Trusts, Estates & Wealth Planning


Trusts are often an integral part of estate planning because they provide a great deal of flexibility in meeting the objectives of an estate plan. In addition, trusts are an important part of tax planning for individuals and closely-held corporations.

Trust basics

A trust is essentially a legal concept that relates

to the ownership of property, whereby legal title to property is vested in a trustee. That trustee is obliged to hold and administer the trust property for the benefit of the beneficiaries, who have an interest in the trust's property and/or income.

The settlor creates the trust by 'settling' the trust with some property. Generally, a gift of property to a trust is a disposition for tax purposes and may generate capital gains. The settlor and trustee execute a trust deed evidencing the settlor's intention to create the trust, as well as setting out the rights, duties, and obligations of the trustee and the principles governing the trust. Generally, the trust deed provides the trustee with broad powers to deal with property.

The trustees become the legal owners of the trust property and are under a fiduciary obligation to manage the trust property in the best interest of the beneficiaries.

All trustee decisions must be properly reflected in resolutions and documents. It is advisable that the trustee establish and maintain the equivalent of a corporate minute book to retain the trust deed, banking documents, and all trustee resolutions.

A corporate trustee may be chosen for its expertise, impartiality, and ability to deal with complex situations.

Benefits of using a trust

The following are some benefits of using a family trust structure.

  1. Income splitting. Trusts can be an effective way to achieve income splitting, particularly with children (subject to the potential application of the attribution rules and the "kiddie tax"). The kiddie tax does not apply to income from listed securities, unless such income is earned through a holding corporation. It is, however, possible to avoid application of the Attribution Rules.

  2. Capital gains splitting. Trusts can be used to transfer appreciation in capital property, such as shares, to other family members, especially children. Generally stated, there is no attribution of taxable capital gains earned by minors. In this circumstance, the minor ben eficiaries would be subject to tax on the capital gains at their marginal rates.

  3. Capital gains exemption. Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of cer tain types of shares (and certain other property). Both the beneficiary and the corporation must meet all relevant tests at the time of disposition, and the trustee must allocate the capital gains to the beneficiaries. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

  4. Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.

  5. Creditor protection. Trusts offer some degree of creditor protection when the beneficial ownership of assets shifts to other beneficiaries.

  6. Control of trust property. By holding assets in a trust all of the above benefits can be achieved while the trustees maintain full control (subject to their fiduciary duties as     trustees) over the trust property. It is important to note that it is the trustees who control the trust property and not the settlor. The settlor, however, sets the terms of the trust in the trust deed and the trustees are bound to act according to the terms of the trust deed as well as general trust law.

Discretionary vs. non-discretionary

A family trust can be either discretionary or non-discretionary. A discretionary trust gives the trustee full discretion to allocate income and capital among beneficiaries.

In a non-discretionary trust, the trust deed sets out the parameters within which income and capital are allocated. For example, if a trust has three beneficiaries, each beneficiary could be entitled to one-third of the income on an annual basis, and one-third of the trust capital when capital allocations are made. Most trusts are irrevocable, as the tax rules deem any income or capital gains earned by a revocable trust to be those of the contributor and taxed in his or her hands, and not income or capital gains of the trust.

Taxation of a trust

For income tax purposes, an inter vivos trust (that is, a trust created during a person's lifetime) is considered an individual and subject to tax at the top marginal tax rate on its taxable income for a calendar year-end. A testamentary trust (that is, a trust that is created on the death of an individual) is subject to graduated marginal tax rates and may have other than a calendar year-end.

Initially, the trust's income is determined in essentially the same manner as an individual's income. However, the trust may deduct its income that is either paid or payable to beneficiaries. Income is not considered paid or payable unless it was paid during the year, or the beneficiary was entitled to enforce payment.

Generally, a trust is deemed by the tax rules to dispose of its capital property every 21 years. This deemed disposition may result in a large tax bill, and steps may be required to distribute the capital property of the trust to the capital beneficiaries prior to the deemed disposition date. Planning opportunities should be considered prior to the 21-year trigger date. The 21 year deemed disposition rule does not apply to alter ego trusts or joint partner trusts.

Alter Ego and Joint Partner trusts
Alter Ego Trust

An alter ego trust is a trust created after 1999 by an individual who is 65 years or older. The terms of the trust must provide that the settlor is entitled to all of the income that arises from the trust property before his or her death, and that only the settlor may receive or obtain the use of the income or capital of the trust while the settlor is alive. On the death of the settlor, the trust property that is remaining may be distributed to, or continue to be held for, family members, friends or charities as specified in the document creating the trust.

Joint Partner Trust

A joint partner trust is similar to an alter ego trust, except that the settlor or his or her spouse, in combination with each other, must be entitled to receive all of the income of the trust that arises before the death of the survivor of them. In addition, no person, other than the settlor or the settlor's spouse, may be entitled to the capital of the trust before the death of the survivor. The definition of spouse, for the purposes of a joint partner trust, includes married, common law and same sex spouses.


There are several benefits associated with creating alter ego or joint partner trusts.

  1. The transfer of property to an alter ego or joint partner trust obviates the need for a will with respect to the property transferred, as the terms of the trust will provide for the disposition of the property to one or more beneficiaries upon the death of the individual or the surviving partner.

  2. The assets in an alter ego or joint partner trust devolve to the beneficiaries outside of the estate. It follows that an individual is afforded more privacy regarding the disposition of his or her assets on death. Furthermore, there is no need to apply for probate, which is a public process.

  3. The assets in an alter ego trust or joint partner trust will not form part of the settlor's estate. Accordingly, the assets are not subject to estate administration tax, also referred to as probate fees. At present, the tax is equal to approximately 1.5% of the value of an estate.

  4. As the assets held on trust are not included among the assets to be distributed under the deceased's estate, the trustee will have continuous legal title to the property and can distribute to the beneficiaries according to the terms of the trust document without the delays inherent in the probate process.

  5. Property transfer to an alter ego or joint partner trust will not constitute disposition of the property. Instead, the property is rolled-over, delaying any realization of capital gains and the tax owing thereon until the death of the individual or surviving partner.

  6. Alter ego and joint partner trusts, unlike other trusts, are not subject to the deemed disposition rule after 21 years, during the lifetime of the individual and his or her partner. Rather, any taxation of capital gains will be deferred until the death of the individual or surviving partner, even if death occurs more than 21 years after the trust is established. If the trust continues to exist after the death of the individual or the surviving partner, however, a deemed disposition will thereafter occur every 21 years.

  7. An alter ego or joint partner trust can be used to ensure the continuous management of the assets of the individual and his or her partner in the event of incapacity. These trusts may therefore serve as an alternative to a power of attorney and, unlike a power of attorney, the terms of the trust will survive the death of the individual and his or her partner.

  8. It should be noted that the use of an alter ego or joint partner trust will not avoid the deemed disposition of assets which occurs upon the death of the individual or the surviving spouse, and that income taxes will be payable in respect of any gains realized.

EXAMPLE of Alter Ego Trust

Individuals aged 65 years or older may want to consider establishing either an alter ego trust or a joint partner trust during their lifetime. These trusts may be suitable for individuals who wish to avoid or minimize estate administration taxes, who are seeking privacy in the administration of their estate, who have substantial assets, and who are willing to incur the costs associated with the establishment and maintenance of a trust.

Offshore Trusts

While the tax advantages of (legally) using offshore trusts are limited, they can still play a key role in estate and financial planning to help you preserve and enhance your wealth.

You may benefit from using an offshore trust if you are a Canadian resident and:

    • you have assets in various locations throughout the world;

    • you intend to distribute assets to individuals living outside Canada during your lifetime;

    • you have recently immigrated to Canada; or

    • you intend to leave Canada.

If you are not a Canadian resident, an offshore trust can:

    • help you distribute assets to Canadian residents tax effectively, either during your lifetime or through your will; or
    • provide significant tax benefits if you plan to immigrate to Canada.
How offshore trusts work

An offshore trust is established under the laws of another country and is administered by a non-Canadian trustee, typically a financial institution. An offshore trust has a settlor, a trustee and beneficiaries. If you are the settlor of the trust, you will fund the  trust either by giving or lending property to it. A trust is separate from you and your beneficiaries, and is governed by the laws of the country in which the trustee is resident.

The trustee becomes the legal owner of the trust property and is required to manage the property as directed in the trust deed. The trustee is also responsible for distributing trust assets to the beneficiaries you have named in the trust deed. The trustee has full decision-making powers over trust assets based on the provisions of the trust deed, and it is essential that you have complete confidence in your choice of trustee.

To maximize their effectiveness, offshore trusts are generally established in jurisdictions with little or no income, capital gains, or estate taxes, such as Barbados, the Bahamas and the Cayman Islands, and the Channel Islands. Those countries have local and international financial institutions including local offices of Canadian financial institutions that are experienced in acting as trustees, and have the legal and regulatory systems designed to manage offshore trusts.

Why use an offshore trust?

There are a number of potential benefits to offshore trusts. You can use them to:

    • facilitate the smooth transfer of wealth from you to your dependants while you are alive or after your death;

    • preserve your wealth;

    • take advantage of lower rates of taxation that would apply to offshore trusts in certain circumstances;

    • prevent the imposition of "forced heirship" rules, which dictate how assets are to be distributed on death in certain jurisdictions;

    • reduce probate and other estate fees where applicable;

    • preserve confidentiality with respect to your assets and business affairs; and

    • discourage litigation and encourage settlements

The structure that is appropriate for you will depend on your circumstances and your financial goals. Here are some typical situations in which offshore trusts may offer significant potential benefits:

 You are planning to immigrate (or have recently immigrated) to Canada.

The assets in an offshore immigration trust can earn income and capital gains from foreign sources free from Canadian income tax for up to the first 60 months of the immigrant’s Canadian residency. Because the duration of the Canadian tax holiday is based upon the time you are resident in Canada, setting up the trust prior to the move to Canada maximizes the benefits. However, setting up such a trust may generally still provide some benefits even if established within 60 months after immigration to Canada. For more extensive discussion, please see section on Immigration Trusts.

 You are a Canadian resident with non-resident beneficiaries.

A properly structured offshore trust can be an effective way to distribute certain assets during your lifetime or under your will to family members who are not Canadian residents. The income earned in the trust and distributed to beneficiaries who are not resident in Canada should not be taxable in Canada, and will instead be taxed in the jurisdiction where the trust is established and the jurisdiction in which the beneficiaries live.

 You are not a Canadian resident but you have beneficiaries who are Canadian residents.

Depending on the length of time that you have been a non-resident of Canada, an inter-vivos offshore trust can be set up and funded by a non-resident for the benefit of Canadian residents and can accumulate income tax-free offshore, and distribute capital tax free to Canadian residents. The same rules apply to offshore trusts established in the wills of non-residents of Canada, or former residents of Canada who have been non-residents for at least 18 months prior to their death.

For more extensive discussion on offshore trusts, see Victor Pilnitz on FOREIGN A$$ET PROTECTION TRUSTS.