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Setting Up Trusts For Children

Mar 27 2019

Trusts are a valuable planning tool, particularly where a family has minor, disabled, or vulnerable children. Setting up a trust can provide peace of mind knowing that you have effectively planned for your family’s future. There are different types of trusts and not all trusts may suit your needs or be beneficial for your children, which is why you should always consult with a legal professional before you begin.

What Is A Trust?

A trust is created when a person (the “settlor”) transfers assets or property to another person (the “trustee”) to manage with instructions as to how to use the assets or property to benefit an individual or group of people (the “beneficiaries”).

The way the assets are distributed to the beneficiaries depends on the type of trust and the terms of the trust itself. You can create a trust that specifies under what conditions (for example, when a child turns a certain age) or circumstances (such as the death of either yourself or your spouse) your beneficiaries will receive those assets. You can also create a trust that is completely discretionary, meaning that all decisions about when and how much to distribute to the beneficiaries are made solely by the trustee.

Types Of Trusts

There are two main types of trusts: testamentary trusts and inter vivos or “living” trusts.

Testamentary Trusts

A testamentary trust is one that is created by the terms of a person’s Last Will and Testament and takes effect upon that person’s death. Specific estate assets, a designated portion of a person’s estate, or the entire residue of a person’s estate can be held in a testamentary trust. A Will may contain more than one testamentary trust and a testamentary trust can be changed at any time by simply preparing a new Will.

Usually both parents create testamentary trusts in their Wills for the benefit of their minor children. The trust terms in the Will provide that the trustee can use the assets held in trust for the care,

maintenance, education or benefit of minor children and then upon them reaching the age of majority (19 in BC) or a specified later age to transfer what remains in trust to those children.

  • A testamentary trust can be useful if you have a financially irresponsible child or if your child struggles with drug or alcohol addiction. In those cases, the trustee could manage their inheritance.
  • If you have a mentally or physically disabled child who receives (or will eventually receive) provincial disability benefits, you can set up a trust to ensure your child will not be cut off from that assistance.

Inter Vivos Trusts

This type of trust is created by a person during his or her lifetime and takes effect when the trust agreement has been signed and the trust has been funded. Assets are transferred to the trustee to hold in trust for the beneficiaries.

The Income Tax Act identifies several different types of trusts for income tax purposes and different tax rules apply based on the type of trust. Some inter vivos trusts can be set up without having to pay immediate capital gains tax on the transfer of assets to the trust but certain criteria must be met. Some trusts allow children to be beneficiaries along with you while you are alive. Others require that you be the sole beneficiary while you are alive and your children become the beneficiaries upon your death.

One of the key benefits of an inter vivos trust is that it can be used to avoid probate when a person dies. (Probate is the process used when a Will is validated by a court.) Assets held in an inter vivos trust are not subject to probate fees and are protected from creditors. The trust agreement also remains confidential whereas a Will becomes a public document when it is probated.

Legal and Tax Advice

Each type of trust must meet specific criteria so it is important to ensure that it is set up properly. A wills and estates lawyer will know about the requirements surrounding each trust, be familiar with recent changes to trusts and estates law and can make the best recommendations based on your personal situation. Your wills and estates lawyer will often work closely with your accountant in drafting the terms of your trust since tax advice is important due to recent changes to the taxation of trusts introduced by the federal government.

If you are considering setting up a trust for your children, contact RDM Lawyers to set up a consultation.

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