What is a Living Trust in Canada: Everything you Need to Know

Planning how your property will be distributed and managed after your demise can give you peace of mind. But does that mean you cannot have a similar plan while you are alive?

Even though many aspects of estate planning involve making arrangements for when you are not around, various legal documents are available to help you create a plan in your lifetime. These documents can be used while you are alive and enable full transfer of ownership after you die. This article focuses on living trust and how to use it to provide financial security for yourself and your loved ones.

A living trust, commonly known as an inter-vivos trust, is a legal arrangement you make during your lifetime. It involves transferring your property into a trust while you are alive. You can organize the arrangement to become null and void after you die or leave instructions for the beneficiaries to receive the assets as directed in the trust upon your demise.

How does a living trust work in Canada?

The individual who creates the trust (settlor or grantor) entrusts some or all of their property to one or more people of their choice (trustee). The trustee acts in the settlor's best interest and holds the property's legal title on behalf of the beneficiaries. Notably, a trust does not qualify as a separate legal entity like a corporation would, although the document can be treated as a separate taxpayer when dealing with tax obligations.

Importance of a Living Trust in Estate Planning

An overarching importance of a living trust as an estate planning strategy is its ability to offer financial security to your property during and after your lifetime. You succeed in efficiently managing and distributing your assets when you transfer ownership of key financial assets to your trust. Living trusts also ensures your financial empire stays afloat in case you become incapacitated. Within the trust, you can specify how the named trustee will execute your wishes if you become severely ill or experience a disability of any nature.

To understand the difference between living trust and testamentary trust, we must discuss each separately. As mentioned earlier, a living trust or inter-vivos trust is developed while the grantor is still alive and has access to the property. Living trusts can be irrevocable or revocable, meaning the creator can modify the former, while the latter cannot be changed. Inter-vivos trust also bypasses the probate process, enabling the families to access the assets within a short time after your demise.

On the other hand, testamentary trusts, also known as will trusts, are created after your demise. The person you named as trustee will create the trust according to the specifications you provided in the last will and testament. Since the testamentary trust does not come into effect until you die, it is by nature irrevocable. Upon your death, the will must go through probate to confirm its authenticity. Afterward, the executor will create the testamentary trust according to your instructions and transfer the assets into it.

The following table summarizes the key differences between the two estate planning methods:

It is advisable to consult an estate planning specialist as you plan to create your living trust to ensure that the trust complies with provincial laws, as requirements can vary across Canada. And regularly review and update the trust as needed. However, the following are the simple steps to take when developing one:

1. Choose whether you want to create an irrevocable or revocable living trust.
2. Think through the people you know and choose a reliable trustee to manage the trust assets.
3. It is highly recommended to work with an estate planning expert to ensure the trust meets specific needs and complies with Canadian laws.
4. Review the document and sign it in the presence of a notary public.
5. Add the assets to the trust.
6. Keep the trust document safe in a safe deposit box in your bank or a secure cloud space.

Drafting a Trust Agreement

A trust agreement is a critical document to have together with the living trust as it spells out the terms and conditions of the trust and the trustee’s role. Here is the process for creating an inter vivos trust:

1. Establish the purpose of the trust and define its beneficiaries.

2. Select a trustee who can manage the trust effectively.

3. Work with an estate planning specialist to draft the trust agreement.

4. Include clear terms regarding trustee duties, beneficiary rights, and asset management.

5. Review and sign the document; notarization may be advisable but is not mandatory in Canada.

6. Transfer assets into the trust (funding).

7. Store the trust document securely.

In Canada, living trusts are created to safeguard the property of its creator by assigning the trustee the role of handling the estate on behalf of the beneficiaries. There are two main types of living trusts: irrevocable and revocable. Let’s discuss each.

Revocable Living Trust

A revocable living trust, also referred to as revocable trust, is a living trust where the grantor reserves the right to update or change elements of the trust. For instance, they can:

• Change beneficiaries
• Sell assets
• Add additional assets
• Take back assets previously held in the trust
• Divert a portion of the trust’s income to themselves

The flexible nature of revocable trusts makes them more appealing as the decision made is not cast in stone. It enables the creator to maintain full control of their property.

Irrevocable Living Trust

An irrevocable trust cannot be modified, amended, or revoked after you create it. The instructions you give are final, with rare exceptions for amendment. A situation you may be permitted to amend is where you had a trust agreement, and you gave the beneficiaries or the trustee the testamentary or lifetime power of appointment. Only then can the trust’s terms be changed for the sole benefit of the current or future beneficiaries.

Irrevocable trusts avoid the probate process and allow your beneficiaries to access the property within a short period after your passing. It is also protected from becoming a public record, unlike leaving a will only, which must be filed in court and becomes an open record.

Inter-vivos Trusts

An inter-vivos trust is created during the lifetime of the settlor. The terms and duration are set when you draft it and can include how you want assets to be distributed during or after your lifetime. It is also called a living or estate trust. Inter-vivos trusts are categorized into revocable and irrevocable.

A carefully drafted living trust provides significant benefits that safeguard your interests and those of your loved ones. Let's discuss three advantages of this estate planning document.

Avoiding Probate Fees

Most people create living trusts because they do not want their loved ones to experience the hassle of applying to court and accruing huge amounts of probate fees - in Ontario, probate fees can cost the estate up to 1.5% of its gross total value. The beneficiaries also avoid waiting for long periods of time before they can access their inheritance. A living trust also comes with tax benefits that ensure your beneficiaries receive more assets from your trust after they avoid probate.

Maintaining Privacy of Estate Distribution

By placing your assets in a living trust, you protect them from the public eye during the probate process. Estates that go through court proceedings risk becoming part of the public record, potentially exposing your financial information. Additionally, a living trust helps maintain privacy for your beneficiaries, as it prevents public disclosure of their inheritances.

Providing for Minor Children and Beneficiaries with Special Needs

A living trust ensures that minor children and beneficiaries with special needs are protected. For instance, a parent with a minor child can create a living trust to hold their assets. They can structure it to ensure the child's needs are met until they reach the legal age of majority, or any other age. Afterward, the child can receive the trust assets outright. A living trust can help ensure that all expenses of the beneficiaries with special needs are taken care of without disqualifying them from government assistance programs.

What are the disadvantages of a living trust in Canada?

Setting up a living trust is more complex and costly than preparing a will, often requiring the expertise of a lawyer to ensure compliance with laws. Additionally, there are ongoing administrative costs and responsibilities, which may not be suitable for everyone. However, despite these challenges, a living trust remains a powerful tool for individuals seeking greater control over their assets, privacy in their estate planning, and smoother transitions for their beneficiaries.

Additional Considerations and Related Trusts

Family Trusts

Family trusts are created to hold and pass on family property. People prefer to set up a family trust to safeguard the family’s assets and enjoy certain financial benefits that come with creating one.

Alter Ego Trusts

Alter ego trusts are a type of trust you can create under the Canada Income Tax Act in which you are the grantor, trustee, and beneficiary when you are alive. However, you must be a Canadian citizen over sixty-five years. The alter ego trust works differently than a living trust. While both allow control over assets during lifetime and facilitate asset transfer after death, alter ego trusts specifically cater to Canadians aged 65 or older and come with tax deferral benefits.

Living trusts have tax implications pertaining to capital gains and tax benefits in the following way:

• If the trustee doesn't time the realization of capital gains, the trust may incur more tax liability.

Income Tax Considerations

Under Canadian income tax laws, trusts are taxed on the income they earn. For revocable trusts, any income generated is attributed to the settlor and taxed at their personal marginal tax rate. In contrast, irrevocable trusts are treated as separate taxable entities and are subject to their own tax rates. As a result, the income earned by an irrevocable trust is taxed independently and must be reported on the trust's T3 income tax return.

Do you need help creating a living trust that complies with Canadian laws and takes advantage of all the potential tax benefits it offers? ClearEstate can offer you the guidance and support you need and help you save time and money in your estate planning endeavours. Talk to an expert today.