While there are several tax reasons to consider a trust for current and future planning, sometimes the best reasons to set up a trust now or in a will have nothing to do with tax. Three excellent reasons to use a trust? Matrimonial issues, protecting children and wealth preservation.
• Trusts can be an effective way to alleviate the impact of matrimonial rights on assets. An interest in a trust, especially a discretionary trust, is a different, and almost certainly lesser property right than absolute ownership. A trust can better protect a child's inheritance from matrimonial claims as opposed to an outright gift. Trust assets are segregated from the child's other assets, keeping them from being inadvertently mixed up with jointly-owned or matrimonial assets. Also, a trust can help preserve the exclusion of income and growth on inherited or gifted property from sharing on marriage breakdown or death.
• When planning for minor children under a will, trusts are the preferred choice since without a trust, property inherited outright by a minor must be paid into court and is paid to the child upon reaching the age of majority (18 in Ontario) unless there is a legal guardian for the child appointed by the court who can hold and manage the funds. A trust under a will can protect a child's inheritance until the child is of a financially mature age to receive it, and allow management by trustees who can invest and distribute income and/or capital for the child's benefit. It can also ensure succession of capital on the child's death to his or her own children. Each trust can be tailored to meet a child's specific needs and the aspirations of the person establishing the trust.
• Wealth preservation is another goal that can be met by using a trust. Once one has built up wealth, a trust can allow for the needs of current beneficiaries while preserving capital for future generations. Trusts also help protect against future claims such as for professional and director's liability, as an alternative to direct ownership. Financially astute trustees can help preserve capital for the long-term, maximize income and minimize expenses, adding to everyone's peace of mind.
Trusts are not just tax minimization tools. There are many reasons to consider a trust now or as part of a will on death. A trust can be used to accomplish a variety of wealth preservation and protection goals, in addition to the common tax-motivated ones of income-splitting, probate fee and capital gains and other tax minimization.
Our next blog - The accidental U.S. citizen and potential unknown exposure to U.S. estate tax.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.