For many Canadians, estate planning starts with drafting a will. But for those looking to provide longer-term support, manage incapacity, avoid probate, or ensure family assets are used wisely, a trust may be the most effective tool available.
This article breaks down the core types of trusts, how they work, and why a trust may be a good solution for your family.
What Is a Trust?
A trust is a legal arrangement where one party (the trustee) manages assets for the benefit of another (the beneficiary), according to terms set out by the person who creates the trust (the settlor). Unlike a will, a trust can be customized to manage property over time, address specific needs, and in some cases, offer legal and tax benefits.
Key Features of a Trust:
- Control: The settlor can define when and how assets are distributed.
- Protection: Trusts can shield assets from mismanagement, creditors, or legal disputes.
- Continuity: Trusts can begin during your lifetime or take effect at death, continuing beyond probate.
Types of Trusts in Canadian Planning
1. Testamentary Trusts (Arising at Death)
These trusts are created in your will and only come into effect after your death. Common uses include:
a. Spousal Trusts
Used to provide income or support to a surviving spouse, while preserving the capital for children or others. Particularly helpful in blended families.
Requirements for tax deferral:
- Must be resident in Canada.
- Spouse must be entitled to all income for life.
- No other person can access the capital during the spouse’s lifetime.
This structure allows a tax-deferred rollover of assets to the trust and postpones capital gains tax until the spouse’s death.
b. Trusts for Minor Children
Without a trust, minors’ inheritances over $10,000 in BC go to the Public Guardian and Trustee. A testamentary trust allows an appointed trustee to manage the funds and control timing of access—often distributing funds at staggered ages (e.g., 25, 30, 35).
c. Trusts for Adults with Disabilities
A discretionary “Henson trust” can maintain provincial disability benefits while supplementing the beneficiary’s quality of life. When structured as a Qualified Disability Trust (QDT), it may be eligible for graduated tax rates.
d. Protective Trusts for Vulnerable Adults
For individuals with addiction, poor financial literacy, or unstable relationships, a discretionary or spendthrift trust allows a trustee to provide support without exposing the assets to misuse or creditor claims.
2. Inter Vivos Trusts (Created During Lifetime)
These trusts begin operating immediately and are often used for advanced planning.
a. Alter Ego and Joint Partner Trusts
Available to Canadians aged 65 and older, these allow individuals to retain control over assets during their lifetime while avoiding probate at death.
Advantages:
- Assets transfer to beneficiaries privately, outside the court probate process.
- Planning for incapacity is built in: if the settlor becomes incapable, a successor trustee steps in.
- Reduces risk of Wills Variation Act claims, since assets are no longer part of the estate.
Tax Considerations:
- Capital gains are deferred until death.
- No 21-year deemed disposition rule during the settlor’s life.
b. Family Trusts
Common in business succession or multigenerational wealth planning. These trusts often hold shares in a corporation and allow for income splitting among family members.
Note: Since 2018, the Tax on Split Income (TOSI) rules significantly limit income-splitting unless certain criteria are met.
c. Disability Trusts (Inter Vivos)
A discretionary trust established by a parent or grandparent for a disabled adult can allow continued eligibility for provincial disability benefits. These trusts may not qualify for the principal residence exemption or preferred tax rates unless structured carefully.
Key Considerations When Setting Up a Trust
1. Choose the Right Trustee
A trustee has legal control of the assets. You must choose someone who is trustworthy, financially capable, and willing to take on administrative responsibility. You can appoint:
- A trusted family member
- A professional advisor (e.g., lawyer or accountant)
- A regulated trust company
2. Plan for the 21-Year Deemed Disposition
Most trusts face a tax event every 21 years as if they had sold all their assets, triggering capital gains. Trustees must plan in advance to manage this liability—either by rolling assets out to beneficiaries or setting aside funds.
3. Review Family Dynamics
In blended families, complex sibling relationships, or situations with dependents who have disabilities or addictions, trusts can provide fairness, structure, and long-term oversight.
4. Understand Income Tax Attribution Rules
If a trust is improperly structured, income or capital gains may be taxed in the hands of the settlor. This is especially important in family trusts and spousal loans.
Examples of When a Trust Might Be Helpful
- You want to ensure your partner is cared for after your death but protect assets for your children.
- Your adult child has a disability or struggles to manage money.
- You’re concerned about potential legal challenges to your will.
- You want to avoid delays and costs of probate and maintain privacy.
- You want to manage how and when your grandchildren receive their inheritance.
Not Just for the Wealthy
Contrary to popular belief, trusts aren’t just for the wealthy. They are legal tools that offer practical solutions to real-life problems, whether that’s protecting a loved one, simplifying administration, or respecting complex family circumstances.
While trusts are powerful, they must be properly designed, funded, and maintained. Working with experienced professionals - legal, tax, and professional trust companies if applicable - is essential to ensuring that a trust accomplishes your goals without unintended consequences.
If you’re updating your estate plan or thinking through how best to support those you love, ask your advisor whether a trust could help provide peace of mind and thoughtful stewardship for the future.
Nicole Garton is president and co-founder of Heritage Trust.
Recognized by Best Lawyers in Canada for trusts and estates and family law, she previously chaired the Canadian Bar Association Wills and Trusts Subsection (Vancouver).
Contact Nicole by email or phone at (778) 742-5005
Heritage Trust is a leading non-deposit taking financial institution, regulated by the BC Financial Services Authority (BCFSA), a government agency of the Province of British Columbia. Heritage Trust offers caring and professional executor, trustee, power of attorney, committee, escrow and family office services to BC resident clients.
We welcome you to contact us.