Trusts Overview

Types of Trusts: The following provides a high level overview of some of the main differences between different types of common trusts.

Family Trust/Regular Trust

 

Uses

This is a “regular” trust in that it is not subject to any preferential tax treatment. It may be used for any number of reasons, including:

• business sale or succession planning; or
• any situation in which it is desirable to appoint a trustee to manage a beneficiary’s assets.

Trust Requirements

ALL trusts require the following:

• Settlor: the person who “settles” or creates the trust.
• Trustee: the person who manages the trust assets.
• Beneficiary(ies): the person(s) who are entitled to benefit from the trust assets.

Taxation of Trust Assets

• The transfer of assets into the trust typically trigger transfer taxes (ex: tax on capital gains and property transfer tax for land).
• The trust is deemed to dispose of its assets every 21 years, triggering tax on capital gains.
• Any unallocated income remaining in a trust at the end of the taxation year is subject to tax at the highest marginal personal tax rate (in BC, currently approximately 53.5%).
• Planning is required to avoid the attribution of the trust’s taxable income or capital to the settlor.

 

Alter Ego Trust

 

Uses

This is an estate planning tool (essentially a will replacement) that can be used to transfer assets to beneficiaries after the death of the Settlor without the requirement of probate (which avoids probate fees, which in BC is currently approximately 1.4% the value of estate assets).

Trust Requirements

• The Settlor must be over the age of 65.
• Only the Settlor may contribute assets to the trust.
• Only the Settlor may benefit from the trust assets during their lifetime.

Taxation of Trust Assets

• During the lifetime of the Settlor, all income and capital gains continue to be taxed in the hands of the Settlor.
• The trust is exempt from the above-described tax rules that apply to a Regular Trust.
• After the death of the Settlor, the trust becomes a “Regular Trust” and is subject to the above-described tax regime if the trust continues on.

 

Joint Spousal Trust

 

Uses

This is the same as an Alter Ego Trust, except can be used by spouses rather than just one person.

Trust Requirements

• The Settlor(s) must be over the age of 65.
• Only the Settlor(s) may contribute assets to the trust.
• Both the Settlor and the Settlor’s spouse may benefit from the trust assets during their respective lifetimes.

Taxation of Trust Assets

Same as Alter Ego Trust.

 

Disability Trust

 

Uses

• This is the same as a “Regular Trust”, but is typically the term used to describe a trust that is created for a beneficiary who is a person with disabilities.
• It is useful for a beneficiary who has person with disability (“PWD”) status, which limits the amount of assets the beneficiary may have in their personal name. Some assets can be moved into their disability trust, thereby preserving their PWD status.
• It is also useful if a beneficiary requires assistance in managing their assets.
• Not to be confused with a Qualified Disability Trust, described below.

Trust Requirements

Same as a Regular Trust.

Taxation of Trust Assets

Same as a Regular Trust.

 

Testamentary Trust

 

Uses

This term describes a trust that is created as a result of a death, such as a trust that is set out in a Will.

Trust Requirements

Comes into existence as a result of a death; otherwise, it is the same as a Regular Trust if it does not fit into one of the other categories set out in this chart.

Taxation of Trust Assets

Same as a Regular Trust.

 

“Henson Trust”

 

Uses

This term describes a trust that is typically set out in a Will (i.e., it is a Testamentary Trust) for a beneficiary who who has person with disabilities status (i.e., it is a Disability Trust and may also be a Qualified Disability Trust).

Trust Requirements

Same as a Disability Trust/ Regular Trust, unless it meets the requirements of a Qualified Disability Trust.

Taxation of Trust Assets

Same as a Regular Trust.

 

Qualified Disability Trust (“QDT”)

 

Uses

This is a term under the Income Tax Act which describes a Testamentary Trust that is created for the benefit of an individual who has person with disability status.

Trust Requirements

• Must come into existence as a result of a death.
• The sole beneficiary must have person with disability status for the entirety of the trust.
• There can be only one QDT (for example, if both parents set up this trust in their Wills, only one of those trusts can receive QDT status).

Taxation of Trust Assets

Trust assets are subject to graduated rates of taxation (the same as an individual).

 

Bare Trust

 

Uses

This is a term to describe an unregistered and sometimes undocumented trust. It is common in simple situations, such as where a parent transfers land or a bank account into joint tenancy with a child, with the intention that the asset remains the parent’s own asset.

Trust Requirements

Same as a Regular Trust.

Taxation of Trust Assets

• Same as a Regular Trust, although typically all income is taxable in the hands of the beneficiary.
• CAUTION: Where a bare trust may exist, it is strongly recommended that this be documented by a simple bare trust deed. This protects both the original asset owner (vis a vis their asset) and the trustee (vis a vis their exposure to tax or creditors).