A trust is one of the most powerful tools available to assist in wealth preservation and management. By use of a trust, it is possible to provide for family members now, and also protect their financial interests in future, while maintaining control over the management and distribution of the trust property. In Part 1 of this series, I described the concept of a trust and the two main types of trusts: inter vivos and testamentary. I’ll continue with a look at how trusts can be used used as a powerful tool for wealth protection and management, as well as for tax minimization.
Wealth protection and management
By use of a trust, third-party professional management of financial assets can be obtained while ensuring succession of property to future generations of family members. A trust can also be used to protect assets from possible future unknown claims, including matrimonial and creditor claims.
Protecting beneficiaries with special needs
A trust can also be used to hold and manage property for persons who by virtue of aging, disease, infirmity, or physical or mental disability require special assistance to manage their property. A trust can be structured to allow the trustee to control the level of payments for the benefit of a special-needs individual, while providing flexibility as needs change over time.
Using a trust as a substitute for a will
One of the areas in which use of a trust is becoming increasingly popular is as a “will substitute.” The trust is used as an alternative to a will, or in combination with a will and other vehicles to distribute property on death.
Most provincial jurisdictions charge probate fees (in Ontario, “Estate Administration Tax”) to obtain a Court grant confirming the validity of a will and the authority of the executors (“probate”) or for the appointment of an administrator of an estate where there is no will.
In Ontario, Estate Administration Tax, at a rate of approximately 1½% of the value of assets of the estate, may be viewed as a form of “wealth tax” payable on death. To circumvent the need to probate a will, and to minimize exposure to this wealth tax, increasing attention has been focused on transferring property on death by other means, including by use of a trust.
Income tax legislation provides for two types of trusts, the “alter ego” trust and the “joint partner” trust, to which property may be transferred on a tax-deferred basis by persons age 65 or older. This legislation facilitates the use of these types of trusts as effective will substitutes and important estate planning vehicles.
Another common use of a trust is in conjunction with an “estate freeze.” In an estate freeze, in order to minimize capital gains tax liability on death, the value of assets is frozen for tax purposes at their current level, and future growth is passed on to others. Use of a trust to hold the growth property, such as common shares of a private company, can ensure continued control and management of the growth property in the hands of trustees, and is generally more protective and tax-efficient than an outright gift of growth property to children and others.
Funding education and other expenses
One of the popular uses of a trust is to fund children’s and grandchildren’s education and other expenses in a tax-efficient way. By use of a trust, trustees can control the investment and management of the trust property and its distribution. If the trust is discretionary, the trustees can be provided with the flexibility to determine who will receive the income and capital of the property, in what amounts, and at what ages.
Next time, I’ll continue my look at trusts and how they may be used as income-splitting vehicles to minimize tax
Margaret O'Sullivan is the principal of the Toronto-based trusts and estates boutique law firm O'Sullivan Estate Lawyers. She practices exclusively in the areas of estate planning, estate litigation, advising executors, trustees and beneficiaries, and administration of trusts and estates.
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The foregoing is for general information purposes only and is the opinion of the writer. It is not intended to provide specific personalized advice on any individual situation, including, without limitation, investment, financial, legal, accounting or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your particular circumstances.