TRUSTS

What is a trust?
Trusts are entities allowed to exist under the law that enable you to manage and distribute money or the benefits of property included in the trust. Although the trustee of a common law trust has the legal ownership of the trust property, a trust is distinct from the person who operates it. Trusts are set up for a variety of reasons and are usually structured to protect the assets included in the trust. The traditional reasons for preparing trusts include:

• Tax savings
• Income splitting, a strategy that shifts income to a lower tax bracket
• Protection from creditors, family claims and second marriages
• Assistance for young beneficiaries in education expenses
• Assistance for disabled beneficiaries

It is beyond the scope of this brief summary to explain the finer details and differences of trusts, as this involves a rigorous understanding of the laws of relevant provincial or federal jurisdictions. Tax law also comes very much into play, not to mention the variety of unique concerns associated with the benefits of trusts. With the cooperatio of your financial advisors, I am ready at your convenience to prepare the legal documentation to maximize the income and tax benefits available to protect your assets.

Drafting a testamentary trust
A testamentary trust in a will offers the the most effective method to transfer an estate to beneficiaries while at the same time limit the tax consequences. The following matters should be considered in the preparation of the testamentary trust:

• Who are the beneficiaries;
• where do the beneficiaires reside
• when are the beneficiaries to be determined
• how long is the trust to exist
• how is the annual net income of the trust to be dealt with
  • for what purpose can income be distributed?
  • can income from the trust be distributed directly to the beneficiary [someone else on behalf of the beneficiary?]
  • how is undistributed income to be dealt with in the trust
• if undistributed income is to be accumulated inside the trust, what is to happen to the accumulated income after the accumulation period ends
• is capital distribution to be permitted by the trust before the trust terminates? If so, so: for what purpose is capital distributed? Can capital be distributed directly to beneficiary(ies)? How often are distributions be carried out in the trust?
• does any beneficiary have precedece to the income/capital distribution
• is there to be a minimum payment paid to be paid out each year(indexed to the cost of living)
• if the trust is to terminate upon a beneficiary living until 18 years old, is there a gift over to someone else in the event the beneficiary dies beforehand

Will my will reduce taxes payable by my estate?
Without proper inheritance planning the income that your beneficiaries receive could be paid at a much higher tax bracket than necessary, depending on the incomes of all parties concerned. Your bequest to your beneficiary could be piled on top of the income of your beneficiary already taxed at high taxation rates.

A will properly drafted can have a direct impact on how much taxes your estate pays on your death, and how much tax your beneficiaries will pay annually.

Why bother with a testamentary trust in my will?
Unfortunately there are legal and accounting costs involved in setting up trusts and their annual administration, but as a general rule – from a strictly financial perspective, I do not recommend setting up a testamentary trust unless the trust assets available for distribution have a minimum value of $300,000.00.

The testamentary trust income advantage occurs every year at the expense of Canada Revenue Agency.