If you want to do Estate planning, you must know the types of trusts available for you. A trust is a medium for holding and transferring family assets.
Trust serves many purposes. By switching income to family members in lower tax brackets, it helps to reduce taxes. It works as a safeguard to young inheritors by watching over their property until they come to the right age. It can save the property from eroding abruptly by controlling the impulsive member’s payout.
What Is a Trust?
Trust is, in short, a fiduciary relationship. It occurs when one party, known as a trustor, gives the right to hold the property, known as the trustee, to manage it for a third party, the beneficiary.
Trust provides legal protection to the truster’s property. It is established to make sure that the trustor’s property gets distributed or spent according to his/her wish. Trust can be formed to run the charity work when the trustors are gone.
Types of Trust
There are mainly two types of trust- Testamentary trust and living trust. Every trust you see either a testamentary trust or a living trust.
A testamentary trust is established upon the death of the testator. It is stated in his/her will. There could be more than one testamentary trust in a will.
A testamentary trust needs four parties to complete –
Settlor/Trustor: The person who wants to create trust as a part of his/her will. He/she is also known as the grantor.
Trustee: The person who manages the property of the trustor for the benefit of the third party. He is usually appointed by the settlor. The probate court may also appoint him/her.
Beneficiary: The person/persons who are going to receive the benefit of the trust.
Probate court: Well, not accurately a party, but it supervises the trustee’s management of the trust.
A trust that is established during the lifetime of the trustor is called a living trust. It is also familiar as “inter vivos” trust. It is the type of trust that is used in estate planning. It makes the assets more easily transferable. Most importantly, it helps the trustor to avoid the delay and expense of probate.
Trust can be categorized into the following two types-
A trust that can be altered or obliterated according to the wish of the trustors is called revocable trust.
As the name suggests, this trust can’t be changed or canceled once it gets established.
As you can see, a testamentary trust is irrevocable trust whether inter vivos trust can be revocable or irrevocable.
Now that you get an overview of the main types of trust let’s dig into some important specific trusts in Canada.
A spousal trust is established for the benefit of the surviving couple and the next generation. The trust may be formed to provide allowance to the surviving couple and reserve capital for the next generation.
Alter Ego Trusts and Joint Partner Trusts
These are some particular types of trusts in Canada. You need to at least 65 years old to qualify for alter ego trusts or joint partner trusts.
In alter ego trust, the settlor is only entitled to receive the income during his/her lifetime.
If the settlor makes his/her spouse or common-law partner beneficiary, then it will be called joint partner trusts.
The only difference from alter ego trust is both the settlor and spouse is entitled to receive all the income of the trust.
Both of these trusts are inter vivos trust. Only elderly Canadian people are eligible for this trust. These trusts are very popular as tax reduction policy.
Trust for individuals with disabilities
This trust can either be testamentary trust or inter vivos trust. It is used to provide lifelong allowance to beneficiaries with disabilities.
An insurance trust is only for those who adopt a life insurance policy. It is established separately from a person’s estate. Other aspects of trust are like testamentary trust.
Trust is something that you can put your trust when you are dead. That’s why it’s so closely associated with estate planning. If you have a clear view of types of trust, then it will be easier for your estate planning.
If you want to know more about trust or trust fund, then contact us. Our professional team is always there to help you.