Simply speaking a trust is a relationship where one person (the settlor) transfers assets to a trustee for the benefit of a third person (beneficiary). The trustee manages the assets for the benefit beneficiary.
In more formal terms, a trust is a relationship whereby a person (the settlor or donor) transfers property to another person (the trustee) for the benefit of a third person (the beneficiary). By making this transfer, the ownership and management of the assets are then separated and removed from the donor. Or stated slightly differently, a trust is a means to separate the legal ownership and management of assets from the beneficial interests in the assets.
Elements Of A Trust
There are three elements required to create a trust. There must be certainty of:
- The intent of the settlor to create a trust;
- The identity of the property that is to be placed in the trust; and
- The identity of the beneficiary or beneficiaries of the trust.
The names of the beneficiaries may or may not be specified but rather may be referred to as a class. For example, “the children” of an individual would be sufficient to satisfy the third element of a trust.
Trusts are tools that help transfer assets but are not separate legal entities. The trustees are the registered owners of the property within the trust and are the ones who must be described as the relevant parties to any agreements. However, for tax purposes the Income Tax Act views trusts as individuals for the calculation of income taxes.
Trusts can be used in situations where the settlor is not certain the beneficiary can effectively deal with the problems associated with managing the assets or is unable to enter into contracts. For example,
- A surviving spouse may not be able to manage a large and sophisticated investment portfolio or business. The assets can be placed into a trust for the benefit of the surviving spouse and managed by a trustee with the skills to handle such a portfolio.
- A set of assets may be placed into a trust for a minor child. The child cannot legally enter into a contract but the trustee may do so on behalf of the child.
Since the trust provides for the separation of ownership and beneficial interest in a set of assets, it can be used in these situations
What Are Estates?
The term estate refers to the personal property and possessions of an individual person whether they are alive or deceased. During your lifetime, the care and management of your estate is a personal matter and after you pass away, your estate is administered by your executor. On the other hand, a trust refers to assets that are no longer owned by the individual. However, the Income Tax Act refers to both estate and trust interchangeably.
Expert Advice – We Can Help
Whether you own a business or simply want to ensure the safe passage of your lifetime assets, estate planning is important. We can help you properly plan your estate to reduce the impact income and other taxes can have on it’s value.