Establishing a Financial Trust

A trust is a legal arrangement whereby a person gives assets (that he or she owns) to a trustee to manage and use for the benefit of another person or a group of people (known as “beneficiaries”). The trustees of a trust have strict legal responsibilities to hold and administer trust assets, to follow the terms of the trust and to act in the best interest of the beneficiary or beneficiaries. Trustees cannot use trust assets for their own purposes and must keep trust assets separate from their own assets.

There are a number of important decisions that must be made when establishing a trust as part of your estate plan.

When to establish the trust? There are two basic types of trusts that differ on when they are established. A living trust is established while you are alive. To become effective, this type of trust requires creating a legal document and the transfer of assets to trustees. The benefit of this type of trust is that it sets aside assets for a beneficiary at an earlier time. It also will allow families to oversee the administration of the trust or even be a trustee of the trust. There are tax issues to be considered when setting up a living trust. Income earned within these types of trusts is taxed at the highest federal tax rate. There may be ways to limit the amount of tax that will have to be paid. When setting up this kind of trust, make sure you obtain good advice from an expert in tax issues (for example, an accountant or lawyer who specializes in tax law).

The second main type of trust is called a testamentary trust. This is a trust that is established through your Will and only takes effect upon your death. This means that you can change the terms of the trust while you are still alive. This type of trust also allows you to continue to use your assets while you are alive. Testamentary trusts are taxed in the same way as individuals. This means that tax rates will depend on the amount of income that the trust earns each year from investments. For most modest sized trusts, the lowest tax rate will be used.

Who will be the trustees? Choosing a trustee or trustees is a very important estate planning decision. Your trustee will decide when and how to use the money or other property you have put in trust for the benefit of your family member. There are a variety of options for choosing trustees. You can rely on other family members or friends or you can appoint a financial institution to fulfill this role. You might have one trustee or two or more trustees. When you have two or more trustees (called co-trustees) they must usually decide jointly about how to manage and administer the trust properly. You can also appoint alternate trustees who will take the place of a trustee who may be unwilling or unable to continue to act as a trustee.

There are a number of important considerations when choosing trustees:

Your trustee’s willingness and desire to take on this responsibility.
The trustee’s relationship with your family member with a disability. Generally, the trustee should be someone who knows and cares about your family member.
The trustee’s ability to manage and invest assets.
The trustee’s knowledge and understanding of rules regarding government benefits and services (particularly if your trust is intended to supplement these sources of support).
Your trustee’s age in relation to the age of your family member with a disability.
What assets will be put in trust? Again, there are a variety of options that you can consider for establishing a trust. A trust can receive a specific sum of money, a share of your estate, proceeds from a life insurance policy, or real property such as a home. A living trust will usually be established with a specific sum of money or an identified asset. Testamentary trusts can be set up to receive a share of your estate or the proceeds of a life insurance policy.

What kind of trust will be created? This issue requires careful consideration if you are planning for a family member with a disability. Make sure you get good legal advice before you decide on how to establish a financial trust. There are provincial rules that you may need to consider (for example, the provincial government now allows people with disabilities who receive income support benefits under the Extended Benefits Program to have up to $200,000 in a financial trust, as well as some monthly income (up to $800 per month) from the trust, without affecting their monthly cheque).

Generally, there are three kinds of trust options to consider:

An income trust. This type of trust is designed to pay the beneficiary a regular income from a trust. This kind of trust can be a useful way to supplement the income of a family member with a disability. Depending on how much income is paid each month (or otherwise), an income trust may affect the amount of money the person can receive from government programs that provide income support benefits and disability related services.
A support trust. In this type of trust, trustees are given some specific direction to use the trust to support and maintain the beneficiary. Trustees can be given some discretion about how the support should be provided and how much money is paid from a trust either monthly or more or less frequently.
An absolute discretionary trust. An absolute discretionary trust (sometimes referred to as a “Henson” trust) is a trust that gives trustees full and complete discretion to decide if, when and how to use the trust for the beneficiary. Under this kind of trust, trustees have no specific obligations and cannot be forced to pay the income or capital to the beneficiary. A potential drawback of this type of trust is that the trustees may, in their discretion, decide not to use the trust for the beneficiary with a disability.
Who will receive trust assets following the death of the beneficiary? In the event that the trust has assets remaining at the time of the beneficiary’s death, your estate plan must indicate who will receive trust assets. Normally, the trust will be terminated at this time and the assets will be distributed according to your wishes.

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