Understanding Trusts: A Comprehensive Guide to Estate Planning in Ontario

What is a trust?

A trust is a legal agreement between the person creating the trust, known as the settlor, and a trustee. The trustee is responsible for managing the trust's assets and distributing them according to the settlor's wishes.

Trusts can be used for a variety of purposes, such as:

• Providing for minor children
• Caring for a disabled child or adult
• Reducing estate taxes
• Protecting assets from creditors
• Donating assets to charity

Types of trusts

Many different types of trusts are available, each with its unique purpose and benefits. Some of the most common types of trusts in Ontario include:

• Revocable trusts: These trusts can be changed or revoked by the settlor at any time during their lifetime.
• Irrevocable trusts: The settlor cannot alter or rescind these trusts once established.
• Living trusts: These trusts are created during the settlor's lifetime and can be either revocable or irrevocable.
• Testamentary trusts: These trusts are set in a will and take effect after the settlor's death.
• Asset protection trusts: These are designed to protect assets from creditors and lawsuits.
• Charitable trusts: These trusts are created to donate assets to charity.

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Examples of each type of trust:

Revocable living trust

A revocable living trust can provide for minor or disabled children. For example, a couple with two minor children could establish a revocable living trust to hold their assets. The trust could be structured to provide for the children's needs until they reach a certain age, such as 18 or 21. Once the children reach the specified age, they receive the assets held in the trust.

Irrevocable life insurance trust (ILIT)

‍An ILIT can reduce estate taxes. For example, a high-net-worth individual could establish an ILIT to purchase a life insurance policy. The ILIT pays the premiums, and the death benefit is paid to the trust beneficiaries. Since the ILIT is a separate legal entity, the death benefit is not subject to estate taxes.

Asset protection trust

‍An asset protection trust can protect assets from creditors. For example, a business owner could establish an asset protection trust to hold their business assets. This could help protect the assets from creditors if the business were sued.

Charitable trust

‍A charitable trust can be used to donate assets to charity after the settlor's death. For example, a settlor could establish a charitable trust to donate 10% of their estate to their favourite charity after death.

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Here are some additional examples of trusts:

• Testamentary trust: A testamentary trust is established in a will and takes effect after the settlor's death. It can be used to provide for minor children or disabled children or to reduce estate taxes.
• Special needs trust: A special needs trust is designed to provide for a disabled child without jeopardizing their eligibility for government benefits.
• Pet trust: A pet trust can be used to care for a pet after the settlor's death.
• Dynasty trust: A dynasty trust is an irrevocable trust that can be used to pass assets down to multiple generations of heirs.

Benefits of trusts

Trusts offer several benefits, including:

• Asset protection: Trusts can help to protect your assets from creditors and lawsuits. For example, if you are sued, your assets held in a trust may be protected from seizure by your creditors.
• Tax benefits: Certain types of trusts can provide tax benefits, such as reducing estate taxes and income taxes. For example, an irrevocable life insurance trust (ILIT) can be used to minimize estate taxes by removing the death benefit of the life insurance policy from your estate.
• Flexibility: Trusts can be tailored to meet your needs and goals. For example, you can create a trust to provide for minor children until they reach a certain age or to care for a disabled child or adult for their lifetime.
• Privacy: Trusts can be used to keep your financial affairs private. For example, if you have a trust, your assets held in the trust will not be subject to probate, which is a public process.

Drawbacks of trusts

Trusts also have some disadvantages, including:

• Cost: It can be expensive to create and maintain a trust. You must pay legal fees to develop the trust and review it regularly. You may also need to pay fees to the trustee.
• Complexity: Trusts can be complex to understand and manage. It is essential to understand how your trust works clearly and choose a trustee qualified to manage its assets.
• Lack of control: Once you have transferred assets to a trust, you lose some control over those assets. For example, you cannot sell or give away assets held in the trust without the trustee's permission. Additionally, if the trust is irrevocable, you cannot change or revoke it once it is established.

How to choose the right trust

When choosing a trust, it is essential to consider your individual needs and goals. Some factors to consider include:

• Your age and family situation: If you have a minor or a disabled child, you may want to consider a trust to provide for them after your death.
• Your financial assets and liabilities: The amount of assets you have and the types of assets you own will affect the kind of trust that is right for you.
• Your estate planning goals: What do you want to happen to your assets after death? Do you want to reduce estate taxes? Do you want to protect assets from creditors?
• Your risk tolerance: How much control do you want over your assets? Are you comfortable giving up some control to a trustee?

If you are unsure which type of trust is right for you, it is crucial to seek the advice of an estate planning attorney. They can help you assess your needs and choose the best trust for you.

Examples of trusts in action

Here are a few examples of how trusts can be used in estate planning:

• Revocable living trust for minor children: A revocable living trust can be used to provide for minor children after the death of their parents. For example, a couple with two minor children could establish a revocable living trust to hold their assets. The trust could be structured to provide for the children's needs until they reach a certain age, such as 18 or 21. Once the children reach the specified age, they will receive the assets held in the trust.
• Irrevocable life insurance trust (ILIT): An ILIT can reduce estate taxes. For example, a high-net-worth individual could establish an ILIT to purchase a life insurance policy. The ILIT pays the premiums, and the death benefit is paid to the trust beneficiaries. Since the ILIT is a separate legal entity, the death benefit is not subject to estate taxes.
• Asset protection trust: An asset protection trust can protect assets from creditors. For example, a business owner could establish an asset protection trust to hold their business assets. This could save the assets from creditors if the business were to be sued.
• Charitable trust: A charitable trust can be used to donate assets to charity after the settlor's death. For example, a settlor could establish a charitable trust to donate 10% of their estate to their favourite charity after death.

Conclusion

Trusts can be a powerful tool for estate planning. By understanding the different types of trusts available and how to choose the right one for your needs, you can ensure that your assets are protected and your final wishes are respected.

• Suppose you are considering using a trust in your estate plan. In that case, consulting with an estate planning attorney is essential. They can help you assess your needs and choose the best trust for you.

Tips for choosing the right trust

• Consider your needs and goals. What do you want to achieve with your trust? Do you want to protect assets from creditors? Reduce estate taxes? Provide for minor children or a disabled child?
• Seek professional advice. An estate planning attorney can help you choose the right trust for your needs and draft the necessary trust documents.
• Choose a trustee carefully. The trustee will manage the trust's assets and distribute them according to your wishes. Choose a trustworthy, organized trustee with the financial skills to manage the trust effectively.

Here are some additional tips for choosing the right trust:

• If you have minor children, consider a testamentary trust. A testamentary trust is established in your will and takes effect after your death. It can provide for your children until they reach a certain age.
• If you have a disabled child, consider a special needs trust. A special needs trust is designed to provide for a disabled child without jeopardizing their eligibility for government benefits.
• Consider an irrevocable life insurance trust (ILIT) if you are concerned about estate taxes. An ILIT is a type of irrevocable trust that can be used to reduce estate taxes by removing the death benefit of a life insurance policy from your estate.
• Consider an asset protection trust to protect assets from creditors. An asset protection trust is designed to protect assets from creditors in case of a lawsuit.
• If you want to donate assets to charity, consider a charitable trust. A charitable trust can be used to donate assets to charity during your lifetime or after your death.

It is important to note that there is no one-size-fits-all answer to which trust is right for you. The best way to choose the right trust is to consult an estate planning attorney.

Conclusion

Trusts can be a powerful tool for estate planning. By understanding the different types of trusts available and how to choose the right one for your needs, you can ensure that your assets are protected and your final wishes are respected.

Suppose you are considering using a trust in your estate plan. In that case, consulting with an estate planning attorney is necessary. They can help you assess your needs and choose the best trust for you.

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Additional tips for estate planning with trusts in Ontario

• Make sure your trust is drafted correctly. A trust is a legal document, so it is crucial to have it prepared by an experienced estate planning attorney.
• Fund your trust. Once you have created a trust, you must fund it by transferring assets. This can be done during your lifetime or after your death.
• Review your trust regularly. Your circumstances and goals may change over time, so reviewing your trust periodically and updating as needed is vital.

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