Choice of trustee
The choice of trustees is usually a personal decision. This is because
trustees, who hold the trust property on behalf of the beneficiaries, will
have a fairly active role in managing the trust property and determining
distributions. A discretionary trust typically gives the trustees “absolute
discretion” in respect of distributions to the beneficiaries. They can
determine when distributions are to be made and to whom (and can distribute
to any one beneficiary to the exclusion of the others). So choose your
I would also typically recommend that three trustees be appointed. It may
be that you want to transfer property to the trust. If so, you need to
avoid falling afoul of the attribution rule, which is triggered if property
that is transferred to the trust by an individual could potentially revert
back to the individual, i.e., by virtue of your being a beneficiary of the
trust – see my
previous article. To do this, you should be one of three trustees in making any decisions
regarding the distribution of that transferred property. If you are one of
two trustees, then arguably you have a negative veto (since majority rule
is required). Although the Canada Revenue Agency (CRA) has provided some
administrative largesse where you are one of two trustees, it’s better to
be prudent and ensure you are one of three trustees, so there is no
To the extent that the trustees make any decisions regarding the trust
property or distributions, it is important that they document their
decisions in writing. In addition, if any income or other monies are
distributed from the trust to the beneficiaries, the trustees must ensure
that those monies are actually paid out to the appropriate beneficiaries,
and not scooped by the parents. This is an issue that has apparently been
targeted by the CRA on audits, so it’s important to ensure that the flow of
funds matches the trustees’ decisions.
Is the trust properly formed?
The “settlor” plays an important role in establishing the family trust. He
or she is the person who formally establishes the trust by “settling” the
trust with property (i.e., cash or a gold coin has been typically used) to
clearly indicate the intention to form the trust. It is important that this
property, known as the “settlement instrument,” be properly safeguarded by
the trustees, as the CRA has been known to ask for proof of the initial
instrument’s existence. You might, for example, tape or attach the
settlement instrument to the original trust agreement, so it doesn’t get
But the settlor’s role is not as simple as handing over a gold coin. He or
she must actually intend to form the trust and should understand the terms
of the trust agreement. The settlor cannot be a beneficiary of the trust,
or else the attribution rule will kick in. However, he or she should be the
person who instructs the advisor preparing the trust deed, or because that
may not always be practical at the very least review and confirm the terms
of the trust prior to its finalization and execution. The settlor’s role
also includes the confirmation of the trustees. So, the settlor should not
always be a choice of convenience.
Once the settlor has formally formed the trust deed, his or her role is
generally done, as the settlor has no further ongoing duties in respect of
the trust. That is the trustees’ duty.
Creating a trust is not as cut and dried as it might appear, with a number
of formal steps required to establish it and ensure that it is legal and
not open to challenge by the CRA. It’s important to get proper legal and
tax advice if you’re contemplating setting up a trust.
Tax impacts of discretionary trusts, and why set one up in the first place.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a
Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-author of
Tax and Family Business Succession Planning, 3rd Edition . She is also
co-editor of various Wolters Kluwer Ltd. tax publications.
Portions of this article first appeared in The TaxLetter, © 2018 by MPL
Communications Ltd. Used
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
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The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
personalized advice including, without limitation, investment, financial,
legal, accounting or tax advice.