You probably know of others who have set up a trust(s) to protect their assets. Maybe you’ve heard mention of trusts on a TV special regarding inheritance and finances. Ever wondered what a trust is? Inquisitive as to how a trust might benefit you, your family and your business? The following is information regarding trusts and how they can protect assets.
What is a trust?
A trust is a legal entity that allows you to transfer the legal title of an asset(s) to a person while assigning the benefit of the asset to another. The creator or original owner of the asset is called the grantor. The person who manages the trust is known as the trustee (often an attorney or accountant). The person who receives the benefits is known as the beneficiary. Depending upon the type of trust, the grantor can retain the right to make some or all decisions regarding the trust. A well-designed trust helps save time, paperwork and other challenges when settling an estate. It can reduce the amount of estate taxes beneficiaries have to pay when they inherit assets.
Categories of trusts:
Trusts are either revocable or irrevocable and may take effect during your lifetime or after death.
Revocable trusts are most common and can be changed or revoked at any time. They instruct the trustee on how to distribute your assets to beneficiaries while you’re alive, after death or if you become incapable of doing so. Income from trust-held assets is taxable at Canadian trust tax rates.
Irrevocable trusts are set in stone the minute the agreement is signed. Only in rare circumstances may changes be made. Irrevocable trusts remove the benefactor’s taxable estate assets, meaning they are not subject to estate tax upon death. The benefactor is also relieved of tax responsibility for any income generated by the assets. The trust is protected from creditors and legal judgment.
What are the advantages of a trust?
There are a variety of benefits to the establishment of a trust. You can:
- Control assets and provide security for both the grantor and the beneficiaries.
- Provide for beneficiaries who are minors or require expert assistance managing money.
- Minimize the effects of the estate or income taxes.
- Provide expert management of estates.
- Minimize probate expenses.
- Minimize the time to accomplish probate.
- Maintain privacy.
- Protect real estate holdings and/or a business.
What are the disadvantages of a trust?
There are a few issues to be aware of when considering the establishment of a trust(s).
- Cost: An estate attorney usually does the paperwork involved in setting up a trust and transferring your assets into the trust.
- Time: You’ll need to spend time dealing with paperwork. You may need to have uncomfortable conversations about who gets what.
- May not be necessary: Some people can indeed save on estate taxes with certain trusts, but most estates aren’t subject to estate taxes in the first place.
Reasons to set up a trust:
There are a number of reasons that you may seek to establish a trust(s).
- You want to leave assets to minors or young adults
- You have children from a previous marriage
- You want a professional to manage your assets when you’re gone
- You have a disabled or special-needs child
- You want to support your spouse in the case of his/her incapacity
- You want to save taxes
If you’re seeking to ensure that your finances are well managed as you pass your assets on, a trust is useful. A trust helps make sure that your assets are directed toward the people and causes that are important to you.
Need help understanding the benefits of a trust? Want assistance setting up a trust? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.