Trusts can be valuable tools for ensuring the financial security of your family members, including minors and persons with disabilities. A trust is a legal arrangement that allows you to leave behind assets (including real estate, cash and investments) for your loved ones, while retaining a degree of control over how they are used. Assets in a trust are legally held by one person or entity (known as the “trustee”) for the benefit of another (known as the “beneficiary”). The trustee manages the trust on behalf of the beneficiary. The person establishing the trust is known as the “settlor” and could be a parent, sibling, relative or friend.
A trust can be established through a trust agreement or deed and take effect while the settlor is alive; this is known as an inter vivos trust. A testamentary trust is established through a will and comes into effect on the settlor’s death.
The types of trusts that people usually consider when making their estate plan include:
- Henson Trusts: Also known as an “absolute discretionary trust,” a Henson Trust is created to hold property or assets in trust for the benefit of a person with a disability (i.e., the beneficiary of the Henson Trust). Henson Trusts are unique because the beneficiary of the trust continues to be eligible for government supports such as the Ontario Disability Support Plan (ODSP) even though there is property or money held in trust for them. There is no limit on the value of the assets that can be held in a Henson Trust.
- Qualified Disability Trusts: A Qualified Disability Trust is a testamentary trust that benefits from preferred tax treatment. Note that at least one beneficiary of the trust must qualify for the Disability Tax Credit.
- Lifetime Benefit Trusts: A Lifetime Benefit Trust is another tax savings vehicle that allows a parent or grandparent to rollover their RRSP, RRIF and LRIF assets on a tax-deferred basis.
- Staged Trusts: A Staged Trust is used when the beneficiary is a minor and is considered to be too young and immature to make appropriate choices about how to spend or use their inheritance. A trustee usually pays the capital of the trust to the beneficiary in stages.
- Spousal Trusts: A Spousal Trust holds all or a portion of the settlor’s estate for the benefit of his or her spouse for as long as the spouse lives. Upon the spouse’s death, the assets in the trust are distributed to the settlor’s children.
- Insurance Trusts: When minors or persons with disabilities are named as beneficiaries of a life insurance policy, an insurance trust can be used to avoid the proceeds becoming part of the estate and being subject to probate fees. In addition, the trust ensures that the proceeds are paid in the most effective way (i.e., bearing in mind the potential impact on ODSP eligibility).
For more information on Henson Trusts and other trust vehicles, or to make an appointment to discuss establishing a trust, contact PooranLaw today.