Trusts are becoming an increasingly popular estate and life planning tool in British Columbia. Individuals may only be marginally familiar with the fundamentals of the trust and consider it strictly a vehicle for the super wealthy to shield assets. There are, however, a number of reasons for those with more limited assets to consider the fundamentals and benefits of the trust.
WHAT IS A TRUST?
A trust is not a separate legal entity (such as a natural person or corporation), but rather a relationship between trustee and beneficiary. The trustee holds legal title to the trust property for the benefit of the beneficiary. The trustee manages and controls the trust property in accordance with the terms of the trust and his or her duties as trustee.
There are many different approaches to the categorization of trusts. One common method is to distinguish an inter vivos trust or living trust, and the testamentary trust. Living trusts, as the name implies, are established during the life of a settlor (the individual transferring property to the trustee). A testamentary trust arises on death, and is commonly set up through a Will or life insurance policy declaration. Living trusts and testamentary trusts each offer a number of benefits and disadvantages. Some of the benefits are discussed below.
BENEFITS OF THE TRUST
1. AVOID PROBATE FEES
In British Columbia, probate taxes of approximately 1.4% are charged on the value of the deceased’s estate when probate of the will is granted. The value of the deceased’s estate includes any real and tangible property situated in British Columbia and the worldwide intangible assets of the deceased at his or her death. As an example, an approximate probate fee of $14,000 will be charged on an estate valued at $1,000,000.00. A living trust can be established to avoid probate fees because the trust property passes pursuant to the terms of the trust and will not form part of the deceased’s estate.
2. AVOID WILLS VARIATION CLAIMS
In British Columbia, spouses (including common law spouses) and children of the deceased can challenge the Will of a deceased person under Part 4, Division 6 of the Wills, Estates and Succession Act (the “WESA”). A court has the power to vary or change a Will if it is the court’s opinion that the Will does not make adequate provision for the spouse or child of the deceased. The wills variation provisions of the WESA create uncertainty and risk for a will-maker who may wish to disinherit or give unequal benefits to his or her spouse and children under the Will.
An effective wills variation action can be avoided by transferring property to a trustee of a living trust. The trust property does not form part of the deceased’s estate at death. The trust property instead passes pursuant to the terms of the trust. In effect, there are no estate assets for an aggrieved spouse or child to claim under the wills variation provisions of the WESA.
3. RETAIN DISABILITY BENEFITS
A testamentary or living trust can be established so that an individual receiving government disability benefits may avoid running afoul of the government’s strict asset and income limitations and risk losing his or her benefits.
4. RETAIN PRIVACY
Where the deceased has a Will and probate is required, the probated Will and disclosure of the deceased’s assets becomes a public document. The terms of a living trust remain private to the world at large (although beneficiaries are entitled to information about the terms of the trust and its administration).
This article has set out the basics of the trust relationship and some of its many benefits. There are additional benefits and disadvantages beyond the focus of this article that should also be considered before deciding what type of trust, if any, is suitable. Individuals interested in learning more or considering utilizing a trust in their estate or life plan are encouraged to speak with their professional advisors.