A trust is an arrangement between three entities - the grantor (or settlor), the trustee and the beneficiary.
The process is initiated by the grantor - the individual who wishes to give away assets by placing the assets in a trust. The grantor places the responsibility for those assets in the hands of the trustee.
The trustee is accountable for ensuring that the assets are received by the beneficiary in the manner intended by the grantor, which is outlined in the trust document.
Here is where it can get interesting - in some cases, the grantor and the trustee may be the same individual. So, a person can say to herself or himself - “I no longer own this property for myself, I now own it only to take care of it for the beneficiaries.”
In other cases, the trustee may be a trusted person or persons, or a trusted institution such as a bank.
There are two main categories of trust. The first is an inter vivos trust, also called a living trust, established during the life of the grantor with the assumption that the grantor will be able to control or witness the distribution of the assets in the trust. In most instances, the terms of such a trust may be altered at any time at the will of the grantor, and so it is typically termed “revocable”.
The second type is called a testamentary trust, which is usually created as a part of the grantor’s Will. Since it “kick-starts” upon the death of the grantor, it is always “irrevocable”. Once kick-started or established, an irrevocable trust is nearly impossible to change.
The above two categories have many sub-categories. So,
a spousal trust ensures that any income generated by the assets in the trust go to the surviving spouse following the death of the grantor, with the principal often being passed on to the children;
a real estate investment trust (REIT) is a great vehicle for storing assets such as rent payments; it often comes in the form of large holdings that get traded on the stock exchange, but there is no reason why a landlord with a few holdings can’t set up one for the next generation;
a charitable remainder trust is similar to the spousal trust, with the twist that instead of the children, the principal goes to a charity after the surviving spouse (or anyone else set up to benefit from the income) passes on.
There are many others.
Why set up a trust?
The main reason for creating a trust is to ensure that the assets within it will be managed in a specific way, and that such management will be guaranteed even following the death of the grantor.
This can be especially useful when the beneficiary is very young, irresponsible, or otherwise unable to manage the assets alone. See our post about Henson Trusts for more information about leaving assets to a person living with abilities that are reduced or otherwise outside the norm.
Another reason to establish a trust is that the assets in the trust will bypass the probate system following the death of the grantor. This accomplishes three things:
it provides a great deal of confidence and ease in the transfer of assets, compared to the probate system;
it sidesteps probate court fees, which can add up - in Ontario it is $250 for the first $50,000 of an estate and $15 for each additional $1,000, with no upper limit; and
it keeps the transfer of assets highly private, which a basic Will cannot do since probate is a public, court process.
Placing assets in a trust is a great method of protecting an inheritance and ensuring that it is directed to the intended beneficiary.
Who needs a trust?
Many people could use a trust.
As the number or volume of your assets increase, or the complexity of your estate deepens, establishing a trust becomes an increasingly attractive option. So, trusts are not limited to the wealthy. They should be considered by anyone developing an estate plan as a vehicle for simplifying the distribution of assets, or sidestepping thorny family issues by targeting a portion of the estate for transfer to a specific beneficiary in a carefully controlled manner.
If you feel as though a trust may be a good option to include in your estate plan, and you are resident in Ontario, we can readily assist as estate planning lawyers. Get started here, at afolabi.law