A Trust is a legal relationship in which property is transferred by the person making the Trust (the “Testator”) to a party who manages the property, for the benefit of the Testator or another. Trusts are separate legal entities. Assets inside a Trust are managed by a trustee who has legal responsibility for managing and overseeing trust proceeds in accordance with the Testator’s wishes, set out in the trust document. The Trust document stipulates how the assets should be managed, and how, when and to whom the assets will be distributed.
You can establish two main types of trusts:
- “Inter Vivos Trust” – a Trust that takes effect during the Testator’s lifetime; or
- “Testamentary Trust” – that takes effect upon the death of the Testator.
A Living Trust passes ownership of property immediately to a beneficiary. The result is that the trust assets do not form part of your estate and are not subject to probate tax. A Testamentary Trust is created in a Will and only takes effect upon the Testator’s death. The assets held in a Testamentary Trust form part of the Testator’s estate, so they are subject to estate fees and taxes. The Trust can be changed at any time before the Testator’s death by simply preparing a new Will. The decision on whether to set up a Living Trust or a Testamentary Trust depends on many factors, including the Testator’s need for the assets during his or her lifetime, the intended use of the assets, tax implications, and the Testator’s personal situation.
Trusts can be used to accomplish a number of estate planning goals. There is a misperception that only the wealthy can benefit from Trusts. This is not the case as Trusts are highly flexible and can provide for an unlimited combination of needs, circumstances and objectives.
Common Uses for Trusts in Estate Planning
1. Blended families
If you have children from a previous relationship, and then remarry, a Spousal Trust can provide support for your spouse during their lifetime, while ensuring that your children eventually inherit any remaining assets.
2. Gifts to minors
Trusts are used to provide income to minor beneficiaries including children or grandchildren, in their minor years and to pay out the capital when they reach a specified age.
3. Avoid probate & maintain privacy
A Living Trust allows you to bypass probate for any assets held in the Trust and also allows for greater privacy for Trust assets, as probate is a public process and anyone can access these records.
4. Beneficiary is disabled or incapable of managing financial affairs
A Trust can be used to ensure a spouse or child living with a disability, addiction or who is a spendthrift, receives an appropriate level of care and has sufficient assets to maintain this care after you die.
5. Make a charitable gift
A Trust can be used to provide Trust income to your beneficiaries during their lifetime and then upon their death, any remaining money in the Trust is donated to a chosen charity(s).
6. Your spouse lacks financial expertise
If your spouse needs help with money management after you die, a Testamentary Trust allows a qualified Trustee to manage the Trust assets on behalf of your spouse.
7. Control your wealth and protect your financial legacy
You can specify the terms of a Trust precisely, controlling when and to whom distributions may be made. You may also set up a revocable Trust so that the Trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter. A properly constructed Trust can also help protect your estate from your heirs’ creditors.
8. Taxes
Trusts also offer potential tax benefits and costs, depending on the situation. Professional assistance is needed to structure a Trust to meet your tax and estate planning goals. Your lawyer should work in cooperation with your accountant and financial advisor to determine the best strategy for your specific estate planning needs and goals.
Get professional advice before taking action in setting up a Trust. Trusts are sophisticated legal arrangements that can involve a number of tax and estate planning issues. A Trust must be properly structured to achieve your estate planning goals.
The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.