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Estate & Insurance Services

Trusts for Protection and Tax Savings

Trusts provide protection for your wealth and beneficiaries, and can also be used to reduce taxes. They can be created now, or upon your death in your Will as part of an effective estate plan.

A trust is often used to provide for one person or group of persons now, with a "gift over" to another person or group at a later time. For example, in the case of a second marriage, a spousal trust is often created to maintain the lifestyle of the surviving spouse with a gift over to the children of the first marriage. The trust ensures capital is preserved for the children since the spouse has limited access to the trust fund.

Trusts can be used to provide financial security for a special needs beneficiary such as a disabled child or other beneficiary with ongoing financial needs. In some provinces, a discretionary trust can be used to preserve a beneficiary's right to provincial disability benefits.

How do trusts work?
They permit the separation of legal and beneficial ownership of property. Control of the property is transferred to the trustee but the beneficiary can enjoy the use or benefit of trust property on whatever conditions are created in the trust document.

The trust document contains the instructions to the trustee. The terms may include how income and capital are to be distributed, when the trust is to end and who receives the remaining property in the trust at that time. The trustee may have mandatory instructions as to the division and timing of distributions of income and capital during the time the trust property is being administered. More often the trustee has discretion, which can be restricted or absolute.

There are few restrictions in creating trusts; the trust must end eventually, and the beneficiary must be a legal person or a charity. The beneficiaries can be named, or they can be defined as a class of persons.

Tax Planning Advantages
Trusts that are created as part of your estate plan to be set up after death (called "testamentary") have several tax advantages over trusts set up during your lifetime (called "inter vivos").

Testamentary trusts can be used to create a tax shelter for beneficiaries by reducing the tax rate on the investment income from the inheritance. Testamentary trusts have the same graduated tax rates as an individual taxpayer. This permits income splitting between a testamentary trust and the beneficiary with potential tax savings of up to $10,000 per annum. Testamentary trusts can be used to income split between the trust and a surviving spouse, or the trust and a surviving child.

Inter vivos trusts can also be used in tax planning. For example, a trust for minor children can be effective to reduce tax on capital gains realized in the trust. Or a trust for adult beneficiaries can provide financial assistance in a more tax efficient manner if the beneficiary is in a lower tax bracket than the contributor to the trust.

The protection and tax planning available with trusts makes them an attractive financial and estate planning tool. Trusts are also extremely flexible and can be designed to suit the creator's exact purpose.

Trusts can be used to:

• Protect Beneficiary from: Creditors, Spouse, Addiction, Mental Illness
• Preserve Capital for Others: Spouse trust for children - in case of remarriage,
• Spouse trust for children of first marriage, Children for Grandchildren
• Provide for special needs or a particular purpose: Minor Children, Disabled Persons, Education of Grandchildren

For more information, contact an Investment Advisor at a BMO Nesbitt Burns branch near you.

If you would like a BMO Nesbitt Burns Investment Advisor to contact you, simply complete this brief contact form.

The comments included in this article are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments contained herein are general in nature and professional advice regarding an individual's particular tax position should be obtained.