What is a Trust?
If you’ve ever looked into wills and estate planning, you’ve probably come across the term “trust” and you may have wondered what exactly it means. Trusts are powerful legal tools that can help you manage and protect your assets, both during your lifetime and after your death. But what exactly is a trust, and why might you want to create one?
What is a Trust?
A trust is a legal arrangement that allows one person or entity (called the “Trustee “) to hold and manage assets on behalf of another person (called the “Beneficiary”), according to instructions provided by the person who created the trust (called the “Settlor”).
When a trust is created, the Settlor transfers ownership of certain assets (such as real estate, investments, or bank accounts) to the trust. The Trustee then manages those assets according to the terms of the trust document, and for the benefit of the Beneficiary. The Trustee has a legal duty to act in the best interests of the Beneficiary.
The trust is like a container that hold assets. That container is governed by a set of rules written by the Settlor. The Trustee is responsible for following those rules and managing the contents of the container for the Beneficiary’s benefit.
Key Roles in a Trust:
Settlor: The person who creates the trust and puts assets into it
Trustee: The person or organization responsible for managing the trust assets
Beneficiary: The person who benefits from the trust
Types of Trusts
There are many types of trusts, but they generally fall into two categories:
Inter vivos trusts: These are created during the settlor’s lifetime. Common examples include alter ego trusts and joint partner trusts, which are used in estate planning for Canadians over 65.
Testamentary trusts: These are created through a will and take effect after the settlor’s death. Examples of trusts that are commonly set up as testamentary trusts include trusts for minor children, spousal trusts and Henson trusts for disabled beneficiaries.
Each type of trust serves a different purposes, and the right option depends on your personal circumstances and estate planning goals.
Why Create a Trust?
Trusts can serve many purposes, depending on your goals. Some common reasons to create a trust include:
Protecting assets: Trusts can shield assets from creditors, lawsuits or family disputes.
Avoiding probate: Assets that are held in trust don’t go through the probate process, which can save time and reduce fees. Avoiding the probate process can also provide privacy, since probated wills become public, whereas trusts do not.
Supporting a minor or vulnerable beneficiary: Trusts can be structured to provide for children, family members with disabilities, or others who may need help managing money.
Tax planning: Trusts can sometimes be used to reduce taxes, although careful planning and professional advice are needed.
Controlling how and when assets are distributed: With a trust, you can specify when beneficiaries receive funds - for example, at certain ages or for specific purposes like education of home purchases. Without a trust, minor beneficiaries of a will become entitled to receive their full inheritance at the age of 18 in Ontario.
Is a Trust Right for You?
Not everyone needs a trust, but they can be incredibly useful in the right circumstances. If you want more control over how your assets are managed or distributed, if you have a complex family situation, or if you are looking to minimize estate administration costs, a trust might be worth exploring.
If you have any questions about trusts or would like to discuss setting one up, please contact us to schedule a consultation
This blog post is for informational purposes only and is not intended to provide legal advice. If you require legal assistance, before taking any action you should contact us or another qualified lawyer to discuss your situation.
