Trust Exercises

If you have a trust set up or are the beneficiary of a trust, then this article probably isn’t for you. If, however, you aren’t entirely certain what a trust is, or why people have them or if you need one, then read on.

A trust is essentially a legal arrangement where a person (called the “settlor”) transfers the legal ownership of certain assets to another person (the “trustee”) who manages the trust assets for the benefit of those who stand to benefit from the assets (called, not surprisingly, “beneficiaries”). This arrangement is set out in a “trust deed”.  The settlor and trustee are not also beneficiaries of the trust. Often, but not always, trust beneficiaries are family members of the settlor. The assets of the trust can be money, securities, real estate, or any other asset of value. The primary job of the trustee is to take care of the trust assets by investing them or preserving them and to pay funds out of the trust to the beneficiaries as the trust deed dictates.

There are a lot of different types of trusts and we are not attempting to discuss them all; rather, this is just an overview of what a trust is and some of the common variations of and motivations for them.

Most people will establish trusts to benefit members of their family. Sometimes this is because they want to give money to children, but do not want the children to have access to the money all at once or before a certain age. Sometimes, there may be a family member who for reasons of physical or mental disability needs lifelong support and cannot manage funds independently. Family trusts are also established as a means of reducing the family’s overall tax burden through a method known as “income splitting” (about which we will not elaborate at this time – as with most topics, if merits its own discussion). Such trusts may be set up during the life of the settlor (called “inter vivos trusts”) or planned for in the will of the settlor and created on his or her death (called “testamentary trusts”).

People may also establish trusts to benefit charities or charitable purposes. Often, but not always, such trusts are set up during the lifetime of the settlor, who will often receive the income from the assets/investments held in trust, but on the death of the settlor, the trust assets themselves are transferred to a philanthropic purpose or organization. This might mean that the settlor states specifically that the assets are to go to a specific charity, like ‘Doctors Without Borders’, or it might mean that the trustee is directed to use the trust assets to benefit the ‘arts in Vancouver’, in which case the trustee must use his or her discretion to decide how to use the trust assets to further that goal.

As alluded to or discussed, one of the main reasons people establish trusts is to reduce tax liability, but they also establish trusts to ensure long term care for minors, the elderly, or those unable to care for themselves. They may also establish trusts to ensure that their post-death wishes are carried out. But these are not only reasons for trusts.

People frequently settle trusts to preserve their wealth after their deaths. When you die, the value of your estate is determined and your executor must generally pay probate fees that are a percentage of your estate. Assets that are held in trust however are not part of your estate (because they aren’t yours anymore) and so they are not counted when determining your estate’s value and no fees need be paid on that amount.

Trusts are also a means of protecting assets from creditors, if the beneficiaries have no say in how the trust assets are distributed, then the trust assets are protected from the beneficiaries’ creditors. (That said, putting assets in trust to thwart the settlor’s creditors from realizing on them may be a fraudulent conveyance and a lawyer should be consulted before such actions are taken.)

Trusts aren’t for everyone of course. You need to have assets you are willing to part with, for one thing. Remember, once the settlor has placed assets in trust, they aren’t his (or hers) anymore; the trust is irrevocable and the trust property belongs, beneficially, to the beneficiaries. Creating a trust may create a tax liability for the settlor on is creation, as the assets may be deemed to have been sold by the settlor. Additionally, it should be noted that most trusts are deemed to dispose of certain types of trust property at fair market value every 21 years; this means that if those assets have increased in value, the trust property will be taxed on those gains.

There are various other varieties and motivations for them, but this is an overview of how and why most people establish trusts. Like most things, it comes down to money: how to keep more of it for yourself and how to pass as much of it as possible on to others after you die. (You may not be able to take it with you, but you can do what you can to ensure the government doesn’t get it.)

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