Trusts in wills (called ‘testamentary trusts’) are a very powerful tool but they are complex.
An improperly considered or drafted trust can result in very harsh or unfair outcomes.
The most common trusts and the rationale for them are:
- Spousal trusts, whereby the spouse of the testator has the right to use certain assets (such as a house) during their lifetime, with a gift over to children on the death of the second spouse (known as the life tenant). There are two key drivers for spousal trusts: a) to defer taxes on assets that have increased in value substantially, and b) to address a second marriage situation where you want your estate to ultimately benefit your children, not your spouse’s children. Key considerations for spousal trusts include the choice of trustee, who pays for what expenses such as taxes, utilities, maintenance and renovations, and when the trust terminates – for instance, what happens if the beneficiary must move in to a nursing home?
- Trusts for minor children, which may extend beyond their early adult years to avoid improvident spending (trusts lasting to age 25 or 30 are not uncommon). These trusts can last a long time. Key questions include who is an appropriate trustee, and what expenses may be covered during the trust: education? Housing? Entrepreneurship?
- Trusts for adult children, especially to provide for them without disqualifying them from access to social assistance such as ODSP. Disability Support Plans and Henson Trusts are some of the options. The purpose is to provide on-going financial support to the disabled child without providing them assets that disqualify them for support.
Trusts are very powerful. They can be enormously helpful for deferring and minimizing taxes, and for ensuring that your estate benefits the people that you want in the way that you want. However, they are complex and must be drafted with care. The key considerations for every trust are:
- Who is the trustee? Can they be trusted to respect the interests of all beneficiaries? What happens if they are unable or unwilling to act at any time?
- Who are the beneficiaries – of income? Of the capital? Is there a ‘residual beneficiary’ after the death of a beneficiary?
- How much discretion will the trustee have to allocate or distribute income or capital? Will the trustee’s decisions align with the beneficiaries’ interests?
- How long will the trust last, and what will happen when it terminates?
Proper estate planning requires proper consideration of the possible use of trusts, and where they are appropriate, detailed consideration of the terms of the trust.