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.

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 this document. 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. 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 the person you trust to become the trustee.
3. Use a living trust template to fill in the details, or use the one provided by an estate planning expert you are working with.
4. Review the document and sign it in the presence of a notary public.
5. Add the assets to the trust.
6. Keep the documents 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 a simple process for creating it:

1. Establish why you are creating the trust and how you want the beneficiaries to feature.
2. Choose the trustee you feel can perform the role well.
3. Draft the trust agreement with the help of a solicitor or use a reputable estate planning online tool.
4. Include the terms and conditions, trustee’s duties, and limits of the beneficiaries in influencing decision-making.
5. Review the document, if possible, with the trustee present to further create trust as you explain their role.
6. Sign and notarize the agreement.

It is also important to inform the beneficiaries you’ve created the two documents and the trustee you’ve chosen. Ensure they understand that a living trust is a separate legal entity, and you must name someone else as an executor in your absence.

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 scrape off or modify some aspects of the trust. For instance, they can:

• Change beneficiaries
• Sell the assets
• Add more assets
• Take back assets they had placed in the trust
• Divert a portion of the trust’s income to themselves

Further, a revocable living trust shares the same social security number as the creator’s, meaning the income and any deductions appear in your personal T1 tax return form. 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 as a separate legal entity. 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. 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. Examples of inter-vivos trusts outlined by the Canada Revenue Agency (CRA) include:

• Alter-ego trust
• Bare trust
• Mutual fund trust
• Retirement savings trusts
• Insurance-segregated fund trusts
• Public trusts
• Public investment trusts

After creating the trust, the settlor appoints a trustee who will assume the duties dictated in the document when they become incapacitated or after their demise.

A carefully crafted living trust provides enormous 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 going to court and accruing huge amounts of probate fees - in Ontario, probate fees can cost the estate up to 1.5% of it's gross total value. The beneficiaries also avoid waiting for weeks or months before they can access their property. A living trust, as a separate legal entity from your estate, also comes with tax benefits that ensure your beneficiaries receive more assets from your trust after they avoid probate.

Maintaining Privacy of Estate Distribution

When you transfer your assets into a living trust, you protect it from public scrutiny that occurs during the probate process and estate distribution. When your estate goes through the court process, it risks becoming an open record that exposes your financial details. It also limits privacy for your beneficiaries as people will know what they have received.

Providing for Minor Children and Beneficiaries with Special Needs

A living trust ensures that minor children and beneficiaries with special needs are protected from questionable family members and outsiders. 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 eighteen or twenty-one years. Afterward, the child can take over the assets contained in the trust. A living trust also ensures that all expenses of the beneficiaries with special needs are taken care of without disqualifying them from government programs.

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. For example, you will reduce the overall tax burden, and the family members will move to a lower tax bracket.

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 similarly to a living trust as it protects your asset while alive and allows seamless transfer to your beneficiaries after your demise.

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

• If the trustee doesn't time the realization of capital gains, the trust may incur more tax liability.
• Living trusts allocate a certain limit of capital gains to each beneficiary, often set at $250,000.
• If you include a Real Estate Investment Trust (REIT), the money will enjoy the tax benefit of having only a 50% inclusion rate.

Income Tax Considerations

Canadian Income tax laws subject trusts to taxation on income earned. In revocable trusts, the income earned by the settlor will be included in their personal income and taxed at the grantor’s marginal tax rate. Irrevocable trusts are treated as separate entities and attract their own trust rate that is different from that of the grantor. Hence, the income tax the trust earns attracts taxation as a separate legal entity and must be factored in while filling out the income tax return form.

Do you need help creating a living trust that complies with Canadian laws and takes advantage of all the 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.