A trust is a relationship which arises when an individual is asked to hold real or personal property by legal title for the benefit of an individual or individuals known as beneficiaries. A trust is therefore an obligation binding a person to deal with the trust property as a separate fund distinct from their own private property for the benefit of persons. A trust brings a set of obligations, and creates a fiduciary responsibilities for the person holding the trust. In many cases, since the titled owner only owns the property for the benefit or use of someone else, they can receive a benefit from this work through a trustee fee, which is generally about 1-5% of the value of the trust property. Trusts serve many purposes as they allow you to divest your property for the use of someone else. This can be useful for tax purposes and shielding assets from creditors.
The person creating the trust by transferring property to the trustee with the intention of creating a trust is referred to as the settlor. The individual holding title of trust property is the trustee. Trustees are responsible for managing the trust property, but have limitations on their duties and responsibilities based on the type of trust. A trust can have a number of trustees, though having too many might not be an efficient choice. A settlor can also be a trustee. The individual for whose benefit the trust was created is called the beneficiary. There can be any number of beneficiaries, and it is possible for the settlor to be a beneficiary as well. The trustee can be a beneficiary as long as they are not the sole beneficiary, since there would be no separation of title or trust relationship in this situation. A trustee has an equitable right to enforce the trust but does not have proprietary rights.
A living trust, also known as an inter-vivos trust is made during the lifetime of the person. One of the benefits of a living trust is that a settlor can choose their trustee while still maintaining control and management of their assets for as long as they live. A living trust can be revocable or irrevocable depending on what the settlor chooses. An advantage of a revocable living trust is that it can be terminated at any time, bringing ownership back to the settlor. However, doing so creates resulting tax implications and should be avoided if the settlor wishes to avoid such payments. If these are not a concern and the flexibility to end a trust relationship and regain ownership is a priority, then a living revocable trust is a good option. Some benefits of a living trust are that they help you transfer assets outside of a will with confidentiality and discretion, since a trust agreement is private, whereas a will is a public document. Assets in a living revocable trust are not protected from estate taxes or shielded from creditors/ legal action. A living trust does not become a testamentary trust at the death of the settlor.
A testamentary trust is created through the will and comes into effect when the settlor passes away. In this case, the settlor is also called the testator or testatrix. Since a testamentary trust only comes into effect after death, the testator is able to continue to maintain control and ownership over those assets during their lifetime. Testamentary trusts are also taxed more favourably than living trusts and can allow you to achieve long-term tax savings. This can be an important factor in determining what type of trust one might want to create and what type of trust best suits one’s goals. Testamentary trusts are automatically irrevocable, since the testator is no longer alive and cannot make changes to the trust.
An irrevocable trust can be living or testamentary. A living trust that is irrevocable means that the settlor has set up the trust in a way where they cannot make any changes or amend any terms without the permission of the beneficiaries. An advantage of an irrevocable trust is that it can help with asset protection from creditors and results in reduced estate taxes. Irrevocable trusts are a good idea for individuals working in professions which makes them vulnerable to lawsuits, such as doctors or lawyers. Assets held in such a trust are effectively no longer in ownership of the settlor and are exempt from the settlors taxable estate or collection arising from any legal judgment against them. Other uses of irrevocable trusts include gifting a principal resident to children under better tax rules, housing a life insurance policy, decreasing the estate value in order to ensure eligibility for certain government benefits, and preventing beneficiaries from misusing or mishandling assets. Irrevocable trusts also help avoid probate costs, since they already have clear and established beneficiaries. Additionally, since trust agreements are private, the public does not have access to the values or types of assets held within the trust.
Trusts are an important aspect of estate planning, and should be considered carefully in order to maximize benefits and minimize costs. In general, a trust can reduce or eliminate executor fees for estate administration and reduce probate costs and delays associated with probate proceedings. Some disadvantages of trusts are their irrevocability as well as the possibility of loss of control over assets.
Sources:
RBC Wealth Management, “Living Trusts and You” (PDF)
CIBC Wood Gundy, “Trusts, An Introduction”, online (pdf): CIBC Wealth Management
NOTE: This article has been written for general information purposes only and does NOT constitute legal advice. For further questions and/or legal advice please consult a qualified lawyer.