Help Me Save Tax!
A trust is an obligation binding a person, the trustee, to deal with property for the benefit of the beneficiaries (or “cestuis que trust”). A trust isn’t a legal entity (thing) – it’s a relationship between the trustees and the beneficiaries. The person who creates the trust is called the settlor. Trusts are advantageous in tax reduction strategies.
Within a trust, there are essentially three parties:
- The Settlor (the person who created the trust)
- The Trustee (the person who will manage/control the property on the behalf of the beneficiary)
- The Beneficiary (the person entitled to be given assets from the trust)
A will is a testamentary trust. To learn more about wills, click here.
Inter Vivos or “Living” Trusts
These are trusts that are not testamentary trusts. These types of trusts are used mainly for tax planning and passing on wealth. Some examples of popular inter vivos trusts are:
- Alter Ego Trust: the settlor is minimum 65 years old and is the only person entitled to receive all income that comes during their lifetime and only person to use income of the trust. This is a popular choice for tax reduction.
- Joint Partner Trust: Similar to an “alter ego trust” however instead of just the settlor being able to use all income from the trust, their spouse or common-law partner has the right to do this.
- Qualified Disability Trust: This allows a beneficiary living with a disability to receive a yearly allowance and reduce the affect it holds on their taxes
In addition to above, another estate planning method is to name a beneficiary in life insurance, TFSA, RRSP/RRIF and pensions. To learn more about who is a beneficiary, click here.
Some trusts are discretionary: this meaning that the trustee holds the power to make decisions such as when, how much, and if beneficiaries receive property for the trust. In these types of trusts, the trustees have absolute discretion in that they hold governing power in making those decisions, with only vary rare exceptions. Specifically, an exception would be if a Court were to find the trustee was acting in “bad faith”, meaning that the trustee is not acting along with the purpose for which the trust was initially created for.
Examples of when a beneficiary might attempt to challenge a trust are:
- The trustee is ignoring requests by a beneficiary for a payment without giving an explanation;
- The trustee is refusing to give a beneficiary a payment from the trust due a personal prejudice against the beneficiary
- The trustee is using funds from the trust for their own personal use
- Trustee is acting not in line with the purpose of the trust or the settlor’s wishes
Bust the Trust (the Rule in Saunders v. Vautier)
Called "the rule in Saunders v. Vautier" the law allows that if all of beneficiaries of a trust are capable and of adult age, then the beneficiaries may call upon the trustee to terminate the trust and distribute the trust property as they direct.