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What is a Trust?

January 28, 2014

Tax Question:

What is a trust?

Facts:

A Trust is a relationship whereby property is held by one party for the benefit of another. It is created by a settlor, who transfers some/or all of his or her property to a Trustee or can also be created on the death of an individual. The Trustee holds the property for the Trust’s beneficiaries.

Discussion:

The main types of Trusts our clients use are:

Family Trust

Set up as a means of income splitting profits from a business with other family members. The beneficiaries are usually the immediate family including spouses, parents, siblings and adult children of the shareholders. Using a Family Trust allows for dividends to be paid to the beneficiaries but avoids them from having direct ownership of the company. As well, using a Discretionary Trust, allows the Trustee to choose which beneficiary will receive the dividends and how much.

Spousal Trusts

Set up by one spouse during their life or created on their death to transfer some or all of their assets to their spouse. It is used as a way to avoid probate fees and can by-pass the will (when set up during their life).

Alter Ego Trusts

Set up by an individual during their life where they transfer all or some of their assets to a Trust where they are the beneficiary as long as they are alive, secondary beneficiaries are named but are only entitled to the assets after the death of the settlor. It is used as a way to avoid probate fees on the assets transferred to the Trust. Unlike a will, which can be challenged after death by a beneficiary/heir, any assets transferred into an Alter Ego Trust can not be challenged, the distribution of the assets will be as indicated in the Trust agreement.

Estate Trusts

Created on the death of an individual, all or some of the deceased’s assets are held by the estate as dictated by the deceased’s Will. The Will can set up one or many estate Trusts to be created upon the death of the individual. These Trusts can have a limited life or can extend for many years. Look for our FAQ series that will examine each of these different types of Trusts and discuss in more detail when they should be used, as well as the advantages and the traps of the different types of Trusts.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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