In an earlier blog post found here “Business Structures, Rob Peers”, I had the chance to describe what Family Trusts are, what purposes they serve and some of the considerations that need to be made when establishing these kind of legal entities.
As a recap, I explained that Family Trusts are legal estate tools that are created to hold the assets of a family or another group in place of particular individuals or entities. Trusts also happen to have three primary parties: the Settlor, the Beneficiaries and the Trustees.
The Settlor of a trust is the individual who establishes the trust and designates the property that will be held in trust, as well as the rules of the trust’s management.
The Beneficiary(ies) of the trust is the individual(s) who will receive the property or assets currently held by the trust.
Finally, the Trustee(s) of the trust is the individual(s) who is responsible for managing the trust and abiding by the trust’s rules regarding distribution of property.
In my ‘Business Structures, Rob Peers’ blog post, I also highlighted one important consideration that should be made when setting up a Family Trust, that is that when an asset in a trust is sold or every 21 years, the Trust owes Revenue Canada income tax. That’s a significant fact to remember, especially when managing a trust on a long-term basis.
Family Trusts are one trust type. However, it’s not the only type of trust that can be used to intelligently delegate the distribution of assets.
Another type of estate trust that I would like to speak about is a Testamentary Trust. Those who’ve already created a will may be very familiar with a Testamentary Trust. However, in the world of estate planning, this type of trust is a powerful legal instrument and deserves describing.
Much like a Family Trust, a Testamentary Trust dictates the delegation of a person’s assets. However, as I mentioned, a Testamentary Trust is included in a person’s will. Therefore, the time of an individual’s death is when the terms of a Testamentary Trust begin.
It’s my opinion that not only should every person have a will drafted, but also, in order to improve the legal strength and clarity of a will, many estates can benefit if a Testamentary Trust is included in the document.
There are several types of Testamentary Trusts that can be included in a Will. I’d like to review two of them – Spousal Testamentary Trusts and Testamentary Trusts for minors.
Spousal Testamentary Trusts are fairly simple to explain. These are included in an individual’s will as a way to assure that their spouse will receive assets from the estate upon the individual’s death. Terms can be established in a Spousal Trust that define how exactly the assets will be distributed to the spouse. Moreover, at the time of the spouse’s death, the testamentary trust can then instruct that any children or grandchildren will receive what’s left of the estate’s assets.
Testamentary Trusts are also very useful for those who currently have children who are minors. More often than not, minor children are too young and financially inexperienced to properly manage assets that are inherited to them. Therefore, a Testamentary Trust can be incorporated in a will that defines how assets will be distributed to one’s minor children. For example, assets may be distributed when the child becomes an adult, say at age 21. Or, as another example, assets of an estate may be distributed in staggered distributions as a child gets older.