A trust is an agreement between two parties; the other party in a trust arrangement is the settlor, transferring the assets to another party known as the trustee, who then holds them in the trustee’s name and capacity on behalf of the beneficiaries.
Trusts are often incorporated in estate planning for protection and tax advantages, and sometimes for charitable purposes. Formation of trusts in Canada involves a few processes, legal considerations, and documentation. Here is the general step-by-step process on how to establish trust.
Understand the Basics of a Trust
Before creating a trust, it is important to understand its key elements:
- Settlor: The person establishing the trust and transferring property into it
- Trustee: The person or entity in charge of the trust assets based on the terms made within the trust document
- Beneficiaries: The persons or entities that benefit from the trust
- Trust property: The property is transferred into the trust
- Trust deed: This is the legal document that summarizes the terms, conditions, and obligations associated with the trust.
Trusts can be revocable or irrevocable, and the tax implications and legal requirements vary.
Common types of trusts in Canada include:
- Living Trusts (Inter Vivos Trusts): Made during the lifetime of the settlor.
- Testamentary trusts: These Tursts are created in a will and activated after the settlor’s death.
- Charitable Trusts: Meant to benefit charitable organizations.
- Family trusts: These are typically applied for estate planning and wealth transfer.
Determine Your Objectives
Identify why you need a trust. Your goals will define the kind of trust you establish, the terms you include, and the assets you transfer. Typical goals include:
- Asset Protection: Safeguarding assets from creditors or lawsuits.
- Estate Planning: An orderly transfer of wealth to the heirs.
- Tax Planning: Minimizing taxes on income or capital gains.
- Charitable Giving: Support causes you care about.
Clearly clarifying your objectives will help you create a tailored trust that meets your needs.
Choose the Type of Trust
Pick the kind of trust that aligns with your goals. For example:
- If your aim is to administer assets during your lifetime, a Living Trust would be appropriate.
- A Testamentary Trust is suitable if you want to provide for minor children or other dependents after your death.
- A Charitable Trust can be used to support a charitable organization.
- You should consult a legal or financial advisor to determine the best type of trust for your situation.
Appoint a Trustee
The trustee will manage the trust’s assets and ensure that the terms of the trust are followed. In choosing a trustee, consider the following:
- Trustworthiness: The trustee must act in the best interest of the beneficiaries.
- Financial Acumen: The trustee must be conversant with asset management.
- Availability: Management of a trust is very time-consuming.
You can appoint an individual, a group of individuals, or a professional trustee such as a trust company. In Canada, many financial institutions offer trustee services.
Draft the Trust Deed
- The trust deed is the trust’s foundation document. It ought to contain details of the following.
- Purpose of the trust.
- Identity of the settlor, the trustee, and the beneficiaries
- Duties on how assets are to be administered and shared
- The duration period for the trust.
- Special conditions to be fulfilled
Engage a lawyer expert in trusts so that he draws up this paper according to the law and as expressed by you.
Transfer Assets to the Trust
Once the trust deed is finalized, you need to transfer assets into the trust. These assets can include:
- Cash
- Real estate
- Investments
- Business interests
- Personal property
This is done through re-titling the assets in the name of the trust. In the case of investing in real estate, the property’s title would need to be changed to indicate that it belongs to the trust.
Register the Trust (if required)
In Canada, certain trusts must be registered with the Canada Revenue Agency (CRA), and a trust account number must be obtained. Registration is mandatory for:
- Trusts with taxable income.
- Trusts that distribute taxable income to beneficiaries.
- Non-resident trusts with Canadian-source income.
- Filing annual trust tax returns (T3) is also required for taxable trusts.
Review and Update the Trust Regularly
In general, any changes in life, such as marriage or divorce, birth of children, changes in income, etc., will call for an update on the trust. In revocable trusts, one needs to review the deed periodically and amend it as needed.
- Legal and Tax: Please talk to a lawyer to find out if your trust is in compliance with provincial and federal laws.
- Tax Implications: Trust income is normally taxed at the highest marginal rate. However, this does not hold in all cases. For instance, testamentary trusts or qualified disability trusts are some exceptions.
- Provincial Laws: Trust rules vary depending on the province. Therefore, be cautious about the local rules and regulations applicable in your region.
Conclusion
Setting a trust in Canada can be very powerful in achieving your financial, legal, and philanthropic goals. Since the process seems complex, seeking the services of qualified professionals makes the process much smoother and helps ensure that your trust is prepared to fulfill your needs.
From planning for family to protection of assets and giving back to a cause, a properly structured trust is an excellent method of achieving peace of mind with financial security.
