Using trusts as an estate planning tool

Trusts are not simply a tool for the wealthy alone, although many wealthy Canadians have used trusts for a variety of reasons.

In this bulletin, we’ll examine how trusts can be used by many Canadians as part of a properly designed estate plan.

Unlike an individual or a corporation, a trust is not a legal entity under common law. Rather, a trust is a relationship with respect to properly establishing the rights and obligations of the following persons:

• The settlor, who is the person transferring property (assets) into the trust;
• The trustee, who is the person holding legal title to the trust assets for the benefit of the beneficiary and manages the assets according to the trust document; and
• The beneficiary, who is the person for whom the trust assets are being held.

There are basically two types of trusts for tax purposes: inter vivos trusts and testamentary trusts.

An inter vivos trust is created while the settlor is alive and must have a December 31 year-end for tax purposes. A testamentary trust, on the other hand, is a trust created within the will of the settlor and which takes effect on the death of the settlor.