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Set up an express trust

Set up an express trust

What is an express trust?

Express trusts are set up through a legal act that creates a separate estate to which all or part of the trustor’s assets are transferred. The property is administered by one or more trustees to specific ends on behalf of one or more beneficiaries.

From a tax standpoint, express trusts are considered a taxpayer and must produce its own separate tax return.

Express trusts can therefore be set up to be managed by a trustee on behalf of your designated beneficiaries.

There are two types of express trusts:

1- Testamentary trust

In Ontario, any estate (testamentary or other) is automatically a trust. However, you can create one or more express trusts, referred to here as testamentary trusts.

Testamentary trusts are stipulated in the will and are created upon the testator’s (the person making the will) death. In accordance with your will, property is turned over to a trustee who manages it according to your instructions in the best interest of the beneficiaries. A trust company is the only legal entity authorized to do this.

You determine the duration and terms of the testamentary trust.

Why a testamentary trust?

Setting up a testamentary trust for cash and assets (stocks, mutual fund shares, property) can help defer and reduce estate taxes while protecting your estate.

From a tax standpoint, assets left in trust constitute an estate separate from the estate of the beneficiaries.

There are also other reasons to set up a testamentary trust:

  • To protect assets from seizure by your heirs’ creditors.
  • To manage the assets of minor beneficiaries and avoid the intervention of the guardians and public trustees.
  • To release trust income or assets to children gradually over time to minor children, young adults or beneficiaries who have difficulty administrating their assets in a reasonable manner.
  • To meet the needs of family members with a disability.
  • To preserve and transfer important family assets from generation to generation by allowing beneficiaries to inherit the use of the property rather than the property itself.
  • To allow children from a prior marriage to inherit your estate upon the death of your spouse, subject to the rights of the surviving spouse.

2- Living or intervivos trust

This type of trust goes into effect while the trustor (the person who sets it up) is still alive and may remain in effect after he or she dies.

Maximum tax rates and Income Tax Act attribution rules apply. When it follows an estate freeze, living trusts allow income taxes on stock gains to be deferred.

Why a living trust?

In the case of privately-held companies, living trusts can be used to:

  • Hold company shares during an estate freeze.
  • Finance a buy/sell agreement when a shareholder dies.
  • Turn over company shares to designated beneficiaries in case no one is found to take over the business.

They can also be used to:

  • Maintain control over assets when a business owner is not yet ready to turn over control of the business to a major child.
  • Protect assets from being seized by an heir’s creditors.

 

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