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What is a trust?

A trust is an arrangement in which the person creating it has property held through someone for the benefit of someone else.

A trust forges a relationship between three people:

  • The maker of the trust, also known as the settlor;
  • The person the settlor appoints to handle the assets, known as the trustee; and
  • The person who will benefit from the trust, known as the beneficiary.

In this arrangement the settlor appoints the trustee to hold legal title to the assets on behalf of the beneficiary.

This is often done for business and investment purposes, because trusts can be beneficial for tax purposes and avoids probate costs but also to protect assets, for investment management and protection for disabled family members.

This type of trust is most useful in situations of estate freezes, income splitting, providing for a family member with special needs, trusts for charitable organizations and as a will substitute.

There are two main types of trust: a testamentary trust and an inter vivos trust.

Testamentary trust

A testamentary trust is often created on the day a person dies. These trusts are personal trusts and are created under the terms of the deceased person’s will. The terms of the trust are created by the will itself or through a court order as it pertains to the deceased person’s estate under applicable law.

What sets a testamentary trust apart from an inter vivos trust is it’s often set up under a will. However, if the assets under a will are not distributed to the beneficiaries, then a testamentary trust can turn into an inter vivos trust.

Most often people create trusts under a will where minor children are involved who are under the age of majority. Often people leave the inheritance in the form of a trust so that the trustee will manage the assets for the child until the child comes of age or until the specified conditions the settlor set out in the will are fulfilled. For example, the settlor can stipulate that part of the inheritance in the trust is to go to the minor beneficiary upon coming of age. This often gives the settlor control over the assets and helps avoid mismanagement of assets.

Inter vivos trust

An inter vivos trust is defined as a trust that is not a testamentary trust. Unlike a testamentary trust, an inter vivos trust is not a personal trust in that it’s set up during the settlor’s lifetime and is often used for financial planning purposes.

When an inter vivos trust is set up, the trust itself is considered to be an individual for tax purposes.

Often that means that the ownership of an asset is transferred to other people or organizations under an inter vivos trust. The benefit in doing that is the asset is usually transferred to a person or organization that would pay less tax than the settlor on income earned from the asset. However, the settlor still remains in control of the asset.

Examples of inter vivos trust include: non-profit organization trusts, joint spousal or common law partner trust, employee benefit plan trust, and tax-free savings account trust.

How long can a trust last?

Unless it’s a spousal trust, a trust is deemed to have disposed of property every 21 years.

If you want to set up a trust you need to consult a lawyer.

Read more:

Types of trusts

Tax and Estate Planning Using Inter Vivos Trusts