Insight

Trust Basics

Introduction

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. There are, however, a number of reasons for individuals may wish to settle a 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 (a living trust), and a 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.

Benefits of the Living Trust

  1. Avoid Probate

There are three primary concerns about the probate process in B.C..

  • Probate fees can add significant costs to the administration of the estate. A fee of 1.4% is charged on the value of the deceased’s estate over $50,000 (with lower rates below that amount).  The value of the estate of a person who resides in B.C. includes any real and tangible property situated in B.C. and all worldwide intangible assets. As an example, an approximate probate fee of $14,000 will be charged on an estate valued at $1,000,000.00.
  • The probate process is public, as the probate file which contains the Will and disclosure of the deceased’s assets is accessible to anyone who wishes to see it.
  • The probate process takes time: from a few weeks to several months to file the application, followed by a variable period of time for processing (depending upon the workload of the probate registry) from a few weeks to several months.  Once a representation grant issues, the executor must wait a further 210 days before making any distribution of the estate (unless all beneficiaries and intestate heirs otherwise agree), and possibly longer if a Clearance Certificate is required.

The probate process can be avoided entirely, however, if the deceased owns no assets at death.  This goal can be achieved by transferring assets to a trustee to hold for the benefit of settlors during their lifetime.  The trust deed directs how trust property will be distributed following the settlors’ death, and by doing so, acts as the wealth transfer vehicle alternate to the Will.

  1. Avoid Wills Variation Claims

In B.C., spouses (whether married or not) and children of the deceased can challenge the Will 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. See [link to our wv article] for more information on these types of claims.

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 a spouse and/or children under the Will.

As a wills variation claim can only be made with respect to a Will, and will usually only be made where there is an estate to re-apportion, an individual may reduce or eliminate the risk by transferring assets to the trustee of a living trust.  Again, the trust property does not form part of the deceased’s estate at death and passes instead under the terms of the trust deed.

Benefits of the TESTAMENTARY Trust

  1. TAX Benefits

For many years, the testamentary trust was a preferable vehicle for income splitting opportunities, because a testamentary trust was giving preferential tax treatment compared to a living trust. This changed in 2016, when the taxation of testamentary trusts was changed to match living trusts.  Today, whether a trust is settled during an individual’s lifetime or by Will (or other testamentary instrument), trust income is taxed at the highest marginal tax rate for an individual – in B.C., approximately 50%).

Nevertheless, where there are multiple beneficiaries of a trust (such as a child and the child’s descendants), there may still be some income splitting opportunities where trust income is paid or payable to a beneficiary with low or no income (This can also be the case for a living trust but generally only after the death of the settlor/contributor.)

2.    Retain Disability Benefits

A testamentary trust can provide for a disabled beneficiary and if that beneficiary has a Disability Tax Certificate from the Canada Revenue Agency, the trust will enjoy graduated tax rates. If a residence is held by the trustees for the use of that beneficiary, the principal residence exemption can be claimed upon sale. (A living trust can also be used to assist a disabled beneficiary, but it does not enjoy the graduated tax rate and cannot claim the principal residence exemption.)

When a beneficiary is in receipt of provincial disability benefits, it is important to use a discretionary trust (sometimes referred to as a Henson Trust) to avoid running afoul of the government’s strict asset and income limitations.

Conclusion

This article highlights some of the benefits of trusts.  To determine if a trust is suitable for your estate planning, please contact our wills paralegal, Rosanne Fletcher or her assistant, Rebecca Tyler, at 250-388-6631 to arrange an appointment.