For some Albertans, living trusts are important estate planning tools that help transfer wealth taxes effectively.
With a trust, you transfer money or property to a trustee to manage and distribute to the intended beneficiaries at a designated time.
Canadian trusts are slightly different from trusts set up in other parts of the world, but like most estate planning steps, there are both pros and cons to them.
Let’s consider the main advantages and disadvantages of a living trust in Alberta so that you can decide if it’s right for you.
Benefits of a living trust
A living trust (sometimes called a family trust or inter vivos trust) can be set up at any time during your lifetime. It comes with the following potential benefits:
A reduced income tax burden
When assets are transferred to a living trust in Alberta, they are technically no longer owned by the person who sets up the trust (the “settlor”). They are allocated to beneficiaries who must include them in their tax returns.
Effectively, such “income splitting” can reduce the overall tax burden because in Canada, the higher the income the higher rate of tax is paid.
Before going down this path, check with one of our qualified estate planning lawyers to see how the tax laws will affect you.
A reduced estate tax and fee burden
A living trust may also reduce the taxes and fees payable upon death. In Alberta, trust assets are not subject to probate within the deceased’s estate and, instead, may be transferred directly upon death.
Business owners may also benefit. The trust becomes the owner of participating shares in the corporation and any increase in the value of the shares occurs within the trust, meaning that it is not taxable at the time of the business owner’s death. Instead, tax is paid when the business is sold.
This strategy also provides a family business owner with some flexibility when deciding who will take over the business and how.
Simpler transfer of wealth
Within families, living trusts are often used to make the process of transferring wealth simpler and more streamlined.
You can specify who should receive the assets and when — and even what they should be used for. Sometimes, living trusts are used to help protect children from wasting the wealth that they inherit.
Protection from creditors
Provided that a living trust is not set up for the sole purpose of shielding assets from creditor claims, it can protect your assets. Once assets enter a trust, the settlor is no longer considered the owner.
Any claims against the settlor of a bona fide living trust (including during bankruptcy) cannot threaten the assets held in the trust.
A living trust enables the settlor to pass on wealth or a gift to a child or grandchild once the child reaches a certain age. This can be an effective estate planning tool for a disabled child, where strict rules can govern how and when the money should be used.
Disadvantages of a living trust
Besides the many benefits of living trusts, you should also consider a few disadvantages before you commit:
Trusts don’t last forever
The Income Tax Act states that trusts must dispose of their property 21 years after their creation at the latest — meaning that taxes must then be paid.
Living trusts should include an “ultimate distribution clause” that defines when and how the assets will be distributed.
Because of the complexity involved in living trusts, you will likely need to consult with an estate planning lawyer and/or a tax or finance professional. This, of course, requires some investment.
There are also some standard fees involved in creating the trust and transferring assets to it for the beneficiaries.
Trusts also require management, record-keeping and income tax compliance.
The settlor may not be the same person as the trustee. You need to name a trustee who is capable of managing the trust and filing tax returns — and may need to provide payment for this service.
Inconvenience for beneficiaries
While a living trust can protect both children and assets when set up the right way, the fact that the assets may not be accessible until a certain date may be inconvenient for beneficiaries.
How is a Canadian family trust different?
The legal frameworks in Canada mean that trusts are not just for the wealthy. Many ordinary families in Alberta can use family trusts to protect wealth, minimize taxes and estate fees, and protect children.
The tax laws in particular are favourable. For instance, the dividend tax credit and personal tax credit enable Canadian beneficiaries of family trusts to receive thousands of tax-free dollars.
Also, the “estate freeze” law allows the owner of an estate to transfer assets to beneficiaries without any tax consequences.
How to set up a family trust in Alberta
To set up a family trust in Alberta, you will first need to do the following:
- State your intention to create a trust
- Clearly identify the beneficiaries
- Itemize the assets that will be held by the trust
Once these practicalities have been taken care of, the settlor and trustee will need to follow these steps (usually with the aid of an estate planning lawyer or tax planner):
- Draft a trust agreement that clearly states the names of the trustees/beneficiaries and outlines the assets to be transferred and how they will be managed
- Transfer assets into the trust (an irrevocable donation — though more assets can be transferred later)
- Open a bank account in the trust’s name
- Outline a closing agenda
Administering family trusts in Alberta
A family trust may require a high degree of management and administration — in compliance both with the stipulations outlined in the trust agreement and by the tax authorities.
Investments may need to be monitored and decisions made on buying and selling assets, for instance. Records of transactions will need to be maintained and tax returns filed. The trust beneficiaries must also be kept informed of financial performance and any major decisions made.
With this high level of responsibility, it’s important to select a trustee wisely when you set up your trust.
If you’re considering setting up a living trust, speak to an experienced estate planning lawyer at Vest Estate Lawyers in Alberta for an initial consultation about your needs.
We currently have three offices across Alberta — Edmonton, Calgary, and Red Deer. However, we serve the entire province of Alberta. We also have the infrastructure to work with any of our clients virtually — even the furthest regions of Alberta.
We also have a dedicated intake form to help you get the ball rolling. Our intake team will review your specific case and advise you on the next steps to take and what to expect moving forward.
Our offices are generally open 8:30 a.m.—4:30 p.m., Mon—Fri.
WILLS and ESTATES LAWYER
Allison provides a personalized experience in her Wills, Estates and Surrogate practice. She endeavours to get to know the clients to ensure the advice provided fits outside of the “one fits all” mould and fits individual family circumstances.