You may create a trust during your lifetime or draft your Will so that a trust is created upon your death. Both types of trusts operate in the same manner and are useful tools for estate planning.
A trust involves at least three people: the person creating the trust (also known as the Settlor), the person who legally holds the trust assets (also known as the Trustee), and the person for whose benefit the trust is created (also known as the Beneficiary).
The Settlor determines what goes into the trust whether it be a dollar amount, real estate, or another type of asset. The Settlor also decides who will be the Trustee and the Beneficiary. The Trustee is the legal owner of the property in the trust, but holds this property for the benefit of the Beneficiary. A Trustee may be entitled to pay themselves for their time out of the trust, but they are not otherwise entitled to any of the property in the trust. Depending upon how the Settlor sets up the trust, the Trustee may have a limited (e.g. payments may only be made for post secondary school expenses) or an unfettered (e.g. payments may be made for any reason provided it is in the best interest of the Beneficiary) discretion in deciding when and how any property from the trust is transferred to the Beneficiary.
Trusts may be useful in a number of ways and people set up trusts for a variety of reasons. Some of the most common reasons include:
- A trust to provide for children until they reach the age of majority;
- A trust to help pay for post secondary education expenses;
- A trust to freeze the value of assets and manage taxes related to those assets;
- A trust to provide for a loved one who is unable to manage their own financial affairs; and
- A trust to avoid negative consequences with social assistance payments for a loved one suffering from mental health or disability issues.
If you have built up a significant amount of savings, investments or other assets, you should consider whether a trust is the best way to pass along your wealth to your loved ones. To determine the best type of trust for your situation, it is best to consult with a lawyer. A lawyer will present you with the options for estate planning and help you set up any necessary documents.