When you hear the word "trust" or "family trust" what comes to mind? If you're like me, you might think of one of your favorite movies or TV shows where the main characters are part of wealthy families living luxurious lives with trust funds set up for their children.
But trusts are not just for the rich and famous. They can play a valuable role in estate planning for average Canadian retirees as well.
A solid will and a capable executor with an organized set of instructions will be sufficient for settling the vast majority of estates for Canadians. But there are situations where you may want more protection and control over how your assets are handled during your lifetime and after you pass away.
In these cases, trusts can become an effective strategy for many Canadian retirees.
What is a trust?
Think of a trust as a special container you can use to hold onto and take care of your assets. The container provides you with some powerful benefits:
- Control - you can put property into a trust and under the care of a trustee, along with clear instructions for how you want that property to be handled. You can name specific beneficiaries of the trust, such as your family members. This helps you make it crystal clear who you want (and, more importantly don't want) benefiting from your assets.
- Continuity - in many cases, a trust lives on for many years after you have passed away. If you wish to maintain some certainty that your property is going to benefit your loved ones for years or decades, this can be a huge benefit. Assets in a trust do not form part of your estate. So, you do not need to pay probate on these assets, and you can avoid many delays that come along with settling an estate.
- Privacy - trusts are private arrangements between the settlor (you), the trustees (the person or company you put in charge of taking care of the trust), and the beneficiaries (spouse, children, loved ones, charities). Anything you have or do inside of the trust is not open to the public to see at any time, even when you pass away. Regular estates, on the other hand, are open to the public.
What situations might arise where a trust can be useful for a retiree?
- Second marriages and mixed families - If you are re-married and have children from a previous marriage, a spousal trust may be an effective way to ensure that your children are properly taken care of in the event you pass away. Using a spousal trust, you can ensure that your spouse gets the benefit of your assets while he/she is alive. When your spouse eventually passes away, the trust will dictate that all or a portion of your belongings that remain are left in the trust goes to your children. In the absence of a trust, if you pass away, your will might dictate that your belongings go to your spouse. This may make sense at first. But, what happens when your spouse passes away? Your spouse's will may dictate that their estate (comprised of your things and their things) goes entirely to their children. But, what about your children? In this situation, there is a risk that your children from a previous marriage are disinherited.
- Passing down a family cottage - the use of a family trust helps avoid the risk that a marriage breakdown in your family will jeopardize your plans to pass down the family cottage. For example, if you pass away and leave your cottage to your 2 married children and one of them gets divorced, the ex-spouse of your child can lay claim on 1/4 of the cottage's value. If you use a family trust, you can name your children, grandchildren, or others as beneficiaries of the trust. In this case the ex-spouse may end up with smaller claim, or no claim at all.
- A Trust to take care of your own assets - you can use a trust to hand over the management of your affairs to a professional trustee or a family member while you are alive. You may prefer this if you are concerned about your ability to manage your own affairs as you age, and you want to "hand over the keys" to someone else. If you are older than 65, an alter-ego trust can be used to manage your property while you are alive, and it can outline what is meant to happen with your property when you pass away. In many ways, it can serve as a substitute for a will and power of attorney for the property it holds. And, since your assets inside of an trust don't go through your estate, the contents are fully private and you won't need to pay probate on them when you pass away.
How much does it cost to set up a trust?
The cost of setting up a trust will vary based on the type and amount of assets that you want to hold in the trust, as well as the ongoing work to keep the trust up to date with tax filings each year (trusts need to file tax returns just like we do). Expect the up-front costs of setting up a trust to range between $1,000-$2,000, and the annual ongoing costs of maintaining the trust to be between 1% and 2% of the value of the property in the trust.
Talk to your professionals
Be sure to consult with an estate lawyer and an accountant who understands your tax situation to see if these strategies make sense for you.
Trusts can be a valuable tool for many Canadian retirees. They can help you keep control of your assets inside your family, maintain privacy, and allow for the smooth transition of your property to your heirs when you pass away. And, you don't need to be super-rich to have one.
Please consult with your financial advisor, tax professionals, and legal professionals before making any decisions.