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What is a living trust?

 

A trust is created when one party (the settlor) transfers assets to another party who holds legal title (the trustee), with instructions as to how the assets are to be used for the benefit of the parties (the beneficiaries) named in the document setting up the trust (trust indenture). Beneficiaries may be specifically named or they can be identified as a class such as “my children” or “my grandchildren”.

A trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person called a trustee holds property for the benefit of beneficiaries so that the benefits of ownership can accrue to the beneficiaries. Procedural and administrative aspects and the responsibilities and powers of the trustees are outlined in the individual Provincial Trustee Acts.

A living or inter-vivos trust is set up during one’s lifetime and is often referred to as a family trust or a personal trust. A testamentary trust arises at one’s death and is established by a will.

Living trusts can be designated as either revocable, which means that they can be undone by the settlor (the party who sets up the trust) at any time, or irrevocable. With an irrevocable trust the settlor cannot revoke the terms of the trust and has no legal right to take back any of the trust’s assets. If it is not clearly stated in the trust documents that the trust is revocable, it is irrevocable. Although the nature of a trust is that of a relationship, a trust is deemed to be a separate taxpayer for income tax purposes and a separate tax return must be filed each year for a trust.

There are several reasons for setting up a living trust. There may be some concern about transferring capital directly to beneficiaries because they may be irresponsible, unsophisticated or mentally challenged. Another reason would be to “freeze” the estate. Freezing the estate simply means that you freeze the value of the growth of the assets for income tax purposes so that all future capital gains will accrue to the beneficiaries.

There are several drawbacks to setting up a living trust including lengthy set up procedures, legal and accounting fees and annual tax reporting. Moreover, many people are reluctant to give up control of their assets and/or investment income.