Estate planning is more than just handing over your wealth and assets to the next generation to look after. If not done properly, it can create more problems for your loved ones rather than secure their future. Therefore, choosing the right estate planning strategy is a critical step in effective asset management and wealth distribution.

Will Vs. Trust: How Do They Differ?

While there are many estate planning tools you can choose from, drawing up a will and creating a trust are the most common. A will is a legal document that enables you to leave detailed instructions as to how you wish your wealth to be distributed among your loved ones after your death.

A trust is a legal arrangement that allows you to transfer charge of your assets to a reliable “trustee” of your choice, purely with the intention of distributing your estate to your “beneficiaries” over a period of time.

The tool that is most suitable for you depends on your financial situation, business situation, family relationships, and long-term goals and aspirations. For a small-sized family with uncomplicated finances and simple wealth distribution goals, a will can suffice. But for business families with complicated estates and a lot of dependents, a trust is a better option, as it gives you more control over how and when your wealth should be handed over.

Is a Trust the Right Option for Your Wealth?

In a trust, you, as the grantor, transfer the legal ownership and management of your assets – be it real estate, a business, shares, or even family heirlooms – to the trust. Then, as per the conditions laid down by you, when the time and circumstances are right, these assets will be passed on to your chosen beneficiaries, making them the legal owners. Depending on how you would like to manage your wealth, you can explore different types of trusts:

• Bare Trusts, wherein the beneficiary has full control over the assets. The trustee only acts in accordance with the beneficiary’s instructions.
• Living Trusts, which you create while you are still alive, protect your estate from creditors and distribute the income and estate to the beneficiaries in the event of your incapacitation or death without paying probate fees. This trust can be revocable (cancelled by the grantor at any time) or irrevocable (cannot be changed or cancelled once created).
• Testamentary Trusts, which are written as part of a will and only come into being after the grantor’s death. It is used to manage inheritances, provide financial security to minors or dependents, and help reduce potential tax liabilities.

Every type of trust has its own advantages and limitations, but they all offer a degree of flexibility in taxation and estate planning.

How Can Trust Preserve Your Wealth

Regardless of how you intend to control or distribute your wealth using the different trusts, the one common goal every trust fulfils is protecting your wealth and assets against the many external risks your estate faces:

High Tax Liability

The biggest risk to your wealth is the tax liability it entails. However, there are several ways you can preserve your wealth from higher taxation, and trusts are one of them.

Income Splitting: Canada’s progressive tax system charges lower tax to two people earning $60,000 each than one person earning $120,000. When you create a trust and transfer the assets, the trust helps you take advantage of income splitting by dividing the income from those assets among beneficiaries. However, the Canada Revenue Agency (CRA) has strict rules around income splitting and trusts, which a tax specialist can help you navigate.

Estate Freeze: When you transfer shares of an incorporated business to family, they are deemed to be sold, and a capital gain is realized, which can be significant and force your family to sell the asset to pay the tax. Business owners can use a family trust to reduce this tax liability by freezing the value of shares.

The owner transfers the shares to the trust at the time of the freeze. So any future asset increase occurs within the trust, and the tax is paid when those shares are sold by the trust, or there is a deemed disposition in the trust. Since the business owner no longer owns the shares, there is no capital gain at his death.

While a trust offers significant tax benefits, a trust created solely to take advantage of them could face scrutiny from the CRA. The objective of the trust should go beyond tax savings.

Heavy Probate Fees

In the Canadian common law provinces, estates are required to pay probate fees. These are legal costs that must be paid to validate a deceased person’s will and distribute their estate to the beneficiaries. When you transfer your estate using a will, the executor first pays probate fees from the assets and distributes whatever is left as per the stipulations of the will. Moreover, probate fees vary from province to province. This means if you own property in more than one province, the fees will end up eating up a large chunk of your wealth even before reaching your family.

However, a trust is exempt from probate fees. Once you transfer ownership of your assets to it, you can bypass these high probate fees altogether.

Spendthrift Beneficiaries

While you may be great with finances, your family members may not. In some cases, inheriting wealth and property can also lead children to become careless with money. To preserve your hard-earned money from such reckless squandering or even greed, a trust is a great option, especially for high-net-worth individuals with significant wealth and business responsibilities. The trustee manages the assets and distributes income in accordance with the trust deed. You can choose a professional accounting firm to be your trustee.

Creditors

Creditors often seize a debtor’s property and assets to recover their unpaid dues. However, when you create a trust, you transfer ownership of property and assets to it. Thus, any debts incurred after the trust’s creation and left unpaid due to personal bankruptcy or death are not recoverable from the trust’s assets, safeguarding your family’s financial security.

The trust must be created when everything is in order, not when financial troubles are apparent, as the judge could seize trust assets if it is proven that the trust was created solely to avoid creditors.

Protecting Your Wealth for Your Child

One of the biggest advantages of a trust is that it not only preserves your property and money till a time your children are old enough to handle it, but also allows you to lay conditions regarding its distribution. For example, you can instruct the trustee to cover your children’s education and housing costs, while only giving them a specific allowance until they reach a certain age or an educational or income milestone. This can help ensure your children are responsible and mature enough to handle their inheritance once they receive it.

For families with a child with special needs, a trust holds the child’s wealth, managing their needs without burdening them with the stress of managing finances.

A well-structured trust and a secure financial future are perhaps the best gifts you could leave behind for your loved ones. However, a trust has to meet reporting requirements.

Contact Glenn Graydon Wright LLP in Oakville to Help You Create and Manage a Trust

A professional estate planning firm can get you access to an estate planner, wealth manager, accountant, and tax advisor under one roof to help with the technicalities of creating the trust and safeguarding your wealth in the most tax-efficient manner possible. At Glenn Graydon Wright LLP, our accountants and tax advisors can provide services such as creating and managing a trust. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and estate planning services, contact us at 905-845-6633 or connect with us online.