dealing with all kinds of trusts. Contact us here to get in touch today!

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DISCLAIMER: This blog post should not be interpreted as legal advice for your specific situation, concerns, or challenges. All trust plans are unique and should be reviewed by legal, financial, and health professionals, and tax accountants. 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.