Trusts have been around for centuries and used in many different circumstances. While there are many types of trusts, they share a common purpose: to help protect your beneficiaries and transfer property effectively.
Everyone has their own reasons for setting up a trust. Here are some of the more common ones.
1. You want to leave assets to minors or young adults
Many people like the idea of gifting to children or grandchildren, but what if they are too young to manage it? Or unable to handle it responsibly?
With a trust, you can keep the assets protected until the beneficiaries reach a certain age. At that point, you can either transfer all the assets to them or have the trustee follow a prescribed schedule whereby the beneficiaries may receive assets gradually — at certain ages and/or for certain purposes, such as paying for their education or buying a home. By receiving the funds gradually, beneficiaries would also have the opportunity to learn how to handle money over time.
For a beneficiary who tends to spend money carelessly, what’s known as a “spendthrift trust” may be appropriate. In this case, the trustee(s) would have the authority to determine how, when and for what purpose the trust’s assets are transferred to the beneficiary.
2. You have children from a previous marriage
Estate planning can be challenging if you are in a blended family. You want to ensure your current spouse is taken care of, but also know that your children will eventually receive an inheritance. The trust can be structured so that your spouse receives the income earned on the capital of the trust, but the capital goes to your children upon your spouse’s death.
3. You may want a professional to manage the assets when you’re gone
Let’s say your spouse has no experience with bookkeeping or administration. Or your adult children have little interest in financial matters. If these are your beneficiaries, you might be worried about how they would manage sizable assets. By creating a trust, you could enlist a professional trustee to oversee the management of the assets on your beneficiaries’ behalf.
4. You have a disabled or special-needs child
If you have a disabled or special-needs child, a trust may offer peace of mind by helping to ensure that funds will be available to provide the child with proper care.
The trustee may be able to make decisions with respect to the capital or income disbursements from the trust, while also protecting your child’s eligibility for government or other income-tested disability benefits. If you simply leave an inheritance to your child outright, the assets could disqualify her or him from receiving such benefits.
A trust designed to benefit a person with disabilities is often called a “Henson trust.” Since the trustee has full discretion over how the trust funds are dispensed, the assets would not be considered vested in the beneficiary. This is how a Henson trust could help to protect the beneficiary’s eligibility to collect government benefits and other entitlements.
5. You want to support your spouse in the case of their incapacity
A testamentary* spousal trust provides support for your surviving spouse after you’ve died. If your spouse is (or becomes) incapacitated or otherwise vulnerable during their golden years, this kind of trust could be a good tool for protecting their interests. You can structure a spousal trust to defer taxes relating to unrealized capital gains that might otherwise be payable on your death, thereby leaving more funds for your spouse.
When considering such a trust, you may want to ensure that the trustee you appoint is an impartial and experienced third party, thereby minimizing the risk of disputes amongst family members. Even if you’re setting up a testamentary spousal trust, be aware of your legal obligations to family members and any dependants, as claims can still be made against your estate.
6. You want to save taxes
You could structure a testamentary trust to allocate the income or capital gains to beneficiaries in lower tax brackets. For example, if you set up a family trust that includes your children and grandchildren as beneficiaries, your trustee can effectively income-split by “sprinkling” income from the trust to those beneficiaries who are in a lower tax bracket than the trust because they have relatively less or no other taxable income.
Is a trust right for you?
You and your family may benefit from choosing trusts as part of your estate planning. Work with your MD Advisor** as well as your Estate and Trust Advisor at MD Private Trust Company to determine what type of trusts are right for you.
*A testamentary trust generally refers to a trust that arose on and as a consequence of the death of an individual.
** MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.