In the dynamic and intricate world of high-net-worth family-owned enterprises, the importance of precise and…
An Express Trust is set up with a legal act with the intent of a trustee to manage trust property on behalf of beneficiaries. This has proved to be an effective transfer and store of wealth as well as a tax planning tool. A properly planned express trust can take a multitude of forms with specific outcomes in mind. These are a few of the trusts we can assist with.
A Life Interest Trust allows the beneficiary interest in property during their lifetime, including any income generated from the property. Once the beneficiary passes, the property may then go to another beneficiary as determined in the trust deed.
A Trust with other Time Limited Interests will allow the beneficiary interest in property to a specified age or specified date or to be in line with the remoteness of vesting period (deemed disposition for tax, usually 21 years). The property can then be given to the beneficiary in whole or to another beneficiary after the specified time period.
A Discretionary Trusts provided the trustee with discretion on which beneficiaries receive capital or income and the amounts each beneficiary receives. This type of trust is useful for creditor protection. There may also be constraints on this discretion (ie. for education only). Discretion can be controlled as follows:
- Consultation with settlor (note this will result in attribution per subsection 75(2) of the Act)
- A letter of wishes, and
- Appointment of a protector.
A Trusts with Contingent Interests allows income or capital distribution to a beneficiary which is contingent on some future event that is necessary (ie. reaching a certain age). Care must be taken on the contingent interest occurring within the perpetuity rule against remoteness of vesting (usually 21 years).
Trusts for Spendthrift Beneficiaries are used to protect the trust from creditors of the beneficiary who may call for the capital. Supported by the ruling in Saunders v. Vautier, the spendthrift trust can be made in favour of the (spendthrift) beneficiary until the beneficiary attempts to assign the interest or becomes insolvent or bankrupt after which the property is then held in a discretionary trust, in favour of the beneficiary and other family members.
It is also common to have Trusts for Disabled persons. Provinces base disability benefits on assets of individuals. The value of those assets may include beneficial interests of trusts in determining if those individuals will qualify for disability benefits. To mitigate this, trustees are given absolute discretion, and the disabled person has no right to demand payment and therefore no vested interest until they are actually paid out. This type of trust is also known as a Henson Trusts.
Testamentary Trusts take effect on death. This type of trust typically creates a life interest for a spouse (with power to encroach on capital) and gives capital interests, usually in equal portions, to the children.
Secret Trusts allow the testator to bequeath property to “X”. In this situation, before the testator dies, the testator gives instructions to “X” that he is to hold the property in trust according to terms specific by the testator. This bequeath is fully secret since the will gives no indication that “X “is holding the property in trust. Similarly, in a Semi Secret Trust, the will indicates the property is bequeathed to “X in trust”, however gives no details of the beneficiary or the trust instrument.
Insurance Trusts can be used to result in the proceeds not forming part of the deceased’s estate on death. This trust can be used to make a confidential disposition on death, since insurance proceeds will be held in trust under a trust instrument that is not publicly disclosed. This also provides a degree of creditor protection.
Spousal Trusts allow a transfer of property in the lifetime of the couple or on death of once of them without resulting in a deemed disposition. The property is rolled over at settlors’ cost and into the trust. The spousal trust is also exempt from the 21 year rule while the spouse is alive. There are rules that must be considered for spousal trusts.
- Inter vivos (in the lifetime) spousal trust:
- Settlor and trustee must be resident of Canada a the time trust constituted
- Trust created by transferor
- Settlor or spouse entitled to receive all of the income of the trust, and
- No person other than the spouse may receive use of any income or capital from the trust during the spouse’s lifetime
- Testamentary (on death) spousal trust:
- Testator must be resident in Canada immediately before death
- Property transferred to the trust as a consequence of the testator’s death,
- Property must vest indefeasibly in the trust within 36 months of death,
- Testator’s spouse entitled to all the income, and
- No person other than the spouse before their death may receive or obtain use of the income or capital of the trust.
- Trust is taxed at the highest marginal rate. Income distributed from the trust is deduced from the trust’s income. Income received by the beneficiary is taxed at their marginal rate. Beneficial to allocate all of the income to the beneficiary. Also consider using up capital loss carry forwards and lifetime capital gains exemption on roll over election price.
- Settlors (or person contributing property) must be over age 65,
- Only Settlors must be entitled to all income or capital from the trust until death
Alter Ego Trusts can be used as a means to avoid probate fees. This is an inter vevos trust that gives the settlor a life interest in the property, leaving the remainder interest to be dealt with as the settlor would have in a will. The property rolls over at the settlor’s cost and has no 21 year rule. There is a deemed disposition on death of settlor and then every 21 years thereafter. In an alter ego trust, the settlor must be over age 65 and only the settlor is entitled to income or capital from the trust until the settlor’s death.
Some other ideas for Trusts are as follows:
- Trusts used in estate freezes – Usually used to freeze the value of assets of parents in high tax brackets and have future appreciation in value accrue to persons in lower tax brackets while deferring capital gains tax. The trust allows for creditor protection and protection against marital breakups.
- Charitable remainder trusts – Life interest for settlor and/or others with a remainder interest in favour of a registered charity or qualified done. Takes advantage of a tax credit for charitable donation at present value of the remainder interest. Trust must be irrevocable and no power of trustee to encroach on capital in benefit of the life beneficiary.
- Education trusts – Set up for the education of the settlors’ children, grandchildren or other relatives.
- Pour-over trusts – A will that will add to a pre-exiting trust. Accepted if the trust cannot be revoked or amended by the testator.
- Charitable purpose trusts – Not for named persons or recognized classes, but for recognized charitable purposes such as relief of poverty, advancement of education, advancement of religion and other purposes beneficial to the community.
- Asset protection trusts – Created to protect a person’s assets from creditors. Cannot avoid creditors by simply transferring assets to another person to hold in trust for you. If you have equitable interest, creditors could seize that. Perhaps set up so equitable interest is lost on bankruptcy or insolvency, or have more than one beneficiary in a discretionary trust. May also get unwound if created for the purpose of delaying or hindering creditors. May also consider offshore asset protection trusts in said jurisdiction.
- Shareholder voting trusts – To gain more voting rights, shareholders join together and settle their shares on a trustee by assigning the shares to the trustee. Can also be achieved via a shareholder voting agreement.
- Debenture trusts – Debenture is a document that provides evidence of indebtedness. Costs to enforce is high. To address this, a trustee is appointed to enforce the terms of the debenture on behalf of the holders and the costs are shared.
- Trust buy out interest of deceased business associate – entitlement to buy out interest of business partner from their estate. Payment arraigned via life insurance, the proceeds of which go to a trustee with the object of buying the deceased partners interest.
- Business trust – An alternative to incorporation or partnership, where beneficiaries are the investors that have trust units issued to them.
- Liquidation trusts – Trustee appointed to liquidate the assets of a business on behalf of creditors. Owners of the business settle the assets in trust for the benefit of creditors.
- Pension trusts – to provide pensions for retired employees. Funds paid to trust company – the trust company administers the trust and appoints an investment manager.
- Asset securitization trusts – taking assets that pay regular flow of income, such as amounts due on loans, transferring them to a trust and selling units in the trust to give unit holders regular flow of income.
- Environmental reclamation trusts – funds from businesses exploiting resources put in trust for reclamation.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2022 Shajani LLP.
Shajani LLP is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.