Using estate trusts is another way that you can reduce probate. Trusts are a great way to maintain control of assets during and after death. There are many types of trusts and to create one, you would need a trustee and a settlor. The settlor would be the individual who would establish the trust and proceed to transfer property to the trust. The trustee would be responsible to maintain the property for the benefit of the beneficiaries.
Certainties of Estate Trusts
In order for the property transfer to constitute a valid estate trust, it must meet the three certainties:
- 1. The Certainty of Intention;
- The settlor intends for the property to be held in trust for the beneficiary of the beneficiaries.
- 2. The Certainty of Subject Matter; and
- The property that is being held in trust is clearly described in detail.
- 3. The Certainty of Objects
- The beneficiaries are named and clearly identified in order to avoid conflicts in the future.
Inter-Vivos Trusts
Below are inter-vivos estate trusts that one could open to transfer or gift property during one’s lifetime as opposed to a testamentary trust when transfers take effect on death, usually as part of a will.
- Revocable Estate Trusts
- When the settlor transfers in property into the trust, the property can be transferred back in the hands of the settlor
- Irrevocable Estate Trusts
- When property is transferred to the trust, it cannot be transferred back.
- Spousal Estate Trusts
- Set up for the benefit of the spouse and no one else can have access to the trust’s assets.
- Family Estate Trusts
- Property is transferred into the trust for the benefit of family members
- Commercial Trust
- Commercial trusts are known to be used for investment purposes. Mutual funds would be considered commercial trusts.
- Alter Ego Trust
- Alter Ego Trust have an age requirement of 65. It’s created for the benefit of the settlor who is the only individual able to be entitled to the trusts income.
- Charitable Trust
- Charitable trusts are set up for the benefit of a charity who would be the beneficiary.
- Bare Trust
- In this case, the beneficiary would have sole interest in the property or assets inside the trust and may take over possession at any time.
Testamentary Trust
Testamentary Trusts are created on the day a person dies with instructions written out in the will ahead of time. They’re a popular estate planning tool as it allows the trustee to effectively distribute income to minor children or spouse in a tax efficient manner. Testamentary trusts are taxed at the highest marginal tax rate with two exceptions mentioned below. Before 2016, testamentary trusts were taxed favorably at the same rates as personal income tax but that has since changed.
- Graduated Rate Estate (GRE)
- These trusts are registered as a GRE in the first year of trust’s taxation. They arise as a consequence of the person’s death and are taxable at marginal rates for the first 36 months. Only one GRE is allowed per deceased testator.
- Qualified Disability Trust
- The beneficiary of this type of trusts would qualify for the Disability Tax Credit. These trusts are taxed at the marginal tax rate.
21 Year-Deemed Disposition Rule
A deemed disposition would occur every 21 years for most personal trusts. For Alter Ego Trusts, Joint Trust and Spousal Trusts, a deemed disposition would occur as well on death of settlor or spouse and every 21 years thereafter. The trustee would be responsible to file a a tax return on the property in the trust as if they had sold it at fair market value. This tax return would trigger capital gains which could result in a huge tax bill. However, you may transfer assets to a Canadian resident beneficiary on a tax deferred basis prior to the 21 year anniversary.