Trusts are often used as a mechanism by settlors to transfer property to family members or others while still allowing the settlor to establish limitations and restrictions over the property either by being a trustee or by choosing the trustee and dictating the terms of the trust.
Trusts are also often used to hold assets on behalf of minors. Trusts are also used for tax-motivated reasons. Properly structured, trusts allow for the deferral of accrued capital gains and some income splitting.
A formal trust agreement or deed is typically drafted by a lawyer and identifies the settlor, the trust property, the trustees, and the beneficiaries. To demonstrate the existence of an informal trust, the trustee, the settlor, and the trust beneficiary must be clearly identified on the application. The trust property will already be identified on the application. For example, take a parent who sets up an informal trust for her minor child.
When the child turns 18, he wants to receive the funds personally to spend as he wishes. Under the right circumstances, trusts can be effective estate and tax planning tools.
Here are some examples of trusts that can be used for such purposes:. The Income Tax Act Canada contains complex income attribution rules that are designed to attack income splitting situations that may be abusing the tax advantages of setting up a trust. The reason the Canada Revenue Agency CRA may find such situations abusive is because, generally, this type of scenario will be used when the transferee is in a much lower tax bracket than the transferor. When a trust is involved, the settlor would be the transferor and the beneficiaries of the trust would be the transferees.
If the above criteria are met, income on the transferred property will be attributed back to the transferor. When the minor child attains the age of 18, all attribution ceases unless the donor still has control or direction over funds in the account. Also, attribution ceases if the settlor dies or becomes non-resident. As discussed previously, a revocable trust can cause adverse tax consequences.
An irrevocable trust may be considered revocable if the transferor and sole trustee are the same person. This rule may also apply if one spouse is the settlor and the other spouse is the trustee. This is because it could be argued that the spouses are acting together. The attribution rules can be very complex. However, the rules should be kept in mind whenever a person transfers or loans funds, either directly or indirectly, on behalf of specified individuals.
In this type of scenario, the client should seek the advice of a qualified tax advisor. A preferred beneficiary election allows the income that would otherwise be distributed to the beneficiary to accumulate in the trust.
It also allows the preferred beneficiary to use their personal exemption limit and to enjoy income up to that amount tax-free. This can also be useful in preventing a disabled individual from losing government disability benefits.
Preferred beneficiary elections can be filed for both testamentary and inter vivos trusts. The beneficiary can be a spouse, common-law partner, child, grandchild, or great grandchild of the settlor. Duties of Trustees: Under common law and provincial legislation, trustees are given certain powers with respect to the administration of a trust. In addition to their basic duty to comply with the terms of the trust, trustees have the following fundamental duties:. The settlor of the trust can provide in the trust deed how trustee compensation is calculated.
We recommend that the trust deed address trustee compensation; otherwise, the trustees can still obtain compensation, but that matter would be determined by the beneficiaries or the court through costly litigation.
Courts often look at a number of factors when determining appropriate compensation, which can include the expertise of the trustee, the value added by the trustee i. Trustee compensation is fully taxable as income to the trustee. Attempts to recharacterize compensation as a gift are often reviewed by the CRA. Under the ITA, a trust is generally deemed to dispose of its assets after 21 years from the creation of the trust. In general, an executor will not be required to show accounting to the beneficiaries.
However, if the trust requires the executor to provide a yearly accounting to them, then they must do so. Prior to the termination of the trust, the executor will have to give the beneficiaries a final accounting showing where the assets went.
It is very difficult to contest a trust, but it can be done by showing that the person who made the trust was incompetent to make the trust or was forced or coerced by someone to make the trust.
A person who is not named in a trust has no standing to contest that trust, which means that a non-beneficiary would not be able to contest a trust. A will never overrides a trust because a will and a trust are two separate things. A will deals with property that is still owned by the deceased person, while the property that a trust owns does not go through a probate and is not subject to any will. In South Carolina, an executor has 10 years from the date of death to file a will and go for a probate.
After all, the point of a probate-avoidance trust is to keep matters out of court. When all the expenses have been paid and the trust property has been distributed to beneficiaries, the trust simply ceases to exist.
As trustee , your guide is always the trust document sometimes called the trust instrument. It sets out your marching orders, and you're legally bound to follow it.
Only if you have a question that isn't addressed by the trust document do you need to turn to state law. When it comes to a simple probate-avoidance living trust, your responsibility is usually pretty clear: gather trust property, and then quickly distribute it to the beneficiaries named in the trust document.
You shouldn't have any long-term duties. This is in contrast to other kinds of trusts , such as those set up to manage property for a child or young adult , or for someone with special needs ; those trusts can last for many years. If that's what your trust document directs you to do, then when you have gathered the trust property, determined its value, and formally transferred everything to the new owners, you're ready to close the trust.
Though it's called the "final" return, it may be the first one as well, if the trust has been open less than a year. It's an excellent idea to tie up all the loose ends by sending a final accounting and letter to the trust beneficiaries.
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