Navigating the Basics of A Trust in Canada
Trusts can serve as a strong way to handle assets, but they can be complicated without a thorough understanding of how they work. Fundamentally, a trust is made up of three parties: the creator of the trust, referred to as the Settlor, those who handle and manage it, referred to as the Trustees, and those who receive the benefits created by the trust, referred to as the Beneficiaries.
This article will outline the way you can understand and navigate trusts in Canada, but for personalized information, don’t hesitate to reach out to our expert team for a free consultation!
Overview of the Settlor’s Role in a Trust
The Settlor in the context of a trust is the person who manages the trust and adds assets and property to control. They cannot benefit from the trust, but they must be a trustworthy person who can move property into the trust and uphold the terms and conditions of the agreement.
Overview of The Trustees Role
In the context of a trust, the trustees are the people or groups that are in control of handling the trust. There can be one or more trustees to carry out the terms and conditions of the established trust, as per the rules of the Trustee Act, which puts forth the responsibilities and requirements of the trustees. Fiduciary responsibilities refers to, being “legally bound to put their client’s best interests ahead of their own” (Hayes, 2024) and only acting in ways that positively impact the beneficiaries of the trust and prevent clashes or disagreement.
As a brief overview, trustees are in control of the assets, taking calls about investments, cash flow and determining when the trust will be severed. Further, the trustees will consider all of the beneficiaries equally and prioritize their best interests without considering their own, or benefitting from the trust in their own way, unless they are also defined as a beneficiary in the trust.
If they do benefit from the trust, there would be legal ramifications in place, which is why they have to ensure positive impacts for the beneficiaries, or else it would result in liability for violating the trust.
Managing a discretionary trust involves a lot of responsibility for trustees because they make decisions on how both the income and capital are allocated. However, this power must be exercised with responsibility, to make sure that decisions are made thoroughly and with deep understanding of the trust’s terms and conditions.
It is essential for trustees to keep detailed records and minutes of their meetings, as these documents can be crucial if and when their decisions are challenged.
Overview of the Beneficiaries in a Trust
Beneficiaries are the people or groups who will receive income or capital from the trust. For example, family members, like your spouse or children, or even whole organizations can be beneficiaries. The income or assets that are derived due to the trust are considered the beneficiaries’ property, and they are supposed to pay taxes on what they receive.
The trustees have to make sure that the income is distributed to the beneficiaries fairly and in accordance with what the trust agreement outlines.
What is Trust Property?
The Settlor is the one who adds the initial property to fund the trust, and this can include money, assets, or other property. Once it’s in the trust, the trustees are responsible for holding and managing it. They have a lot of flexibility to invest and manage the assets, unless the trust document says something different.
Trusts are not typically meant to last forever. In Canada, the law requires a “deemed disposition” every 21 years, meaning the trust is treated as if it sold all of its capital property at market value for tax purposes. To avoid unwanted tax consequences, the trust can transfer property to the beneficiaries within this 21-year period without triggering taxes.
Trustees need to carefully manage the trust’s assets, making sure that any income generated is either distributed to the beneficiaries or available to them when they request it. It’s also important for trustees to set up a separate bank account for the trust to keep transactions organized and running smoothly.
Important Things for Trustees to Keep in Mind
Firstly, Saunders v. Vautier is a rule that lets beneficiaries change or end a trust early, as long as all beneficiaries are of legal age, have irrevocable interests, and agree unanimously. Secondly, trusts are generally meant to be irrevocable, meaning once they’re set up, they can’t be easily altered.
However, if the trust is discretionary, the trustees have the power to adjust distributions and make decisions on a yearly basis. Thirdly, if a parent or grandparent puts property into a trust for a child’s benefit, the income from that property may be taxed to the parent or grandparent. However, capital gains are treated differently and aren’t attributed in the same way.
Finally, the residence of a trust isn’t determined by law but by case law, and is determined by where the trust’s management decisions are made.
Concluding Remarks
A trust can be a great way to manage and protect assets as well as planning taxes and making sure that wealth is transferred the way the Settlor of the trust intended for it to be. However, it’s important to fully understand the legal responsibilities and implications.
Whether you’re setting up a trust, managing one, or benefiting from it, getting professional legal and financial advice is key to making sure it works the way you want it to. If you’re wondering about how a trust might work for you and want to learn more, feel free to reach out to our team of experts for a consultation that is personalized and tailored specifically for your situation.
