While creating a will is a standard part of estate planning, trusts are becoming increasingly popular for some of the different advantages they offer.
Wills and trusts are not mutually exclusive. You can create both and your will can also create a trust. But the two handle your assets in different ways.
A trust is a legal arrangement wherein you (the “settlor”) appoint a person or people (“trustees”) to hold legal title to assets for a beneficiary. The trustee distributes the assets to the beneficiary according to your instructions or at their discretion, if they’ve been so empowered.
This might sound similar to a will and its executor, but there are many differences.
Unlike a will, a trust can be active while the settlor is still alive. A trust is active as soon as it’s created. You can create a revocable living trust to control your assets while you’re alive and you can dissolve it at any time as long as you’re still considered mentally competent.
Here are some other significant differences:
Probate: Unlike a will, trusts don’t go through probate and the resulting taxes, saving time and money.
Taxes: Depending on the type of trust, the assets may not be subject to estate taxes after your death.
Transfer of property: When creating a trust, you transfer your assets into it. While you still dictate what happens to them, they are under the trustee’s control. With a will, all the assets remain yours.
Split income: If you’re paying heavy taxes on your own assets, you can transfer money into a trust where the tax burden can potentially be paid by the trust itself.
Privacy: In Canada, wills become publicly accessible after you die, revealing information about your assets and the beneficiaries. A trust remains private.
Incremental gifts: In a will, a monetary bequest is typically handed over in a lump sum. If you feel your beneficiary is perhaps too young or spendthrift, you may not want to give them everything at once. A trust allows you to give a gift gradually, like an allowance.
Age conditions: In a will, you can withhold assets until a beneficiary reaches a certain age, but such conditions have been voided in court and the assets given once the beneficiary reached the age of majority. A trust can give greater control to create those conditions.
Read more about types of trusts and their tax implications: http://www.cra-arc.gc.ca/tx/trsts/typs-eng.html#intervivos