What Is A Trust And How Do You Choose The Right Trustee?
Trusts can be useful tools for implementing tax strategies and can provide valuable estate planning benefits. This article discusses what a Canadian trust is and how to choose the right trustee. As always, and due to different legal structures in Quebec, it is recommended that you consult with legal counsel for advice concerning in-depth tax and legal matters.
What Is A Trust?
A trust is a legal structure used to separate the control and management of an asset from its ownership. Trusts typically involve 3 parties:
- Settlor: the person who sets up the trust and contributes assets into it. The settlor would also establish the instructions as to how the assets of the trust are to be managed and for whose benefit. These directions form what is known as the “trust agreement.”
- Trustee(s): the party/parties appointed by the settlor to control and manage these assets in accordance with the trust agreement.
- Beneficiary/Beneficiaries: the person(s) named by the settlor to benefit from the assets held in the trust, whether through income, capital, or both.
It is important to note that these key parties can theoretically be the same individual, although the choice of trustee and beneficiary, and the structure of the trust can significantly affect the trust’s function and ultimately its benefit.
Inter Vivos And Testamentary Trusts—What Is The Difference?
Trusts can be created during the settlor’s lifetime, taking the form of Inter Vivos trusts, or upon their passing in the form of Testamentary trusts.
Within the Inter Vivos trust classification, there are a great many variations that the settlor can explore, with different benefits provided by each. A common application of Inter Vivos trusts is in succession planning, whereby the structure can be used to transfer wealth to future generations in a tax-efficient manner. This approach often includes the deferral of capital gains on the assets contributed for a period of time as well as allowing income to retain its character as it is flowed through to the beneficiaries, a mechanism that also lends itself well to income splitting in various applications.
In contrast, a Testamentary trust comes into effect upon the death of the settlor with its terms outlined in the settlor’s will or through a standalone trust document. Instructions established by the settlor prior to their death outline the assets to be held, the beneficiaries, the trustee, and how the assets are to be managed and distributed. In this context, the trust structure can provide a great deal of control in how the settlor’s legacy will play out, along with potentially improved privacy. As well, the assets will bypass probate, resulting in reduced fees.
How To Choose The Right Trustee?
Given that the trustee appointed will be responsible for managing the assets held inside the trust and following the settlor’s instructions, selecting the individual, or institution, to take on this role is an important decision. A trustee may be faced with difficult decisions, such as withholding assets from a spendthrift beneficiary, applying his/her own judgement in the case of a discretionary trust, or following specific directions in the trust agreement. The trustee must therefore be comfortable being objective and maintaining their fortitude.
The settlor may also wish to appoint a trustee with some financial management skills, as the trustee may be required to look after recordkeeping and reporting, particularly in the case of a Testamentary trust. As a last note, the settlor of a future Testamentary trust should consider the longevity and age of a potential trustee, since they would wish the trustee to live longer than themselves to avoid having to name a new trustee.
Whichever trust structure is called for in a given situation, a trustee should be thoroughly vetted and aware of his/her duties in taking on this important role.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.