Trusts BASIC STRUCTURE OF A TRUST SETTLOR TRUSTEE TRUST BENEFICIARIES

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1 What is a trust? A trust is an obligation that requires a person (the trustee) to hold and oversee property for the benefit of other persons (the beneficiaries). The trust is not a legal entity. It is a relationship established whenever a trustee is holding property in a manner such that the value of the property accrues to the beneficiaries. BASIC STRUCTURE OF A TRUST SETTLOR TRANSFER OF PROPERTY TRUST TRUSTEE BENEFICIARIES RECIPIENT OF BENEFITS FROM THE TRUST How is a trust created? The trust is created when a person (known as the settlor) makes a transfer of property to the trustee to be held for the beneficiaries. Generally, trusts are brought into existence through the formal execution of a trust indenture. The trust document specifies the details of the arrangement. For example, the trust document will set out: the appointment of trustees naming of the beneficiaries instructions with respect to the allocation of income and capital powers of the trustees (otherwise the trustees are governed by provincial legislation) Benefits of utilizing a trust A trust can be a very powerful estate-planning tool. Benefits include the following: control over assets can be maintained for those who are unable to properly manage their affairs income tax and estate planning There are specific benefits that may be realized depending on the type of trust arrangement. Specific types of trusts are described in more detail below.

2 Testamentary trusts A testamentary trust is established as a consequence of the death of an individual. Generally, it is created under the deceased s will. The will specifies the details of the trust arrangement. A testamentary trust is taxed as an individual utilizing the progressive tax rate schedule without the benefit of personal exemptions. A testamentary trust may select any year-end. A testamentary spousal trust is a trust where: all or some portion of the deceased s assets are placed in a trust arrangement for a surviving spouse the deceased s spouse must be entitled to receive all the income earned from the trust capital before the surviving spouse s death no person, other than the surviving spouse, may obtain use of income or capital from the trust until the surviving spouse s death upon the death of the surviving spouse, the assets are distributed according to the original will. Consider the following example: Mr. and Mrs. Smith have accumulated a comfortable net worth over the years. Mr. Smith has managed the majority of the financial affairs. Mrs. Smith is a very generous and giving person. Mr. Smith is concerned that Mrs. Smith may be unable to manage her financial affairs. He is concerned that capital may be eroded and she may not have sufficient income to maintain her current lifestyle. Mr. Smith creates a spousal trust within his will. The benefits are as follows: 1. With the assistance of the trustees, a proper investment and cash flow plan will be established for Mrs. Smith. This provides a degree of certainty that Mrs. Smith will be financially secure for her lifetime. 2. The transfer to the spousal trust can occur free of income taxes. 3. Since the remaining capital will be allocated according to Mr. Smith s will, he is assured that the capital will eventually pass to his children. 4. The income can be taxed within the trust even though it is paid to Mrs. Smith. This provides an opportunity to take advantage of the trust s low tax rates. Furthermore, it may allow Mrs. Smith to avoid the loss of the age credit, avoid the OAS clawback and maintain eligibility for tax credits.

3 Raymond James Wealth Management Strategies Spousal Trust= Concept Upon Mr. Smith s death, a trust arrangement is established through his will. The trust entitles Mrs. Smith to all the income and capital. Upon Mrs. Smith s passing the aftertax amount remaining in the trust is distributed to the beneficiaries. = Mr. Smith s Assets Trust for Mr. Smith = Income Taxes Beneficiaries Benefits Mr. Smith has some degree of control over the ultimate distribution to the beneficiaries. Issues The trust is taxed as a separate taxpayer and subject to low marginal rates. Income taxes are deferred until second death. Transfer to Trust subject to Probate fees. Selection of Trustees is critical Family Law Act Implication A testamentary child or grandchild trust is a trust in which: all or some portion of the deceased s assets are placed in a trust arrangement for a parent s children and/or grandchildren, the children and/or grandchildren are entitled to receive all the income earned from the trust capital before a specified distribution, the children and/or grandchildren may be entitled to receive all or part of the capital for specific purposes as stated in the will, upon the distribution date, the assets are allocated according to the original will. Consider the following example: Mr. and Mrs. Smith have accumulated a comfortable net worth over the years. Mr. and Mrs. Smith are concerned about their adult children s ability to manage their inheritance. They also wish to protect their children in the event of a marriage breakdown.

4 Mr. and Mrs. Smith decide to establish a trust within their will as follows: A trust fund is set up for their children and grandchildren upon the last to die of Mr. and Mrs. Smith. Income will be distributed annually. The capital of the trust is to be distributed to the beneficiaries for specific purposes (e.g., to fund education, a down payment on a new home, etc.) Mr. and Mrs. Smith have now ensured that there will be a capital base for their children and grandchildren regardless of whether their children encounter financial hardship, marital problems or any other unforeseen circumstances. A trust fund also provides the opportunity to accumulate income at low marginal tax rates. Concept Raymond James Wealth Management Strategies In Trust Accounts = Mr. Smith established an In Trust account for his grandchild. Mr. Smith designates himself as Agent for the account (Grandchild s SIN is reported on account). Mr. Smith gifts $1,00 to the account and acquires a mutual fund. New Client App ---$ ---$ ---$ $ Benefits The Capital Gain will be reported at grandchild s lower tax rate. Minimize grandparent estate for probate and income tax purposes. Low cost simple approach to build funds for the grandchild. Issues Interest and dividends should be reported to grandparent. At age 16 the grandchild has control. Is an RESP an alternative? Other common uses for testamentary trusts include the following: Providing for a mentally challenged family member. Providing for a long-term plan of charitable giving. Providing a long-term vehicle for the ownership of a family heirloom such as a cottage property.

5 Raymond James Wealth Management Strategies Spousal Trust= Concept Mr. Smith (widower) establishes a revocable trust to hold his assets. The Trust entitles Mrs. Smith to all the income and capital. Upon Mrs. Smith s passing the aftertax amount remaining in the trust is distributed to the beneficiaries. = Mr. Smith s Assets Trust for Mr. Smith = Income Taxes Beneficiaries Benefits Complete listing of assets is prepared before passing. Issues Trustee arrangement more powerful than the Power of Attorney. Transfer to the beneficiaries occurs with out probate fees. Confidentiality is maintained. Selection of Trustees. Administration and set-up costs. No income tax benefits Inter vivos trusts An inter vivos trust is established during one s lifetime. Generally, it is created by a separate trust indenture. An inter vivos trust is taxed at the top marginal personal tax rate. It must report on a calendar year basis. There is little or no tax benefit in reporting income within an inter vivos trust. As a result, inter vivos trusts generally act as conduits to flow the taxable income to the beneficiaries. A family trust is usually established to hold assets for the next generation. For example, common shares of private companies are often held within a family trust as part of an estate freeze. An alter ego trust is established when an individual over the age of 64 transfers assets to a trust which provides that, prior to his or her death, the individual is the only person able to receive the income or capital from the trust. A joint spousal trust is established when an individual over the age of 64 transfers assets to a trust which provides that the individual and his or her spouse must be entitled to all the income and capital during their lifetimes.

6 Consider using a trust Your assets represent a lifetime of work and savings. A trust allows you to establish control over how those assets are used and enables you to benefit from more advantageous tax treatment. Individuals or families with significant assets, which includes most people near retirement, should consider the use of a trust in order to provide for loved ones now and in the future. This is brought to you by Raymond James Financial Planning Ltd. (RJFP) for informational purposes only. It expresses opinions not necessarily those of RJFP. Statistics and factual data and other information are from source RJFP believes to be reliable but their accuracy cannot be guaranteed. This information is furnished on the basis and understanding that RJFP is to be under no liability whatsoever in respect there of. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered personal tax advice.we are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.