Transferring assets to family members after death isn't always a simple task. Divorce, remarriage and children from multiple marriages can create complexities. There may be worries about keeping special assets within a family, such as a family property that has been passed through many generations. Or, there may be concerns about how assets will be managed by certain beneficiaries to ensure a lasting legacy.
Among the estate planning tools available for protecting and transferring assets, a trust can provide an effective way for families to help manage these challenges. By planning for your estate using a trust, you may be better able to define how you want your wealth to continue to benefit the people you care about.
Trusts are often misunderstood as being a tool available to only ultra-wealthy families with more complex holdings. However, trusts can offer many benefits to those with more modest wealth positions. While a trust can be created during an individual’s lifetime, known as an “inter-vivos trust,” and can provide various benefits for wealth planning, the focus of this discussion is on estate planning using a “testamentary trust,” which is generally established under your will. After death, certain assets (such as a share of the estate) are transferred to the testamentary trust according to the directions specified within the will, to be managed by a trustee for the benefit of the named beneficiary.
Here are some common situations for which a testamentary trust may act as a valuable estate planning tool for families:
- You are part of a blended family. If you have remarried but wish to provide for children from a previous relationship, a testamentary spousal trust may help to direct your assets as intended. In the case of a second marriage, without a spousal trust, assets that would be passed along to your spouse upon your death would be distributed to the beneficiaries determined by your spouse’s will. A spousal trust is commonly set up for the duration of the surviving spouse’s lifetime, with assets held in the trust for use by the surviving spouse as directed by the terms of the trust. Once the surviving spouse passes away, remaining assets can be distributed according to the terms you specify, such as to your children from a previous marriage.
- Your beneficiaries will need support. A testamentary trust may help to provide ongoing support to dependent beneficiaries, as well as those who may not be financially responsible or those who may need assistance with managing assets. Trusts are frequently established for the benefit of minor children. Here, a trustee will manage funds on the minor’s behalf until the child reaches the age of majority, or later. In other situations, controlling distributions may be beneficial, such as where a spouse may not have strong financial acumen or dependents may not be financially responsible. A trustee would have discretion in the administration of the funds and control the timing and amount to be distributed to the beneficiary.
- You wish to protect inherited assets from a potential marriage breakdown of a beneficiary. In many cases, parents may wish to pass along an important family asset, such as a cottage/cabin or family business, and ensure that it remains within the family. With elevated property prices for many cottages and cabins, and given the potential value of a family business, there may be concerns about passing along family assets to the next generation in the event of a marital breakdown of the beneficiary. A testamentary trust may be one way to pass down these assets while protecting your children from having their share subject to a division due to matrimonial claims or claims from other potential creditors.
- You have a child with a disability. For those who have children with a disability, a Qualified Disability Trust (QDT) can be set up for the benefit of a disabled child, which may also have certain tax advantages. While graduated rates of taxation for other types of testamentary trusts were eliminated by the federal government in 2016 and these trusts are now taxed at the highest marginal rate, a QDT may still benefit from the graduated tax rates. Most importantly, the trust can help to ensure that the child has financial security into the future. In order for a trust to qualify as a QDT, at least one beneficiary of the trust must receive the federal disability tax credit and elect to treat the trust as a QDT.
Securing Your Legacy
Passing on a legacy to family members involves planning, structuring and implementing an estate plan that considers how you will protect and transfer assets. A testamentary trust can be a valuable tool to help ensure that your wishes for your family are met in this regard. However, we recommend seeking the advice of legal and tax specialists as you plan ahead to fully understand the costs, administrative requirements, potential tax implications and ongoing maintenance associated with setting up and maintaining a trust.
Note: Additional costs may include ongoing accounting and trust administration fees, as well as probate taxes during the settlement of the estate if assets are now passing through the estate. Most Canadian trusts will be subject to increased reporting as of the 2022 tax year, including filing a tax return, even if they have no taxable income.