Trusts and Trustees

What is a trust?

A Trust is a legal arrangement that exists whenever you (as the “Settlor” or “Testator”) give property (whether real estate, cash, investments or other assets) to one person (called the “Trustee”) to hold “in Trust,” invest, and manage for the benefit of another person (called the “Beneficiary”). For instance, consider Sam’s Trust:

• • You (Settlor) give a condominium property (the Trust Property) to your daughter, Jill (Trustee), for the use and benefit of your son, Sam (Beneficiary).
  • In this arrangement, Jill’s name would be on title to the property as the legal owner.
  • However, Jill’s ownership of the property is subject to Sam’s right to use and benefit from the property.

The terms and conditions of a Trust, including any restrictions you impose on the use, investment, management or distribution of the assets, including who the assets can be used for, to whom the assets should be distributed and when, are typically laid out in the legal document establishing the Trust, whether that be a Will or a separate Trust Agreement.

Why use a trust?

A Trust allows you to give a gift while at the same time retaining a degree of control over the manner in which the gift is transferred, how and when it is used by the Beneficiary, and who will receive the gift if the Beneficiary passes away before using the entire gift. This enduring control makes a Trust a valuable tool for ensuring the future financial security of your loved ones, including minors, persons who have a disability, and in some cases, spouses with competing responsibilities and interests.

Some examples of the circumstances in which you might want to establish a Trust and the types of Trusts that are appropriate in those circumstances are as follows:

• • You have a loved one who has a disability who is or who may be eligible for ODSP, and you wish to leave an inheritance for him or her. See the sections on Henson Trusts and Qualified Disability Trusts
  • You are a person with a disability who is or who may be eligible for ODSP, and someone has left you an inheritance in your own name. See the section on Inheritance Trusts
  • You have a loved one who has a disability to whom you wish to give a residential property. See the sections on Housing Trusts and Inter Vivos Trusts
  • You have considerable RRSP, RRIF, or LRIF assets and you wish to benefit your son or daughter with a disability while minimizing tax liability. See the section on Lifetime Benefit Trusts
  • You have life insurance that you would like to designate for the benefit of a minor
    or a person with a disability who is eligible for ODSP. See the section on Insurance Trusts
  • You have minor (or young adult) children or grandchildren that you wish to
    See the section on Staged Trusts below.
  • You are in a second marriage and you have children from a previous marriage. See the section on Spousal Trusts

In each case, it is important to consider the implications of the proposed Trust on the Beneficiary, his or her needs and eligibility for government benefits, if any, as well as the tax implications and planning options that apply. Each of the Trusts referenced above is discussed in detail below.

What is a Henson Trust?

See our page dedicated to Henson Trusts here.

What is a Qualified Disability Trust?

Effective January 1, 2016, new rules under the Canadian Income Tax Act came
into effect with respect to the taxation of Trusts. All trusts (with exceptions) are now taxed at the highest marginal tax rate rather than at graduated tax rates, as was previously the case. One of the few exceptions to the higher tax rate is a Qualified Disability Trust (QDT). Thankfully, many Henson Trusts will also qualify as a QDT.

In order to qualify as a QDT, a Trust must meet the following criteria:

• • The Trust must be testamentary (i.e., coming into effect on death of the person making the Trust).
  • The Trust must be a resident in Canada for the Trust year. Therefore, if the Trust was deemed to be a non-resident Trust (i.e., the sole Trustee is a non-resident), the Trust would lose the preferred graduated tax rates.
  • At least one Beneficiary of the Trust must be eligible for the Disability Tax Credit.
  • The Trustee and the Beneficiary must make an annual election in the tax return for the Trust.

No capital distribution may be made to a Beneficiary other than the Beneficiary with the DTC.

If any of these qualifications is not met, the status may be lost, thus resulting in the Trust being subject to income tax at the highest marginal tax rate. It is also important to note that a DTC-eligible beneficiary may only elect one trust to be a QDT.

What is a Inheritance Trust?

Another common type of Trust that may benefit an individual with a disability is an Inheritance Trust. This is a Trust that is created by the ODSP regulations to allow individuals who have a disability in receipt of ODSP to receive an inheritance without voiding their ODSP eligibility.

An Inheritance Trust has a number of restrictions, including the following:

1. 1. Only testamentary gifts can be used to create an Inheritance Trust, such as a gift from a Will, a share of an intestate estate, proceeds from a life insurance policy, death benefits from a pension plan, and proceeds from a locked-in RRSP or RRIF. Before establishing an Inheritance Trust, it is always a good idea to discuss with ODSP whether the testamentary gift in question is eligible for inclusion in an Inheritance Trust.
   2. Unless the Estate Trustee of the estate from which the inheritance is derived has the power to establish an Inheritance Trust (a power not always granted in a Will), the Beneficiary will usually need to establish the Inheritance Trust him or herself.
   3. If the Beneficiary does not have the capacity to manage property, he or she will be unable to establish such a Trust unless he or she has signed a Continuing Power of Attorney for Property, someone has been appointed as guardian for him or her, or a court order has been granted creating such a Trust.
   4. The Trust must be established within six months of the date the Beneficiary inherits the asset, which may not be feasible where the Beneficiary lacks capacity to manage property and does not have a signed Continuing Power of Attorney for Property.
   5. The maximum value of an Inheritance Trust is $100,000. (In contrast, a Henson Trust has no upper limit.) This limit applies to all inheritances received during the lifetime of the Beneficiary. If the inheritance is greater than $100,000, the Beneficiary’s ODSP benefits will be suspended until such time as the portion of the inheritance exceeding $100,000 has been depleted or transferred into an exempt asset such as a principle residence.
   6. Any income of the Trust that puts the value of the Trust over $100,000 will result
      in a dollar-for-dollar deduction from the Beneficiary’s ODSP in the following year. This means that the Trust cannot accumulate income over $100,000.
   7. An Inheritance Trust is considered an Inter-Vivos Trust and therefore cannot qualify as a Qualified Disability Trust. As such, it is taxed at the highest marginal tax rate. The only exception to this rule would be where the Will pursuant to which the inheritance is granted gives the Estate Trustee the authority to establish such a Trust, in which case, arguably, the Trust could qualify for QDT status.

Based on these restrictions, an Inheritance Trust is usually only used as a last resort where the Beneficiary has received an inheritance directly from a family member who was not aware of or otherwise failed to undertake appropriate estate planning.

What is an Inter Vivos Trust?

Many families seek legal advice about establishing a Henson Trust under the mistaken impression that a Trust will be set up immediately. In fact, a testamentary Henson Trust only comes into effect after the death of the person setting up the Trust.

An Inter Vivos Henson Trust, by contrast, comes into effect while you are still alive, on a date chosen by you. Some circumstances in which you might want to consider an Inter Vivos Trust include:

1. 1. Where you are concerned about your Trustee’s ability to coordinate the set-up of the Trust. An Inter Vivos Trust will allow you the opportunity to establish the accounts and set up the systems and relationships with professionals around the Trust in the way that you would prefer before you pass so that things can be transferred seamlessly to a successor upon your death;
   2. Where you are concerned about your Trustee’s ability to administer the Trust or want the chance to evaluate their fit. An Inter Vivos Trust allows you to work with a co- Trustee during your lifetime who will continue on after your death, thereby allowing you to assess their fitness for the role and to learn about their responsibilities and the needs of the Beneficiary to facilitate a smoother transition with fewer unknowns upon your death;
   3. Where you are concerned about your own continuing capacity to manage property, an Inter Vivos Trust allows you to secure funds for your loved one in a Trust while you are alive to address the risk of you becoming incapacitated (due to dementia or Alzheimer’s for instance) and being unable to continue to support him or her; and
   4. Where you have concerns about claims that may be made on your estate upon your death. An Inter Vivos Trust effectively removes the Trust assets from your estate at the time the assets are transferred to the Trust.
   5. Where you have family members who wish to leave an inheritance to your loved one who has a disability, but who are unwilling to undertake the extra planning and costs associated with including a Henson Trust in their own Wills. If you establish an Inter Vivos Henson Trust, these family members can simply name the Trust to receive the share for your loved one.
   6. Finally, where you wish to purchase a home for your loved one who has a disability, but are concerned about the tax implications of owning more than one residential property in your own name and about placing the property into the name of your loved one directly. (This situation is discussed at greater length below.)

If you are considering creating an Inter Vivos Henson Trust, be aware that there are certain disadvantages to doing so, including the following: they are subject to the highest marginal tax rate, Trust accounts must begin to be kept immediately, and tax filings will need to be made every year commencing in the year the Trust comes into effect.

Like any other Henson Trust, it is imperative that the Trust be properly drafted so as to ensure the assets therein will not interfere with your loved one’s ODSP eligibility. Professional legal and accounting advice is also highly recommended.

What is a Housing Trust?

A principle residence is an exempt asset for the purposes of ODSP eligibility. Therefore, many families assume that a home can and should be left to a loved one who has a disability directly, without a Trust. While in some limited circumstances that might be a viable option, in most circumstances where ODSP eligibility is a priority, transferring a home to a Trust is the better route. Transferring the property to a Trust has the following advantages:

1. 1. A Trust addresses any concerns that may exist regarding the ability of the Beneficiary to manage the property;
   2. A Trust accounts for the possibility of the property needing to be sold and the effect that the proceeds from the sale would have on the Beneficiary’s ODSP in the absence of a Trust;
   3. A Trust allows you to dictate who will receive the property (or the proceeds of the property) after the passing of the Beneficiary. In the absence of a Trust, the property will be transferred to the Beneficiary’s heirs, even if those heirs are persons totally unknown to you;
   4. A Trust allows for greater flexibility in the housing options for the Beneficiary. For instance, if the Beneficiary cannot reside in the home or cannot afford to reside in the home, the Trustees can rent out the home and use the proceeds to support the Beneficiary in another residential setting;
   5. Arguably, if a property is held in the Trust, some of the costs of maintaining the property may be considered an expense of the Trust and therefore may not necessarily constitute payments made from the Trust for the benefit of the Beneficiary. While this will be a question of the particular structure of the payments and the benefit the Beneficiary receives from the payments, it could provide added flexibility for Trustees in dispersing Trust funds and supporting the Beneficiary.

Practically speaking, a Housing Trust (or Trust that holds a house) does not need to be any different from the typical Henson Trust. Indeed, it is recommended that the Trust be structured as a Henson Trust in order to take advantage of the benefits listed above. Just like your typical Henson Trust, the Trust that holds a house can be testamentary in nature (i.e., arising upon your death as a result of a gift in your Will) or Inter Vivos (i.e., a Trust established while you are alive to hold a property purchased for the benefit of your loved one who has a disability).

 What is a Lifetime Benefit Trust?

A Lifetime Benefit Trust (LBT) is a little-known tax savings vehicle that has benefits similar to an RDSP. Simply put, the Income Tax Act allows you to rollover the proceeds of your RRSP or RRIF into a Trust for the benefit of an “infirm” spouse, dependent child, or dependent grandchild. The rollover is treated as tax deferred, which means that the RRSPs and RRIFs are not taxed as income to your estate, as they otherwise would be.

This tax deferral opportunity can significantly increase the value of your estate by minimizing your final tax obligations. In order to take advantage of the opportunity, the following requirements must be met:

1. 1. The Beneficiary must be mentally “infirm”;
   2. The Beneficiary must be financially dependent on you by reason of that infirmity;
   3. The proceeds of the RRSP or RRIF must be used to purchase a qualifying Trust annuity, and the Trust must be named as annuitant of that annuity;
   4. An election needs to be made by the Beneficiary or by the Beneficiary’s legal representative if he or she does not have the capacity to make such an election. The capacity to make this election has the potential to heavily restrict the viability of this option in the vast majority of cases;
   5. No person other than the Beneficiary may, during the lifetime of the Beneficiary, receive or otherwise obtain the use of the income or capital of the LBT. The LBT may and should specify who should receive the remainder of the LBT upon the death of the Beneficiary;
   6. The Trustees of the LBT must have the authority to distribute amounts to the Beneficiary but are not required to do so; and
   7. The Trustees are required to consider the needs of the Beneficiary, including his or her comfort, care and maintenance, in exercising their discretion whether or not, or how and when, to make distributions out of the LBT.

While the LBT may be a very tempting option, it should be noted that an LBT might not qualify as a Henson Trust. As discussed above, a Henson Trust must account for the payment of income after the accumulation period expires (in Ontario, 21 years after the Trust comes into effect). Specifically, any remaining income may need to be directed to someone other than the Beneficiary in order to preserve eligibility for ODSP. As noted above, no capital or income from an LBT may be paid to a person other than the Beneficiary during his or her lifetime. Given the competing requirements of the Henson Trust and ODSP on one hand, and the LBT and the CRA on the other, professional, legal, and accounting advice should be sought before including an LBT in your Will.

What is an Insurance Trust?

If you have substantial life insurance policies, you have a few options for the manner in which the proceeds will be distributed.

If you do not take any steps to control or otherwise direct how your life insurance proceeds will be paid, the proceeds will automatically form part of your estate. You can also sign a designation confirming that this is your wish; in other words, you can name your estate as the Beneficiary of the policy. Where your life insurance proceeds form part of your estate, they will be available to your Estate Trustee to use in paying your taxes and other liabilities. Only after these obligations have been met will the remainder of the proceeds be divided by your Estate Trustees amongst the people you have named as Beneficiaries of your estate in your Will. As a part of your estate, your life insurance proceeds are also subject to probate fees or Estates Administration Tax.

The alternative is to specifically designate Beneficiaries to receive the proceeds of your life insurance policy. You can do so either on the policy form documents, in a separate life insurance designation, or in your Will. Whichever method you choose, it is important that you clearly identify the person you wish to designate and clearly communicate your designations to your insurance provider.

In order to prevent your life insurance proceeds from forming part of your estate while at the same time retaining some control over how and when your life insurance proceeds will be distributed, you may want to consider establishing an Insurance Trust.

An Insurance Trust is simply a Trust to which the proceeds of a life insurance policy have been directed. This type of Trust allows you to name a Trustee to receive the life insurance proceeds for the benefit of another person. In the Trust document, you can dictate how the Trustee must manage and distribute the insurance proceeds amongst your Beneficiaries.

You can establish an Insurance Trust in a couple of ways: (i) as a separate Trust created in your Will; and (ii) as a standalone document. In either event, it is imperative that you clearly designate that the insurance proceeds are to be paid to the Trustee of the Trust, that you identify the Trust document, that the Trust document includes the Trustee authorities and powers your Trustee requires to properly administer the Trust, and that the Trust document clearly identifies the Beneficiary, as well as a remainder Beneficiary, to avoid potential intestacies with regard to the insurance proceeds.

If drafted appropriately, an Insurance Trust may also be a Henson Trust and QDT, but recall that there can only be one QDT for any one person. Careful drafting is required to ensure that the Trust is properly constituted as a separate Trust that meets the Henson Trust and QDT requirements. We recommend that you retain a legal professional with experience in this complex area of the law in order to make sure that the Trust that is prepared meets your needs.

What is a Staged Trust?

Staged Trusts are Trusts that are used to administer an inheritance to someone who is a minor, or who otherwise lacks the maturity required to manage property. You may establish a Staged Trust in a number of different scenarios, either as an Inter Vivos Trust (coming into effect while you are still alive) or a Testamentary Trust (on your death).

Typically, the terms of the Trust allow the Trustee to make discretionary payments
to the Beneficiary while the Beneficiary is young for his or her care, education, or other purposes identified in the Trust. The Trust then mandates the payments of a fixed sum or portion of the Trust to be paid to the Beneficiary on specific milestones, such as attaining certain ages (for instance, a quarter being paid at age 21, 25, 30, and 35) or achieving some other fixed criteria (such as upon graduating from university, etc.). In order for the Trust to be effective in preventing premature distribution of the funds, the Trust must clearly delineate what should happen to the Trust funds in the event that the Beneficiary passes away before the Trust funds have been fully distributed.

There are a wide range of options for how a Trust like this can be arranged based on your impression of the needs and abilities of the Beneficiary and the objectives you wish to encourage through the inheritance. Whatever your wishes may be, it is important to retain a lawyer that is experienced in preparing these types of Trusts and to whom you can clearly communicate your wishes.

What is a Spousal Trust?

There are a wide variety of Trust options that can be used to deal with the sometimes complex marital and support arrangements that exist in blended families. You may want to consider a Spousal Trust if you are in a second or third marriage and you have a child with special needs from a previous marriage.

Consider the following scenario:

• • Sue and Tom are married.
  • Sue came into the marriage with sizeable property and savings, while Tom has little in the way of savings and no property.
  • Sue and Tom each have children from a previous marriage.
  • Sue’s son Sam has special needs, is in receipt of ODSP, and is dependent on Sue for ongoing support.
  • Sue and Tom do not have a domestic agreement in place.
  • Sue is not on good terms with Tom’s children.
  • Tom is supportive of Sam but is also dedicated to his own children.

In this scenario, Sue wants to provide financial security for both Tom and Sam. Sue also wants to ensure that upon Tom’s death, her assets go to her own children and not to Tom’s children.

As a starting point, a domestic agreement is almost always a good idea for couples in second marriages with children from previous relationships. These agreements address the various ways in which the relationship could end (i.e., one spouse or the other passing first, divorce, death in a common accident) and what entitlements each spouse (and their children) will have in each case.

If no domestic agreement is in place, or even where a domestic agreement is in place, a Spousal Trust can help to address these concerns. In Sue and Tom’s situation, Sue can provide for Tom by placing a sizeable sum or asset in Trust for Tom (subject to any claims he may have under the Family Law Act), allowing Tom to receive all of the income from the Trust, with or without a right to receive or otherwise deal with the capital of the Trust. This means that Tom will have an income and be provided for out of Sue’s assets, but that upon Tom’s death, the capital and any remaining interest are distributed in accordance with Sue’s wishes rather than as part of Tom’s estate. This type of Trust can be used in conjunction with or as a precursor to a Henson Trust for Sue’s son Sam, depending on Sue’s estimation of Tom’s commitment to providing for Sam after Sue’s passing.

There are a wide variety of options for how to structure a Spousal Trust to provide for your spouse and children in a way that meets their needs and at the same time gives you peace of mind. An experienced Trusts and Estate practitioner should be retained to guide you through the options and to prepare your Wills if you are considering this option.