Most trusts have a minimum of $500,000 in assets, which is a good baseline to justify all the fees involved, says an expert.carlosbezz/iStockPhoto / Getty Images
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After mainstream options such as registered accounts are exhausted, wealthy clients often turn to trusts as a way to pass down assets to the ensuing generations. The benefits of trusts are two-fold – they generate income and can preserve capital. The distribution of the income and capital is managed by a trustee, either a third party or a family member. Clients who set up the trust have the ability to control and time when beneficiaries receive the trust’s assets.
“You could name both children and grandchildren as beneficiaries and then pick and choose who you want to distribute to,” says Aaron Hector, private wealth advisor at CWB Wealth Management in Calgary. “It provides a bit of flexibility on that side.”
But flexibility and control don’t come cheap. Between the legal costs to set up and maintain the trust, managing the assets within the trust and ongoing fees to file trust tax returns, trusts are definitely the haven of the wealthy, says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto.
He adds that most trusts he’s seen have a minimum of $500,000 in assets, a good baseline to justify all the fees involved.
A trust could be an option for clients who want to assist their relatives financially but not risk seeing money disappear almost immediately after they receive their inheritance.
“You can also have more serious situations in which a beneficiary has an addiction and it’s just not prudent to give large amounts of money to such an individual,” Mr. Golombek explains. “Instead, you could leave the money in a trust and name someone or a company as the trustee to distribute those funds appropriately.”
For example, a grandparent may set up a testamentary trust for grandchildren in their will, in which the heirs could get an allocation of the trust’s income every year. “And there could be rules in that trust that govern how the capital is distributed,” he says.
Kevin Burkett, partner at Burkett & Co. Chartered Professional Accountants in Victoria, has seen cases where a client wanted to treat children differently from grandchildren, either because of disharmony or other considerations. By using a family trust, the income generated in the trust can provide for the child, with the capital eventually distributed to the grandchild.
“In many cases, the grandchild benefits in the future as money is not placed in their hands too early,” he says. “The grandchild might be 40 or 50 by the time they actually receives the capital out of that trust because that would require that her parent passed away.”
Henson and alter ego trusts
Mr. Golombek says many parents are concerned that if they leave their disabled child a large inheritance, the child will be cut off from provincial disability support, which is asset and income-tested. But setting up what is referred to as a Henson trust protects against that concern.
“As long as the trust is fully discretionary, meaning the trustee has full discretion as to whether the beneficiary receives any distributions, in most provinces, the assets in that trust will not be counted and they don’t lose their government benefits,” he says.
Alter ego trust, or joint partner trusts in the case of married or common-law spouses, are used primarily in provinces that have higher-than-average probate fees, such as Ontario, which has a 1.5 per cent estate administration tax. Clients age 65 or older can transfer property into these trusts without a taxable disposition and the funds can be paid directly to the trust beneficiaries after death without the need for probate, Mr. Golombek says.
One advantage is a taxable distribution doesn’t need to be in place at the time the assets are actually moved into the trust, Mr. Hector says.
“It could be a situation in which everything remains with the grandparents until they pass away and then they name beneficiaries that would get distributed when they die,” he says. “In that case, it’s more of a probate planning tool.”
These trusts are private documents, which Mr. Golombek says help to speed up transferring assets to beneficiaries as they’re less likely to be challenged in court. Wills, in comparison, are subject to a public probate process.
Regardless of the type of trust, Mr. Golombek advises clients to set one up through an experienced trusts and estates lawyer as many nuances abound.
“They can really give advice on who the trustee might be, some of the conditions you want to place upon the trust and criteria for access to income and capital,” he says.
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